##### Table of Contents



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2002

OR

[   ]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: 0-18553

Ashworth, Inc.

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

2765 LOKER AVENUE WEST
CARLSBAD, CA 92008
(Address of Principal Executive Offices)

(760) 438-6610
(Telephone No. Including Area Code)

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 [X] No [   ]

Indicate the number of shares outstanding of each of the registrants classes
of common stock, as of the latest practicable date.

|                             |  |                                 
|---------------------------- |  | --------------------------------
|Title                        |  | Outstanding at September 6, 2002
|$.001 par value Common Stock |  | 13,300,147                      





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TABLE OF CONTENTS



|                          |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|                          |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                          |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF INCOME         
|                          |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                          |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                          | Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                          | Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II OTHER INFORMATION
|                          | Item 1. LEGAL PROCEEDINGS                                                                    
|                          | Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                          | Item 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                          | Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                          | Item 5. OTHER INFORMATION                                                                    
|                          | Item 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES               
|CERTIFICATIONS           
|EXHIBIT 99.1             
|EXHIBIT 99.2             



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INDEX

|                                                                                              |                                                      |  |      |    | 
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  | ---- | -- | 
|                                                                                              |                                                      |  | PAGE
|                                                                                              |                                                      |  |     
|Part I. Financial Information                                                                 |                                                      |  |      |   
|Item 1. Financial Statements                                                                  |                                                      |  |      |   
|                                                                                              | Condensed Consolidated Balance Sheets                |  |      | 1  | 
|                                                                                              | Condensed Consolidated Statements of Income          |  |      | 2  | 
|                                                                                              | Condensed Consolidated Statements of Cash Flows      |  |      | 3  | 
|                                                                                              | Notes to Condensed Consolidated Financial Statements |  |      | 4  | 
|Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations |                                                      |  | 7    |   
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                      |  | 14   |   
|Part II. Other Information                                                                    |                                                      |  |      |   
|Item 1. Legal Proceedings                                                                     |                                                      |  | 15   |   
|Item 2. Changes in Securities and Use of Proceeds                                             |                                                      |  | 15   |   
|Item 3. Defaults Upon Senior Securities                                                       |                                                      |  | 15   |   
|Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                      |  | 15   |   
|Item 5. Other Information                                                                     |                                                      |  | 15   |   
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                      |  | 15   |   
|                                                                                              | Signatures                                           |  |      | 18 | 
|                                                                                              | Certifications                                       |  |      | 19 | 





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ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                       |                                                |                            |                                          |                                            |            |             |             |             |            |            |            | 
|-------------------------------------- | ---------------------------------------------- | -------------------------- | ---------------------------------------- | ------------------------------------------ | ---------- | ----------- | ----------- | ----------- | ---------- | ---------- | ---------- | 
|                                       |                                                |                            |                                          |                                            |            | July 31,    |             | October 31,
|                                       |                                                |                            |                                          |                                            |            | 2002        |             | 2001       
|                                       |                                                |                            |                                          |                                            |            |             |             |            
|                                       |                                                |                            |                                          |                                            |            | (UNAUDITED) |             |             |            |           
|ASSETS                                 |                                                |                            |                                          |                                            |            |             |             |            
|Current assets:                        |                                                |                            |                                          |                                            |            |             |             |            
|                                       | Cash and cash equivalents                      |                            | $                                        | 399,000                                    |            |             | $           | 1,055,000   |           
|                                       | Accounts receivable  trade, net               |                            |                                          | 38,766,000                                 |            |             |             | 26,817,000  |           
|                                       | Accounts receivable  other                    |                            |                                          | 1,996,000                                  |            |             |             | 2,199,000   |           
|                                       | Inventories, net                               |                            |                                          | 38,857,000                                 |            |             |             | 35,841,000  |           
|                                       | Income tax refund receivable                   |                            |                                          | 367,000                                    |            |             |             | 941,000     |           
|                                       | Other current assets                           |                            |                                          | 3,463,000                                  |            |             |             | 2,359,000   |           
|                                       | Deferred income tax asset                      |                            |                                          | 1,838,000                                  |            |             |             | 1,833,000   |           
|                                       |                                                |                            |                                          |                                            |            |             |             |            
|                                       |                                                | Total current assets       |                                          |                                            | 85,686,000 |             |             |             | 71,045,000 |           
|                                       |                                                |                            |                                          |                                            |            |             |             |            
|Property, plant and equipment, at cost |                                                |                            | 38,495,000                               |                                            |            |             | 36,507,000  |            
|                                       | Less accumulated depreciation and amortization |                            |                                          | (20,318,000                                | )          |             |             | (17,862,000 | )         
|                                       |                                                |                            |                                          |                                            |            |             |             |            
|                                       |                                                |                            | Total property, plant and equipment, net |                                            |            | 18,177,000  |             |             |            | 18,645,000 |           
|                                       |                                                |                            |                                          |                                            |            |             |             |            
|Other assets                           |                                                |                            | 970,000                                  |                                            |            |             | 3,966,000   |            
|                                       |                                                |                            |                                          |                                            |            |             |             |            
|                                       |                                                |                            |                                          | Total assets                               |            | $           | 104,833,000 |             |            | $          | 93,656,000 | 
|                                       |                                                |                            |                                          |                                            |            |             |             |            
|LIABILITIES AND STOCKHOLDERS EQUITY   |                                                |                            |                                          |                                            |            |             |             |            
|Current liabilities:                   |                                                |                            |                                          |                                            |            |             |             |            
|                                       | Line of credit payable                         |                            | $                                        | 10,350,000                                 |            |             | $           | 5,950,000   |           
|                                       | Current portion of long-term debt              |                            |                                          | 803,000                                    |            |             |             | 659,000     |           
|                                       | Accounts payable  trade                       |                            |                                          | 7,365,000                                  |            |             |             | 4,203,000   |           
|                                       | Accrued liabilities                            |                            |                                          | 3,436,000                                  |            |             |             | 3,306,000   |           
|                                       |                                                |                            |                                          |                                            |            |             |             |            
|                                       |                                                | Total current liabilities  |                                          |                                            | 21,954,000 |             |             |             | 14,118,000 |           
|                                       |                                                |                            |                                          |                                            |            |             |             |            
|Long-term debt, net of current portion |                                                |                            | 2,866,000                                |                                            |            |             | 3,166,000   |            
|Deferred income tax liability          |                                                |                            | 752,000                                  |                                            |            |             | 752,000     |            
|Other long-term liabilities            |                                                |                            | 527,000                                  |                                            |            |             | 626,000     |            
|Stockholders equity:                  |                                                |                            |                                          |                                            |            |             |             |            
|                                       | Common stock                                   |                            |                                          | 13,000                                     |            |             |             | 13,000      |           
|                                       | Capital in excess of par value                 |                            |                                          | 38,939,000                                 |            |             |             | 37,959,000  |           
|                                       | Retained earnings                              |                            |                                          | 40,028,000                                 |            |             |             | 38,069,000  |           
|                                       | Accumulated other comprehensive loss           |                            |                                          | (246,000                                   | )          |             |             | (1,047,000  | )         
|                                       |                                                |                            |                                          |                                            |            |             |             |            
|                                       |                                                | Total stockholders equity |                                          |                                            | 78,734,000 |             |             |             | 74,994,000 |           
|                                       |                                                |                            |                                          |                                            |            |             |             |            
|                                       |                                                |                            |                                          | Total liabilities and stockholders equity |            | $           | 104,833,000 |             |            | $          | 93,656,000 | 
|                                       |                                                |                            |                                          |                                            |            |             |             |            

