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SECURITIES AND EXCHANGE COMMISSION

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2002

[   ] 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.

2765 LOKER AVENUE WEST, CARLSBAD, CA 92008
(Address of Principal Executive Office, including Zip Code)
(760) 438-6610
(Registrant’s Telephone Number, including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to section 12(g) of the Act: common stock, $.001 Par Value

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

The aggregate market value of the common stock held by nonaffiliates of the Registrant as of December 31, 2002, was $82,874,000 based upon the last reported sale price of the Company’s common stock as reported by the Nasdaq National Market System.

There were 12,949,047 shares of common stock, $.001 par value, outstanding at the close of business on December 31, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

PART III incorporates certain information by reference from the Registrant’s definitive Proxy Statement for its 2003 Annual Meeting of Stockholders to be filed with the Commission within 120 days of October 31, 2002 pursuant to Regulation 14A, which information is incorporated herein by reference.

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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, distribution facilities, 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 weakens 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 or 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 and Australia. 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 or styles for the Callaway Golf apparel product line 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. 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.
•		An increase in terrorist activities, as well as the threat of conflict, including armed conflict with Iraq, would likely adversely affect the level of demand for the Company’s products as customers’ and consumers’ attention and interest are diverted from golf and fashion and become focused on these events and the economic, political, and public safety issues and concerns associated with them. Also, such events could adversely affect the Company’s ability to manage its supply and delivery of product from domestic and foreign contractors. If such events caused a significant disruption in domestic or international shipments, the Company’s ability to fulfill customer orders also would be materially adversely affected.
•		The Company has entered into an agreement to purchase land and a new distribution center in Oceanside, California to replace and expand existing owned and leased distribution facilities. The Company’s results of operations could be adversely affected if the distribution center is not operational as anticipated by early fiscal year 2004. Any such delay may cause the Company to incur additional expense, experience delays in customer shipments or require the Company to lease additional distribution space or extend the term of existing leases. In addition, whether or not the facilities are operational at the time anticipated, the Company’s results of operations could be negatively impacted if future sales volume growth does not reach expected levels and the facility’s additional distribution capacity is not fully utilized, or if the Company does not achieve projected cost savings from the new distribution facility as soon as, or in the amounts, anticipated.

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•		If economic conditions do not improve, the ability of the Company’s customers to pay current obligations may be adversely impacted and the Company may experience an increase in delinquent and uncollectable accounts.
•		Fluctuations in foreign currency exchange rates could affect the Company’s ability to sell its products in foreign markets and the value in U.S. dollars of revenues received in foreign currencies. The Company’s revenues from its International segment may also be adversely affected by taxation and laws or policies of the foreign countries in which the Company has operations, as well as laws and policies of the United States affecting foreign trade, investment and taxation.
•		The Company maintains high levels of inventory to support its AuthenticsTM 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.

Readers are cautioned not place undue reliance on these forward-looking statements. The Company undertakes no obligation to update any such statements or publicly announce any updates or revisions to any of the forward-looking statements contained hereunder.

2003 ANNUAL MEETING OF STOCKHOLDERS

The Company’s annual meeting of stockholders will be held at 8:00 a.m. on Wednesday, March 19, 2003 at the Company’s corporate headquarters at 2765 Loker Avenue West, Carlsbad, California.

PART I

Item 1. BUSINESS.

GENERAL DESCRIPTION OF THE COMPANY

     Ashworth, Inc., based in Carlsbad, California, was incorporated in Delaware on March 19, 1987. As used in this report, the terms “we,” “us,” “our,” “Ashworth” and the “Company” refer to Ashworth, Inc., its predecessors, subsidiaries and affiliates, unless the context indicates otherwise. The Company designs, markets and distributes quality sports apparel, headwear, and accessories under the Ashworth® label. In 2001, the Company entered into a multi-year licensing agreement to design, source, market and sell Callaway Golf apparel primarily in the United States, Europe, Canada and Australia. Ashworth’s products are sold in golf pro shops, at resorts, to corporate customers, at better department and specialty retail stores and Ashworth retail stores.

     The Company has wholly-owned subsidiaries that currently own and operate eight Company outlet stores and an Ashworth Concept Store. A wholly-owned United Kingdom subsidiary distributes our products in Europe. The Company also established a wholly-owned subsidiary in the Virgin Islands as a foreign sales corporation to take advantage of certain federal income tax benefits with respect to profits from foreign sales. The Company is currently in the process of dissolving the Virgin Islands subsidiary due to federal income tax code changes relating to foreign sales corporations. The Company established one division in 1998 to distribute its Ashworth products in Canada and a second division in 2002 to distribute its Callaway Golf apparel in Canada.