See accompanying notes to condensed consolidated financial statements.

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ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

|                                                                |                                     |   |                             |            |                            |   |            |            |      |   |            |            |   |   |             |            |  
|--------------------------------------------------------------- | ----------------------------------- | - | --------------------------- | ---------- | -------------------------- | - | ---------- | ---------- | ---- | - | ---------- | ---------- | - | - | ----------- | ---------- | -
|                                                                |                                     |   | Three months ended July 31, |            | Nine months ended July 31,
|                                                                |                                     |   |                             |            |                           
|                                                                |                                     |   | 2002                        |            | 2001                       |   | 2002       |            | 2001
|                                                                |                                     |   |                             |            |                            |   |            |            |     
|Net revenues                                                    |                                     | $ | 35,860,000                  |            |                            | $ | 29,765,000 |            |      | $ | 98,542,000 |            |   | $ | 104,379,000 |           
|Cost of goods sold                                              |                                     |   | 21,385,000                  |            |                            |   | 18,344,000 |            |      |   | 59,444,000 |            |   |   | 63,759,000  |           
|                                                                |                                     |   |                             |            |                            |   |            |            |      |   |            |            |   |   |             |           
|                                                                | Gross profit                        |   |                             | 14,475,000 |                            |   |            | 11,421,000 |      |   |            | 39,098,000 |   |   |             | 40,620,000 |  
|Selling, general and
administrative expenses                    |                                     |   | 15,233,000                  |            |                            |   | 10,022,000 |            |      |   | 35,277,000 |            |   |   | 31,139,000  |           
|                                                                |                                     |   |                             |            |                            |   |            |            |      |   |            |            |   |   |             |           
|                                                                | Income (loss) from operations       |   |                             | (758,000   | )                          |   |            | 1,399,000  |      |   |            | 3,821,000  |   |   |             | 9,481,000  |  
|Other income (expense):                                         |                                     |   |                             |            |                            |   |            |            |      |   |            |            |   |   |             |           
|                                                                | Interest income                     |   |                             | 7,000      |                            |   |            | 5,000      |      |   |            | 39,000     |   |   |             | 14,000     |  
|                                                                | Interest expense                    |   |                             | (258,000   | )                          |   |            | (377,000   | )    |   |            | (654,000   | ) |   |             | (1,157,000 | )
|                                                                | Other income (expense)              |   |                             | 54,000     |                            |   |            | (2,000     | )    |   |            | 59,000     |   |   |             | 7,000      |  
|                                                                |                                     |   |                             |            |                            |   |            |            |      |   |            |            |   |   |             |           
|                                                                | Total other expense                 |   |                             | (197,000   | )                          |   |            | (374,000   | )    |   |            | (556,000   | ) |   |             | (1,136,000 | )
|Income (loss) before
provision for income tax
expense (benefit) |                                     |   | (955,000                    | )          |                            |   | 1,025,000  |            |      |   | 3,265,000  |            |   |   | 8,345,000   |           
|Provision for income tax
expense (benefit)                      |                                     |   | (382,000                    | )          |                            |   | 410,000    |            |      |   | 1,306,000  |            |   |   | 3,338,000   |           
|                                                                |                                     |   |                             |            |                            |   |            |            |      |   |            |            |   |   |             |           
|                                                                | Net income (loss)                   |   | $                           | (573,000   | )                          |   | $          | 615,000    |      |   | $          | 1,959,000  |   |   | $           | 5,007,000  |  
|                                                                |                                     |   |                             |            |                            |   |            |            |      |   |            |            |   |   |             |           
|Net income (loss) per share                                     |                                     |   |                             |            |                            |   |            |            |      |   |            |            |   |   |             |           
|Basic:                                                          |                                     |   |                             |            |                            |   |            |            |      |   |            |            |   |   |             |           
|                                                                | Weighted average shares
outstanding |   |                             | 13,289,000 |                            |   |            | 13,155,000 |      |   |            | 13,224,000 |   |   |             | 13,149,000 |  
|                                                                | Net income (loss) per share         |   | $                           | (0.04      | )                          |   | $          | 0.05       |      |   | $          | 0.15       |   |   | $           | 0.38       |  
|Diluted:                                                        |                                     |   |                             |            |                            |   |            |            |      |   |            |            |   |   |             |           
|                                                                | Weighted average shares
outstanding |   |                             | 13,289,000 |                            |   |            | 13,370,000 |      |   |            | 13,597,000 |   |   |             | 13,470,000 |  
|                                                                | Net income (loss) per share         |   | $                           | (0.04      | )                          |   | $          | 0.05       |      |   | $          | 0.14       |   |   | $           | 0.37       |  

See accompanying notes to condensed consolidated financial statements.

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ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                     |                                                        |   |                            |             |      |   |            |             |  
|---------------------------------------------------- | ------------------------------------------------------ | - | -------------------------- | ----------- | ---- | - | ---------- | ----------- | -
|                                                     |                                                        |   | Nine months ended July 31,
|                                                     |                                                        |   |                           
|                                                     |                                                        |   | 2002                       |             | 2001
|                                                     |                                                        |   |                            |             |     
|Cash flows from operating activities:                |                                                        |   |                            |             |      |   |            |            
|Net cash used in operating activities                |                                                        | $ | (4,435,000                 | )           |      | $ | (1,954,000 | )          
|Cash flows from investing activities:                |                                                        |   |                            |             |      |   |            |            
|                                                     | Purchases of property and equipment                    |   |                            | (1,854,000  | )    |   |            | (6,303,000  | )
|                                                     | Proceeds from sale of property and equipment           |   |                            |            |      |   |            | 8,000       |  
|                                                     |                                                        |   |                            |             |      |   |            |            
|Net cash used in investing activities                |                                                        |   | (1,854,000                 | )           |      |   | (6,295,000 | )          
|Cash flows from financing activities:                |                                                        |   |                            |             |      |   |            |            
|                                                     | Principal payments on capital
lease obligations        |   |                            | (84,000     | )    |   |            | (12,000     | )
|                                                     | Borrowings on line of credit                           |   |                            | 32,445,000  |      |   |            | 43,550,000  |  
|                                                     | Payments on line of credit                             |   |                            | (28,045,000 | )    |   |            | (33,965,000 | )
|                                                     | Proceeds from long-term borrowing                      |   |                            |            |      |   |            | 3,000,000   |  
|                                                     | Principal payments on notes payable
and long-term debt |   |                            | (464,000    | )    |   |            | (3,155,000  | )
|                                                     | Payments for repurchase of common stock                |   |                            |            |      |   |            | (217,000    | )
|                                                     | Proceeds from issuance of common stock                 |   |                            | 980,000     |      |   |            | 616,000     |  
|                                                     |                                                        |   |                            |             |      |   |            |            
|Net cash provided by financing activities            |                                                        |   | 4,832,000                  |             |      |   | 9,817,000  |            
|Effect of exchange rate changes on cash              |                                                        |   | 801,000                    |             |      |   | (189,000   | )          
|                                                     |                                                        |   |                            |             |      |   |            |            
|Net increase (decrease) in cash and cash equivalents |                                                        |   | (656,000                   | )           |      |   | 1,379,000  |            
|Cash and cash equivalents, beginning of period       |                                                        |   | 1,055,000                  |             |      |   | 1,231,000  |            
|                                                     |                                                        |   |                            |             |      |   |            |            
|Cash and cash equivalents, end of period             |                                                        | $ | 399,000                    |             |      | $ | 2,610,000  |            
|                                                     |                                                        |   |                            |             |      |   |            |            

See accompanying notes to condensed consolidated financial statements.

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ASHWORTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2002

NOTE 1  Basis of Presentation.



| |  | In the opinion of management, the accompanying condensed consolidated
balance sheets and related interim condensed consolidated statements
of operations and cash flows include all adjustments (consisting only
of normal recurring items) necessary for their fair presentation. The
preparation of 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, liabilities, revenues and expenses, and the
disclosure of contingent assets and liabilities. Actual results could
differ from those estimates. Interim results are not necessarily
indicative of results to be expected for the full year.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Certain information in footnote disclosures normally included in
financial statements has been condensed or omitted in accordance with
the rules and regulations of the Securities and Exchange Commission
(SEC). The information included in this Form 10-Q should be read in
conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations, and consolidated financial
statements and notes thereto included in the annual report on Form
10-K for the year ended October 31, 2001, filed with the SEC on
January 28, 2002.                                                                                                                                                                                           

NOTE 2  Inventories.



| |  | Inventories consisted of the following at July 31, 2002 and October
31, 2001:
| |  | -----------------------------------------------------------------------------

|                       |  |          |            |             |  |   |            | 
|---------------------- |  | -------- | ---------- | ----------- |  | - | ---------- | 
|                       |  | July 31, |            | October 31,
|                       |  | 2002     |            | 2001       
|                       |  |          |            |            
|Raw materials          |  | $        | 367,000    |             |  | $ | 449,000    | 
|Work in process        |  |          |           |             |  |   | 107,000    | 
|Finished goods         |  |          | 38,490,000 |             |  |   | 35,285,000 | 
|                       |  |          |            |             |  |   |            | 
|Total inventories, net |  | $        | 38,857,000 |             |  | $ | 35,841,000 | 
|                       |  |          |            |             |  |   |            | 

NOTE 3  Net Income Per Share Information.



| |  | Basic net income per share has been computed based upon the weighted
average number of common shares outstanding during the period.
Diluted net income per share has been computed based upon the weighted
average number of common shares outstanding plus the dilutive effects
of common shares potentially issuable from the exercise of common
stock options. Common stock options are excluded from the computation
of net income per share if their effect is anti-dilutive. The
following table sets forth the computation of basic and diluted net
income per share based upon the requirements of SFAS No. 128:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|                                                                                                                           |               |   |                             |   |                            |   |            |         |      |   |            |         |  |   |            |         | 
|-------------------------------------------------------------------------------------------------------------------------- | ------------- | - | --------------------------- | - | -------------------------- | - | ---------- | ------- | ---- | - | ---------- | ------- |  | - | ---------- | ------- | 
|                                                                                                                           |               |   | Three months ended July 31, |   | Nine months ended July 31,
|                                                                                                                           |               |   |                             |   |                           
|                                                                                                                           |               |   | 2002                        |   | 2001                       |   | 2002       |         | 2001
|                                                                                                                           |               |   |                             |   |                            |   |            |         |     
|Numerator:                                                                                                                 |               |   |                             |   |                            |   |            |         |      |   |            |         |  |   |            |        
|Net income (loss)
numerator for basic and diluted
income (loss) per share  income
(loss)
available to common stockholders |               | $ | (573,000                    | ) |                            | $ | 615,000    |         |      | $ | 1,959,000  |         |  | $ | 5,007,000  |        
|                                                                                                                           |               |   |                             |   |                            |   |            |         |      |   |            |         |  |   |            |        
|Denominator:                                                                                                               |               |   |                             |   |                            |   |            |         |      |   |            |         |  |   |            |        
|Denominator for basic income (loss)
per share  weighted average shares                                                    |               |   | 13,289,000                  |   |                            |   | 13,155,000 |         |      |   | 13,224,000 |         |  |   | 13,149,000 |        
|Effect of dilutive securities:                                                                                             |               |   |                             |   |                            |   |            |         |      |   |            |         |  |   |            |        
|                                                                                                                           | stock options |   |                             |  |                            |   |            | 215,000 |      |   |            | 373,000 |  |   |            | 321,000 | 
|                                                                                                                           |               |   |                             |   |                            |   |            |         |      |   |            |         |  |   |            |        
|Denominator for diluted income (loss)
per share  adjusted weighted
average
shares and assumed conversions                 |               |   | 13,289,000                  |   |                            |   | 13,370,000 |         |      |   | 13,597,000 |         |  |   | 13,470,000 |        
|                                                                                                                           |               |   |                             |   |                            |   |            |         |      |   |            |         |  |   |            |        
|Basic net income (loss) per share                                                                                          |               | $ | (0.04                       | ) |                            | $ | 0.05       |         |      | $ | 0.15       |         |  | $ | 0.38       |        
|Diluted net income (loss) per share                                                                                        |               | $ | (0.04                       | ) |                            | $ | 0.05       |         |      | $ | 0.14       |         |  | $ | 0.37       |        



| |  | For the quarters ended July 31, 2002 and 2001, the diluted weighted
average shares outstanding computation excludes 656,000 and 1,672,000
options whose impact would have an anti-dilutive effect, respectively.
For the nine-month periods ended July 31, 2002 and 2001, the diluted
weighted average shares outstanding computation excludes 655,000 and
1,178,000 options whose impact would have an anti-dilutive effect,
respectively.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 4  Comprehensive Income.