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     Ashworth designs and markets men’s and women’s sportswear with an authentic style and function for golf and casual lifestyle environments. The Company distributes its products under the Ashworth and Callaway Golf apparel brands to golf pro shops, resorts, specialty golf retailers, and men’s and women’s specialty and department stores. The Company has focused on developing new looks and fabrications that represent innovation, style and function in the golf market.

ASHWORTH PRODUCTS

     The Ashworth Men’s Division designs Authentics^TM, fashion, Ashworth 7^TM and Weather Systems^® collections. Each fashion collection typically consists of knit and woven shirts, pullovers, jackets, sweaters, vests, pants, shorts, headwear and accessories. Product design focuses on classic, timeless designs with emphasis on quality and innovation.

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

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

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

     The Callaway Golf apparel men’s Sport range includes classic and fashion lines featuring knit shirts, pullovers, vests, jackets, sweaters, pants, shorts, headwear and accessories. The designs aim to appeal to the active consumer.

     For the first few seasons, the focus of the Callaway Golf apparel women’s line will be on the classic collection. The designs are intended to be functional and timeless.

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

DISTRIBUTION CHANNELS

     Approximately 88% of our products are warehoused in and shipped from Ashworth’s distribution facilities in Carlsbad, California. Drop-shipments from off-shore factories directly to our international distributors, Ashworth, U.K. Ltd., Ashworth Canada and Ashworth Golf Apparel Canada, account for approximately 12% of the Company’s products. The Company has entered into an agreement to purchase land and a new 200,000 square foot distribution center to be built to the Company’s specifications on a 15.5 acre site in Oceanside, California, to replace the Company’s existing Carlsbad distribution facilities. The new distribution center is expected to be operational in early fiscal year 2004.

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

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

     The Company’s core customers are golf pro shops located at golf courses and resorts as well as off-course golf-theme specialty retailers. According to the 2002 Darrell Survey, a leading golf industry consumer usage survey, Ashworth was the leading golf apparel company in the United States with a 14% share in shirt usage among golfers. The Company currently distributes its products in nearly all of the 50 states.

U.S. Department Stores and Specialty Stores

     The Company currently sells its products to selected upscale department and specialty stores, including Parisian, Belk, Bloomingdale’s and Nordstrom.

U.S. Corporate Market

     The Company markets to top specialty-advertising firms that re-sell the Company’s products to Fortune 500 companies and other major corporations for use in their company stores, sales meetings, catalogs and corporate events.

International Market

     The Company has a wholly-owned subsidiary in Essex, England that distributes Ashworth products and Callaway Golf apparel to customers, either directly or through independent sales representatives, in the United Kingdom and other European countries such as Germany, France, Spain, Sweden, Ireland and Portugal. In 1998, the Company opened one division, operated by Almec Leisure Group pursuant to a management agreement, to sell and distribute its Ashworth products in Canada. In 2002 the Company opened a second division in Canada, operated by S&P Apparel, Inc. pursuant to a management agreement, to distribute its Callaway Golf apparel in Canada.

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

     The Company also uses distributors to sell Ashworth products in other countries such as Guam, United Arab Emirates and Mexico.

Ashworth Retail Stores

     The Company operates, through wholly-owned subsidiaries, eight retail stores in California, Texas, Colorado, Arizona, Utah and Nevada. The main purpose of these stores is to help control and manage inventory by selling prior season and irregular merchandise. The Company also sells its excess and irregular inventory through better clearance retailers.

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Ashworth Concept Store

     The Company opened an Ashworth Concept Store in Costa Mesa, California in October 1997 to sell lifestyle products. These include products such as Ashworth and Callaway Golf branded apparel, accessories and small golf related gift items.

SALES AND MARKETING

     The Company’s products are sold in the United States and Europe largely by independent sales representatives who are not employees of the Company or its subsidiaries. The Company currently has approximately 125 independent sales representatives worldwide. The Company currently uses several different distributors and licensees in various international locations.