| |  | The Company includes the cumulative foreign currency translation
adjustment as a component of the comprehensive income in addition to
net income for the period. For the quarters ended July 31, 2002 and
2001, total comprehensive income was $170,000 and $582,000,
respectively. For the nine-month periods ended July 31, 2002 and
2001, total comprehensive income was $2,760,000 and $4,818,000,
respectively.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 5  Legal Proceedings.



| |  | On January 22, 1999, Milberg Weiss Bershad Hynes & Lerach LLP filed a
class action in the United States District Court for the Southern
District of California (U.S. District Court) on behalf of purchasers
of the Companys common stock during the period between September 4,
1997 and July 15, 1998. The action was subsequently consolidated with
two similar suits and plaintiffs filed their Amended and Consolidated
Complaint on December 17, 1999. Upon the Companys motion, the U.S.
District Court dismissed the Complaint with leave to amend on July 18,
2000. On September 18, 2000, plaintiffs served their Second
Consolidated Amended Complaint (Second Amended Complaint). On
November 6, 2000, the Company filed its motion to dismiss the Second
Amended Complaint, which the U.S. District Court granted, in
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5



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| |  | part, and denied, in part. The remaining portions of the Second
Amended Complaint allege that, among other things, during the class
period and in violation of the Securities Exchange Act of 1934, the
Companys financial statements, as reported, did not conform to
generally accepted accounting principles with respect to revenues and
inventory levels. It further alleges that certain Company executives
made false or misleading statements or omissions concerning product
demand and that two former executives engaged in insider trading. The
plaintiffs seek unspecified damages. The parties are currently in the
early stages of the discovery process.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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 other claims
and litigation cannot currently be ascertained, the Company does not
believe that these other 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.                                                                                                                      

NOTE 6  Segment Information.



| |  | The Company defines its operating segments as components of an
enterprise for which separate financial information is available and
regularly reviewed by the Companys senior management. The Company
has the following two reportable segments: domestic and international.
Management evaluates segment performance based primarily on revenues
and income from operations. Interest income and expense is evaluated
on a consolidated basis and is not allocated to the Companys business
segments. Segment information is summarized (for the dates or periods
presented) below:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               |               |       |   |                             |            |                            |   |            |            |      |   |            |            |  |   |            |             | 
|------------------------------ | ------------- | ----- | - | --------------------------- | ---------- | -------------------------- | - | ---------- | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | ----------- | 
|                               |               |       |   | Three months ended July 31, |            | Nine months ended July 31,
|                               |               |       |   |                             |            |                           
|                               |               |       |   | 2002                        |            | 2001                       |   | 2002       |            | 2001
|                               |               |       |   |                             |            |                            |   |            |            |     
|Net Revenues:                  |               |       |   |                             |            |                            |   |            |            |      |   |            |            |  |   |           
|                               | Domestic      |       | $ | 30,808,000                  |            |                            | $ | 25,472,000 |            |      | $ | 84,832,000 |            |  | $ | 89,878,000 |            
|                               | International |       |   | 5,052,000                   |            |                            |   | 4,293,000  |            |      |   | 13,710,000 |            |  |   | 14,501,000 |            
|                               |               |       |   |                             |            |                            |   |            |            |      |   |            |            |  |   |           
|                               |               | Total |   | $                           | 35,860,000 |                            |   | $          | 29,765,000 |      |   | $          | 98,542,000 |  |   | $          | 104,379,000 | 
|                               |               |       |   |                             |            |                            |   |            |            |      |   |            |            |  |   |           
|Income (Loss) From Operations: |               |       |   |                             |            |                            |   |            |            |      |   |            |            |  |   |           
|                               | Domestic      |       | $ | (848,000                    | )          |                            | $ | 1,691,000  |            |      | $ | 3,268,000  |            |  | $ | 9,409,000  |            
|                               | International |       |   | 90,000                      |            |                            |   | (292,000   | )          |      |   | 553,000    |            |  |   | 72,000     |            
|                               |               |       |   |                             |            |                            |   |            |            |      |   |            |            |  |   |           
|                               |               | Total |   | $                           | (758,000   | )                          |   | $          | 1,399,000  |      |   | $          | 3,821,000  |  |   | $          | 9,481,000   | 
|                               |               |       |   |                             |            |                            |   |            |            |      |   |            |            |  |   |           

|              |               |       |   |            |             |             |   |            |            | 
|------------- | ------------- | ----- | - | ---------- | ----------- | ----------- | - | ---------- | ---------- | 
|              |               |       |   | July 31,   |             | October 31,
|              |               |       |   | 2002       |             | 2001       
|              |               |       |   |            |             |            
|Total Assets: |               |       |   |            |             |             |   |           
|              | Domestic      |       | $ | 88,444,000 |             |             | $ | 79,878,000 |           
|              | International |       |   | 16,389,000 |             |             |   | 13,778,000 |           
|              |               |       |   |            |             |             |   |           
|              |               | Total |   | $          | 104,833,000 |             |   | $          | 93,656,000 | 
|              |               |       |   |            |             |             |   |           

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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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. The
following are important factors, among others, that could cause actual results
to differ materially from the projected results contained in certain
forward-looking statements in this report.



| |  |  | Continued weak global economic conditions could adversely impact
the Companys revenues and growth rate.                        
| | - |  | --------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The competitive environment in the golf apparel industry places
pressure on revenues, gross margins and market share.           
|
| |  |  | Erosion of the financial condition of customers could adversely
affect the Companys business and collectability of receivables.

For additional information, see Cautionary Statements and Risk Factors,
below.

The Companys business is seasonal therefore, the current balance sheet
balances at July 31, 2002 may more meaningfully be compared to the balances at
July 31, 2001 rather than to the balances at October 31, 2001.

Critical Accounting Policies

In response to the SECs Release Numbers 33-8040, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies and 33-8056, Commission
Statement About Managements Discussion and Analysis of Financial Condition and
Results of Operations, the Company has identified the following critical
accounting policies that affect its more significant judgments and estimates
used in the preparation of its consolidated financial statements.

Sales Returns and Other Allowances.Management must make estimates of
potential future product returns 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 in the amount and timing of our revenues for any period if
management makes different judgments or utilizes different estimates. The
reserves for sales returns and other allowances amounted to $653,000 at July
31, 2002 compared to $716,000 at October 31, 2001 and $586,000 at July 31,
2001.

Allowance for Doubtful Accounts.Management must also make estimates of the
uncollectability 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 historical
bad debts, continually evaluating individual customer receivables considering
the customers financial condition and current economic conditions. As of July
31, 2002, the Company had reserved $2,500,000 for the unpaid principal balance
of an unsecured promissory note as well as approximately $2,000,000 of
over-90-day receivables

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due from a national retail customer which has filed for protection under U. S.
bankruptcy laws. If the financial condition of other significant customers of
ours were to deteriorate, resulting in the impairment of their ability to make
payments, material additional allowances for doubtful accounts may be required.
Our trade accounts receivable balance was $38.8 million, net of allowances for
doubtful accounts of $3.3 million, at July 31, 2002, as compared to the balance
of $26.8 million, net of allowances for doubtful accounts of $1.4 million, at
October 31, 2001. At July 31, 2001, the trade accounts receivable balance was
$37.1 million, net of allowances for doubtful accounts of $1.1 million.

Inventory.The Company writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory
and the estimated net realizable value based on assumptions about 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 $38.9 million, net of
inventory write-downs of $1.4 million, at July 31, 2002, as compared to an
inventory balance of $35.8 million, net of inventory write-downs of $955,000,
at October 31, 2001. At July 31, 2001, the inventory balance was $32.9
million, net of inventory write-downs of $1.3 million.

Asset Purchase Credits.In November 2000, the Company entered into an
agreement with a third party whereby inventory 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. 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. From time to time the Company may enter into
additional contracts with such third party suppliers to use the APCs. At July
31, 2002, the Company had $1.0 million of the APCs remaining and management
expects to fully utilize them over the remaining life of the contract.

At July 31, 2002 and 2001, 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
which 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.

Results of Operations

Third quarter 2002 compared to third quarter 2001

Consolidated net revenues for the third quarter of fiscal 2002 increased 20.5%
to $35,860,000 from $29,765,000 for the same period in 2001. Net revenues for
the domestic segment increased 20.9% to $30,808,000 for the current quarter
from $25,472,000 in the third quarter of 2001, primarily due to increased
revenues from the Companys golf related distribution channel primarily
resulting from the addition of the Callaway Golf apparel product line as well
as increased revenues from the corporate distribution channel. These increases
were partially offset by the decline in revenues in the retail distribution
channel primarily due to the lost sales to the national retail account that
defaulted on its debt to the Company. Net revenues for the international
segment increased 17.7% to $5,052,000 for the current quarter from $4,293,000
for the same period of the prior fiscal year. The increase was primarily due
to higher revenues in the Companys U.K. subsidiary, partially offset by slight
decreases in Canada and other

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international territories.

Consolidated gross margin for the quarter increased 200 basis points to 40.4%
as compared to 38.4% for the same quarter a year earlier. This improvement was
primarily due to improved sourcing, improved inventory management as well as
the Companys ability to maintain its prices. The Company continues to benefit
from operational initiatives designed to improve its execution and
profitability.

Consolidated selling, general and administrative (SG&A) expenses increased
52.0% to $15,233,000 for the third quarter of fiscal 2002 from $10,022,000 for
the same period in fiscal 2001. This increase was primarily due to the
$4,250,000 additional bad debt reserve booked for the national retail account
that defaulted on its debt to the Company. Excluding this additional bad debt
reserve, the Companys SG&A expenses would have increased 9.6% to $10,983,000
or 30.6% of net revenues as compared to 33.7% of net revenues in the same
quarter of the prior year. The 9.6% increase is below the 20.5% increase in
net revenues for the current quarter of fiscal 2002. As a percent of net
revenues, the decrease in SG&A (excluding the additional bad debt reserve) is a
direct result of fixed expenses being spread over the higher net revenues base,
as well as cost controls and a workforce reduction implemented since last year.

Total other expense decreased to $197,000 for the third quarter of fiscal 2002
from $374,000 in the third quarter of fiscal 2001, primarily due to lower
interest expense resulting from lower interest rates on slightly higher average
borrowings under the Companys line of credit as well as currency transaction
gains in the current quarter as compared to currency transaction losses in the
same quarter of the prior fiscal year incurred by the Companys U.K.
subsidiary.

The effective income tax rate for the third quarter of fiscal 2002 remained at
40.0% of pre-tax income.

Nine months ended July 31, 2002 compared to nine months ended July 31, 2001

Consolidated net revenues for the first nine months of fiscal 2002 decreased
5.6% to $98,542,000 from $104,379,000 for the same period in fiscal 2001. Net
revenues for the domestic segment decreased 5.6% to $84,832,000 from
$89,878,000 in the first nine months of fiscal 2001, primarily due to lower
revenues from the Companys retail distribution channel which was adversely
affected by the broad weakness in the U. S. economy, partially offset by
increased revenues form the Companys corporate distribution channel. Net
revenues for the international segment decreased 5.5% to $13,710,000 from
$14,501,000 for the same period of the prior fiscal year. The decrease was
primarily due to the lower revenues from the Pacific Rim countries.

Consolidated gross margin for the first nine months of fiscal 2002 increased to
39.7% as compared to 38.9% in the first nine months of fiscal 2001. The
improvement was primarily due to improved sourcing as well as improved
inventory management, partially offset by the negative leverage caused by lower
revenues.

Consolidated SG&A expenses increased 13.3% to $35,277,000 for the first nine
months of fiscal 2002 from $31,139,000 for the same period in fiscal 2001.
This increase was primarily due to the additional $4,250,000 of bad debt
reserve booked for one national retail account that defaulted on its debt to
the Company. Excluding the additional bad debt reserve, the Companys SG&A
expenses would have decreased 0.4% to $31,026,000 or 31.5% of net revenues for
the first nine months of fiscal 2002 as compared to $31,139,000 or 29.8% of net
revenues in the same period of the prior year. The increase as a percentage of
net revenues was primarily due to the fixed expenses being spread over a lower
net revenues base as well as the additional expenses incurred in launching the
Callaway Golf apparel product line.

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Total other expense decreased to $556,000 from $1,136,000 in the first nine
months of fiscal 2002, primarily due to lower interest expense resulting from
lower interest rates on reduced average borrowings under the Companys line of
credit as well as currency transaction gains in the first nine months of the
current year as compared to currency transaction losses in the same period of
the prior fiscal year by the Companys U.K. subsidiary and Canadian divisions.