     In an effort to add exposure and consumer credibility to its Ashworth brand, the Company has golf celebrities who wear and endorse the Company’s products. At October 31, 2002 they were: (1) Fred Couples, (2) Stuart Appleby, (3) Rich Beem, (4) Chris DiMarco, (5) Scott Verplank, (6) Pat Bates, (7) Mark Weibe, (8) Blaine McCallister, (9) Allen Doyle, (10) Bruce Leitzke, (11) Kelly Robbins and (12) Jim Nantz, a popular CBS golf announcer. The Company uses these players and celebrities in advertisements, in-store displays, and for trade shows, store and other special appearances.

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

     Ashworth continued its in-store shop program in 2002 and now has a distinct in-store presence in many locations throughout the United States, Europe and Canada. This modular fixture program is designed to help create an in-store shop for Ashworth products coupled with pictures and displays of our spokespersons and golf professionals.

     In an effort to introduce new young customers to the Ashworth brand, the Company supports high school and collegiate golf by providing team uniforms to selected high school, college and university golf teams. The Company has a sponsorship agreement with the American Junior Golf Association wherein the company makes an annual cash contribution and provides shirts for the participants in four specific events.

     The domestic market for Ashworth apparel has been seasonal, with the highest revenues traditionally in the period from February through August and the lowest revenues in the period from September through January. The Company expects that the addition of the department and specialty retail store markets, the corporate market, and additional product categories for fall and winter in the European market will help to reduce the seasonality of the Company’s business.

     Net revenues in fiscal 2002 were $127,545,000, an increase of 2.3% from net revenues of $124,727,000 in fiscal 2001. During the last three fiscal years, the Company had the following domestic and international revenues:

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     See “Note 1 of Notes to Consolidated Financial Statements, Business,” for revenues, operating income and identifiable assets of Ashworth U.K., Ltd., and “Note 11” for market segment information.

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

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

     At December 31, 2002, we had a sales order backlog of approximately $47,087,000 from independent third parties, which is approximately $12,153,000 higher than the comparable backlog last year. Backlog reflects sales orders that are placed with the Company prior to the quarter in which the goods are to be shipped, as opposed to “at-once” sales orders that are received in the quarter in which the goods are expected to be shipped. The current backlog covers orders for goods expected to be shipped through approximately June 2003. The amount of the sales order backlog at a particular time is affected by a number of factors, including the timely flow of product from suppliers which can impact the Company’s ability to ship on time, and the timing of customers’ orders. Accordingly, a comparison of sales order backlog from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments in any period. In addition, sales orders may be changed or canceled prior to shipment, preventing the Company from converting backlog into revenue.

INVENTORY

     The Company maintains high levels of inventory to support its Authentics program, increased sales volume, and to meet increased customer demand for “at-once” ordering. Disposal of excess prior season inventory is an ongoing part of the Company’s business, and inventory writedowns may impair the Company’s financial performance in any period. Particular inventory may be subject to multiple writedowns 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. The Company’s goals are to increase the inventory turns and lower the overall inventory levels relative to revenues.

COMPETITION

     According to the 2002 Darrell Survey, the Ashworth brand was the leader in the Company’s core green grass market in 2002, with a 14% share in shirt usage among golfers. The Company’s share of other markets, including upscale department stores and the corporate market, is less significant. The golf apparel market is not dominated by any single company, and is highly competitive both in the United States and

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abroad. The Company competes not only with golf apparel manufacturers, but also with other branded sports and sportswear apparel manufacturers that have entered the golf apparel market in recent years. Many of the Company’s competitors have greater financial resources. Ashworth competes with other golf apparel manufacturers on design, product quality, customer servicing and brand image.

PRODUCT SOURCING

     Ashworth sources its products in the following ways:

     Contract Manufacturing: At the beginning of fiscal 2000, starting with the Spring 2000 line, Ashworth ceased most contract manufacturing and stopped purchasing its own raw materials. However, Ashworth is currently using a contract manufacturer in Central America to cut and sew its remaining raw materials.

     Ready-Made Finished Goods: During fiscal 2002, nearly all of the Company’s production was through “full package” purchases of ready-made goods, manufactured to the Company’s quality and styling specifications domestically and by sources outside of the United States. In fiscal 2002, approximately 80% of the Company’s finished goods were made in Asian countries while 20% were made in Europe, Canada, the United States and Central and South America. Asian countries included China, Hong Kong, Indonesia, Korea, Macau, Malaysia, the Philippines, Sri Lanka, Taiwan, Thailand, India, Brunei and Bahrain.