The effective income tax rate in the first nine months of fiscal 2002 remained
at 40.0% of pre-tax income.

Capital Resources and Liquidity

The Companys primary sources of liquidity for the remainder of fiscal 2002 are
expected to be its cash flows from operations, the working capital line of
credit with its bank and other financial alternatives such as leasing. The
Company requires cash for capital expenditures and other requirements
associated with the expansion of its domestic and international production,
distribution and sales, as well as for general working capital purposes. In
May 2002, the Company extended its business loan agreement with its bank
through March 1, 2003. The loan agreement provides a revolving line of credit
of $25,000,000 with a seasonal increase in the line of credit to $35,000,000
through July 1, 2002 and again for the period of February 1, 2003 through March
1, 2003. Interest is charged at the banks reference (prime) rate, minus
one-half of one percentage point. The loan agreement also provides for
optional interest rates based on inter-bank offered rates (IBOR) for periods
of at least 30 days in increments of $500,000. The loan agreement is unsecured
but contains various restrictive covenants requiring, among other matters, the
maintenance of certain financial ratios. Management believes the Company was
in material compliance with, or has obtained a waiver for, all such covenants
as of July 31, 2002. The loan agreement permits the Company to acquire, for
value, shares of Ashworth stock in an aggregate amount not to exceed
$10,200,000 during the term of the agreement. The line of credit may also be
used to finance commercial letters of credit and standby letters of credit.
Commercial letters of credit outstanding under this loan agreement totaled
$8,320,000 at July 31, 2002 and $5,506,000 at October 31, 2001. The Company
had $10,350,000 outstanding against the line of credit at July 31, 2002,
compared to $5,950,000 outstanding at October 31, 2001. The increases in
outstanding letters of credit and borrowings are primarily due to the
seasonality of the Companys business. At July 31, 2002 the available balance
under this loan agreement was $6,330,000.

Net trade receivables were $38,766,000 at July 31, 2002, an increase of
$11,949,000 from the balance at October 31, 2001. Because the Companys
business is seasonal, the net receivables balance may more meaningfully be
compared to the balance of $37,149,000 at July 31, 2001, rather than the
year-end balance. The comparison to the third quarter of fiscal 2001 shows an
increase of 4.4% in net trade receivables. Excluding the additional bad debt
reserve booked during the quarter ended July 31, 2002, the receivable balance
at July 31, 2002 increased 9.1% from the prior year and is below the increase
in net revenues for the quarter.

Net inventories increased 8.4% to $38,857,000 at July 31, 2002 from $35,841,000
at October 31, 2001. Compared to net inventories of $32,930,000 at July 31,
2001, net inventories at July 31, 2002 have increased by 18.0%, primarily due
to the addition of the Callaway Golf apparel line. The Company believes that
its current inventory mix is appropriate to respond to market demand.

During the first nine months of fiscal 2002, the Company incurred capital
expenditures of $1,854,000 primarily for computer software and equipment,
furniture and fixtures and leasehold improvements. The

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Company anticipates spending approximately $1,046,000 during the remainder of
fiscal 2002, primarily on upgrades of computer systems and equipment and outlet
stores renovations. Management currently intends to finance the purchase of
the Companys capital equipment from its own cash resources, but may use leases
or equipment financing agreements if deemed appropriate. In addition, the
Company continues to evaluate significant projects requiring additional capital
expenditures in connection with the planned expansion of its domestic and
international production, distribution and sales.

Common stock and capital in excess of par value increased by $980,000 in the
nine months ended July 31, 2002, due to the issuance of shares on exercise of
options.

On September 3, 2002, the Company announced that its board of directors had
authorized the repurchase during a 12-month period, in open market or private
transactions, of up to $6,500,000 of the Companys outstanding common stock.
As of September 12, 2002, a total of $521,000 had been repurchased at per share
prices ranging from $5.10 to $5.45.

Based upon current levels of operations, the Company expects that sufficient
cash flow will be generated from operations so that, combined with other
financing alternatives available, including cash on hand, borrowings under its
bank credit facilities and leasing alternatives, the Company will be able to
meet all
of its debt service, capital expenditure and working capital requirements for
at least the next 12 months.

Derivatives

Although the Company and its subsidiaries did not do so during the first nine
months of fiscal 2002, from time to time the Company enters 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 and the
U.S. dollar and the Canadian dollar. The contracts provide that, on specified
dates, the Company would sell the bank a specified number of British pounds or
Canadian dollars in exchange for a specified number of U.S. dollars.
Additionally, from time to time the Companys U.K. subsidiary 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 transactions.
These contracts have maturity dates that do not normally exceed 12 months. At
July 31, 2002, neither the Company nor any of its subsidiaries was a party to
any outstanding foreign exchange contracts.

New Accounting Standards

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for
Asset Retirement Obligations, which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The standard applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or normal use of the
asset.

SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If
the obligation is settled for other than the carrying amount of the liability,
the Company will recognize a gain or loss on settlement.

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The Company is required and plans to adopt the provisions of SFAS No. 143 for
the quarter ending January 31, 2003. To accomplish this, the Company must
identify all legal obligations for asset retirement obligations, if any, and
determine the fair value of these obligations on the date of adoption. The
determination of fair value is complex and will require the Company to gather
market information and develop cash flow models. Additionally, the Company
will be required to develop processes to track and monitor these obligations.
Management does not expect the adoption of SFAS No. 143 to have a material
impact on the Companys financial statements.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes both SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Ofand the accounting and reporting provisions of Accounting
Principles Board (APB) Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that
Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for
recognizing and measuring impairment losses on long-lived assets held for use
and long-lived assets to be disposed of by sale, while also resolving
significant implementation issues associated with SFAS No. 121. For example,
SFAS No. 144 provides guidance on how a long-lived asset that is used as part
of a group should be evaluated for impairment, establishes criteria for when a
long-lived asset is held for sale, and prescribes the accounting for a
long-lived asset that will be disposed of other than by sale. SFAS No. 144
retains the basic provisions of APB Opinion No. 30 on how to present
discontinued operations in the income statement but broadens that presentation
to include a component of an entity (rather than a segment of a business).
Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never
result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under SFAS No. 142, Goodwill and Other Intangible Assets.

The Company is required to adopt SFAS No. 144 no later than the fiscal year
beginning after December 15, 2001, and plans to adopt its provisions for the
quarter ending January 31, 2003. The provisions of the statement for assets
held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Management does not expect the adoption of SFAS No. 144 for long-lived assets
held for use to have a material impact on the Companys financial statements
because the impairment assessment under SFAS No. 144 is largely unchanged from
SFAS No. 121.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB SFASs No. 4,
44, and 64, Amendment of FASB SFAS No. 13, and Technical Corrections. SFAS No.
145 updates, clarifies and simplifies existing accounting pronouncements
including: rescinding SFAS No. 4, which required all gains and losses from
extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect and amending SFAS No. 13
to require that certain lease modifications that have economic effects similar
to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. Upon adoption of SFAS No. 145, companies will be
required to apply the criteria in APB Opinion No. 30, reclassifying prior
period items that do not meet the extraordinary item classification criteria in
such Opinion. SFAS No. 145 is effective for fiscal years beginning after May
15, 2002, with early adoption of the provisions related to the rescission of
SFAS No. 4 encouraged. The Company does not expect the adoption of this
statement to have a material impact on its financial position or results of
operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal

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Activities, which addresses financial accounting and reporting for costs
associated with exit or disposal activities. SFAS No. 146 nullifies EITF Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The principal difference between SFAS No. 146 and EITF Issue
No. 94-3 relates to the recognition of a liability for a cost associated with
an exit or disposal activity. SFAS No. 146 requires that a liability be
recognized for those costs only when the liability is incurred, that is, when
it meets the definition of a liability in the FASBs conceptual framework. In
contrast, under EITF Issue No. 94-3, a company recognized a liability for an
exit cost when it committed to an exit plan. SFAS No. 146 also establishes
fair value as the objective for initial measurement of liabilities related to
exit or disposal activities. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002 although earlier
application is encouraged. Management does not believe that the adoption of
this statement will have a material impact on its financial position or results
of operations.

Cautionary Statements and Risk Factors

This report contains certain forward-looking statements, including without
limitation those regarding the Companys plans and expectations for revenue
growth, product lines, strategic alliances, designs and seasonal collections,
marketing programs, foreign sourcing, cost controls, inventory levels and
availability of working capital. These forward-looking statements may contain
the words believe, anticipate, expect, estimate, project, will
be, will continue, will likely result, or other similar words and phrases.
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, and the Companys business in
general 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:



| |  | Demand for the Companys products may decrease significantly if the
economy continues to weaken or if the popularity of golf decreases.                                                                                                                                                                                                                                                                                          
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Like other apparel manufacturers, the Company must correctly anticipate
and help direct fashion trends within its industry. The Companys
results of operations could suffer if the Company fails to develop
fashions and styles that are well received in any season.                                                                                                                                                           
| 
| |  | The Company is party to a multi-year licensing agreement to design,
source and sell Callaway Golf apparel primarily in the United States,
Europe, Canada, Australia, New Zealand and South Africa. The Company
must correctly anticipate the fashion trends and demand for these
product lines. The Companys results of operations could suffer if it
fails to develop fashions and styles that are well received in any
season.
| 
| |  | The market for golf apparel and sportswear is extremely competitive.
While the Company is currently a leader in the core green grass market,
it has several strong competitors that are better capitalized and have
stronger distribution systems. Outside the green grass market, the
Companys market share is not as significant. Price competition or
industry consolidation could weaken the Companys competitive position.
| 
| |  | The Company relies on domestic and foreign contractors to manufacture
various products. If these contractors deliver goods late or fail to
meet the Companys quality standards, the Company could lose sales.                                                                                                                                                                                                                   

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| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | If economic conditions do not improve, the Companys customers ability
to pay current obligations may be adversely impacted and the Company
may experience a further increase in delinquent and uncollectable
accounts.                                                                                                                                                                                                                                                                                                                                                                                                                      
| 
| |  | The Company maintains high levels of inventory to support its
Authentics 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
may materially impair the Companys financial performance in any
period. Particular inventories 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.




Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Companys debt consists of notes payable which had a total balance of
$3,669,000 at July 31, 2002. The debt bears interest at variable and fixed
rates ranging from 5.9% to 11.0%, which approximates fair value based on
current rates offered for debt with similar risks and maturities. The Company
also had $10,350,000 outstanding at July 31, 2002 on its revolving line of
credit with interest charged at the banks reference (prime) rate minus
one-half of one percentage point. The loan agreement also provides for
optional interest rates based on IBOR for periods of at least 30 days in
increments of $500,000. A hypothetical 10% increase in interest rates during
the nine months ended July 31, 2002 would have resulted in a $24,000 decrease
in net income.

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.
Although the Company and its subsidiaries did not do so during the first nine
months of fiscal 2002, from time to time the Company enters 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 and the
U.S. dollar and the Canadian dollar. The contracts provide that, on specified
dates, the Company would sell the bank a specified number of British pounds or
Canadian dollars in exchange for a specified number of U.S. dollars.
Additionally, from time to time the Companys U.K. subsidiary 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 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. At July 31, 2002, neither the Company nor any of its
subsidiaries had any outstanding foreign exchange contracts.

14



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##### Table of Contents






PART II

OTHER INFORMATION




Item 1. LEGAL PROCEEDINGS

On January 22, 1999, Milberg Weiss Bershad Hynes & Lerach LLP filed a class
action in the United States District Court for the Southern District of
California (U.S. District Court) on behalf of purchasers of the Companys
common stock during the period between September 4, 1997 and July 15, 1998.
The action was subsequently consolidated with two similar suits and plaintiffs
filed their Amended and Consolidated Complaint on December 17, 1999. Upon the
Companys motion, the U.S. District Court dismissed the Complaint with leave to
amend on July 18, 2000. On September 18, 2000, plaintiffs served their Second
Consolidated Amended Complaint (Second Amended Complaint). On November 6,
2000, the Company filed its motion to dismiss the Second Amended Complaint,
which the U.S. District Court granted, in part, and denied, in part. The
remaining portions of the Second Amended Complaint allege that, among other
things, during the class period and in violation of the Securities Exchange Act
of 1934, the Companys financial statements, as reported, did not conform to
generally accepted accounting principles with respect to revenues and inventory
levels. It further alleges that certain Company executives made false or
misleading statements or omissions concerning product demand and that two
former executives engaged in insider trading. The plaintiffs seek unspecified
damages. The parties are currently in the early stages of the discovery
process.

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 other claims and litigation cannot currently be
ascertained, the Company does not believe that these other 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS  NONE




Item 3. DEFAULTS UPON SENIOR SECURITIES  NONE




Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  NONE




Item 5. OTHER INFORMATION  NONE




Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  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. 0-18553) and incorporated
herein by reference).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|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.
0-18553) 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)(1) |  | 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. 0-18553) and incorporated herein by reference).                                            
|       
|4(b)(2) |  | Specimen certificate for Options granted under the Founders Stock
Option Plan dated November 6, 1992 (filed as Exhibit 4(b)(2) to the
Companys Form 10-K for the fiscal year ended October 31, 1993 (File No.
0-18553) 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. 0-18553) 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. 0-18553) 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. 0-18553) 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. 0-18553) and incorporated herein by reference).                                                
|       
|10(c)   |  | Promotion Agreement effective November 1, 2001 by and among Ashworth,
Inc., James W. Nantz, III and Nantz Communications, Inc. (filed as Exhibit
10(c) to the Companys Form 10-K for the fiscal year ended October 31,
2001 (File No. 0-18553) and incorporated herein by reference).                                        
|       
|10(d)*  |  | First Amended and Restated Executive Employment Agreement effective
February 22, 1999 by and between Ashworth, Inc. and Randall L. Herrel, Sr.
(filed as Exhibit 10(a) to the Companys Form 10-Q for the quarter ended
April 30, 1999 (File No. 0-18553) and incorporated herein by reference).                              
|       
|10(e)*  |  | Employment Agreement effective December 15, 2000 by and between
Ashworth, Inc. and Terence W. Tsang (filed as Exhibit 10(f) to the
Companys Form 10-Q for the quarter ended January 31, 2001 (File No.
0-18553) and incorporated herein by reference).                                                                       
|       
|10(f)*  |  | Founders Stock Option Plan dated November 6, 1992 (filed as Exhibit
10(g) to the Companys Form 10-K for the fiscal year ended October 31,
1993 (File No. 0-18553) and incorporated herein by reference).                                                                                                                     
|       
|10(g)*  |  | 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. 0-18553) and incorporated herein by
reference).                                                                                            

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##### Table of Contents





|10(h)*   |  | 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. 0-18553) and incorporated herein by
reference).                                                                                                                                                                                                
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        
|10(i)*   |  | 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(j)(1) |  | Business Loan Agreement dated June 1, 2000, between the Company and
Bank of America, expiring May 1, 2002 (filed as Exhibit 10(m) to the
Companys Form 10-Q for the quarter ended April 30, 2000 (File No.
0-18553) and incorporated herein by reference).                                                                                                                                                                    
|        
|10(j)(2) |  | Amendment No. 3, effective as of May 1, 2002 to the Business Loan
Agreement dated June 1, 2000, among Ashworth, Inc., Ashworth Store I,
Inc., Ashworth Store II, Inc., Ashworth International, Inc., Ashworth U.K.
Ltd. and Bank of America, N. A., expiring March 1, 2003 (filed as Exhibit
10(j)(2) to the Companys Form 10-Q for the quarter ended April 30, 2002
(File No. 0-18553) and incorporated herein by reference).
|        
|10(k)*   |  | Change in Control Agreement dated November 1, 2000 by and between
Ashworth, Inc. and Randall L. Herrel, Sr. (filed as Exhibit 10(m) to the
Companys Form 10-K for the fiscal year ended October 31, 2000 (File No.
0-18553) and incorporated herein by reference).                                                                                                                                                            
|        
|10(l)*   |  | Change in Control Agreement dated November 1, 2000 by and between
Ashworth, Inc. and Terence W. Tsang (filed as Exhibit 10(n) to the
Companys Form 10-K for the fiscal year ended October 31, 2000 (File No.
0-18553) and incorporated herein by reference).                                                                                                                                                                  
|        
|10(m)    |  | 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. 0-18553) and
incorporated herein by reference).                                                                                                                                                                          
|        
|10(n)*   |  | Amended and Restated Offer and Acceptance of Executive Employment
effective February 1, 2000 by and between Ashworth, Inc. and Nicoletta
Larucci-Miele (filed as Exhibit 10(p) to Registrants Form 10-Q for the
quarter ended January 31, 2001 (File No. 0-18553) and incorporated herein
by reference).                                                                                                                      
|        
|10(o)*   |  | Offer and Acceptance of Executive Employment effective November 29, 1999
by and between Ashworth, Inc. and Anthony Wilkinson (filed as Exhibit
10(q) to the Companys Form 10-Q for the quarter ended January 31, 2001
(File No. 0-18553) and incorporated herein by reference).                                                                                                                                               
|        
|99.1     |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002 by Randall L. Herrel, Sr.                                                                                                                                                                                                                                                                               
|        
|99.2     |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002 by Terence W. Tsang.                                                                                                                                                                                                                                                                                    

*     Management contract or compensatory plan or arrangement required to be filed
as an Exhibit pursuant to Item 14(c) of Form 10-K and applicable rules of the
Securities and Exchange Commission.

(b)  Reports on Form 8-K:



| |  | The Company filed a report on Form 8-K on September 5, 2002 reporting
that the Board of Directors of the Company had approved a repurchase
program which authorizes the Company to repurchase up to $6.5 million of
its common stock.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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SIGNATURES

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

|      |  |                    |  |                                                                                                           |  |                       
|----- |  | ------------------ |  | --------------------------------------------------------------------------------------------------------- |  | ----------------------
|      |  |                    |  | ASHWORTH, INC                                                                                            
|     
|Date: |  | September 13, 2002 |  | By:                                                                                                       |  | /s/   Terence W. Tsang
|      |  |                    |  |                                                                                                           |  |                       
|      |  |                    |  | Terence W. Tsang
Executive Vice President, Chief Operating Officer,
Chief Financial Officer and Treasurer

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##### Table of Contents






CERTIFICATIONS

Each of the undersigned, in his capacity as the Chief Executive Officer and
Chief Financial Officer of Ashworth, Inc., as the case may be, provides the
following certifications required by 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, and 17 C.F.R.
section 240.13a-14.

Certification of Chief Executive Officer

I, Randall L. Herrel, Sr., certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of
Ashworth, Inc.;                                                                                                                                                                                                                                                             
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly 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 quarterly
report; and
|
| | 3. |  | Based on my knowledge, the financial statements, and
other financial information included in this quarterly 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 quarterly report.                       



|Dated:  September 13, 2002 | /s/   Randall L. Herrel, Sr.
Randall L. Herrel, Sr.
Chief Executive Officer
|-------------------------- | ---------------------------------------------------------------------------

Certification of Chief Financial Officer

I, Terence W. Tsang, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of
Ashworth, Inc.;                                                                                                                                                                                                                                                             
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly 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 quarterly
report; and
|
| | 3. |  | Based on my knowledge, the financial statements, and
other financial information included in this quarterly 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 quarterly report.                       



|Dated:  September 13, 2002 | /s/   Terence W. Tsang
Terence W. Tsang
Chief Financial Officer
|-------------------------- | ---------------------------------------------------------------

19