     In-House Embroidery: Ashworth embroiders custom golf course, tournament and corporate logos in-house using approximately 55 multi-head, computer-controlled embroidery machines with a total of approximately 550 sewing heads. The embroidery design library contains over 36,000 Ashworth and customer designs. Embroidery is applied to both garments and finished headwear. On average, the Company embroiders 105,000 logos per week on approximately 85,000 garments.

TRADEMARKS AND LICENSE

     The Company owns and utilizes several trademarks, principal among which are the Ashworth typed and design marks, the Golfman design mark, and the Weather Systems design mark. The Ashworth typed and design marks, the Golfman design marks and the Weather Systems design mark have been registered for apparel, shoes, leather goods and/or golf bags on the Principal Register of the United States Patent and Trademark Office. Additionally, the Company has several pending trademark applications in the United States.

     The Company has registered the Ashworth typed and design marks, the Golfman design marks and/or the Weather Systems design marks for apparel, shoes, leather goods and/or golf bags, which registrations have effect in approximately 70 countries. Additionally, the Company has pending trademark applications in several of those countries. The application process varies from country to country and can take approximately one to three years to complete.

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

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     Callaway Golf is a trademark of Callaway Golf Company. The Company is an Official Apparel Licensee of Callaway Golf Company. The Company has licensed the use of the Callaway Golf trademark pursuant to a multi-year licensing agreement to design, source and sell Callaway Golf brand apparel primarily in the United States, Europe, Canada and Australia.

EMPLOYEES

     At December 31, 2002, Ashworth had approximately 470 regular employees and 125 seasonal temporary employees. Ashworth considers its labor relations to be generally good.

Item 2. PROPERTIES.

     The Company owns two buildings located on Loker Avenue West in Carlsbad, California that were purchased on December 9, 1993 for $3,500,000. The buildings include a total of approximately 78,000 square feet, consisting of space for embroidery, warehousing and distribution functions. The mortgage on these two buildings was refinanced on December 1, 2000 for $3,000,000 amortized over 25 years but is due and payable in five years on December 1, 2005.

     The Company has entered into an agreement to purchase land and a new 200,000 square foot distribution center to be built to the Company’s specifications on a 15.5 acre site in Oceanside, California. The proposed building will replace the Company’s existing distribution facilities currently operating out of three separate owned or leased buildings in Carlsbad, California. The new distribution center is expected to be operational in early fiscal year 2004.

     The Company and its subsidiaries currently have the following leases for administrative and distribution facilities, as well as store leases for retail space:

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     The Company also pays percentage rent based on revenues that exceed certain breakpoints for all of the retail and concept store leases. All of the leases require the Company to pay its pro rata share of taxes, insurance and maintenance expenses. The Company guarantees at least some portion of several leases held by Ashworth subsidiaries.

Item 3. 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 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.

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

     No matter was submitted to a vote of the Company’s security holders during the fourth quarter of the fiscal year covered by this report, either by proxy solicitation or otherwise.

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Market Information

     The Company’s Common Stock is traded on the Nasdaq National Market under the symbol “ASHW.” The following table sets forth the high and low sale prices on the Nasdaq National Market for the quarters indicated.

Holders

     There is only one class of common stock. As of December 31, 2002, there were 552 stockholders of record and approximately 5,100 beneficial owners of the Company’s common stock.

Dividends

     No dividends have ever been declared with respect to the Company’s common stock. In the past, the Board of Directors has chosen to reinvest profits in the Company rather than declare a dividend. The Company does not currently intend to pay cash dividends for the foreseeable future.

Item 6. SELECTED CONSOLIDATED FINANCIAL DATA.

     The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto which are included elsewhere in this report. The statement of income data set forth below with respect to the fiscal years ended October 31, 2002, 2001 and 2000 and the balance sheet data as of October 31, 2002 and 2001 are derived from, and should be read in conjunction with, the audited Consolidated Financial Statements included elsewhere in this report. The statement of income data

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set forth below with respect to the fiscal years ended October 31, 1999 and 1998 and the balance sheet data as of October 31, 2000, 1999 and 1998 are derived from audited financial statements not included in this report. No dividends have been paid for any of the periods presented.

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

RESULTS OF OPERATIONS

General

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

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 significant judgments and estimates used in the preparation of its consolidated financial statements.

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     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 $535,000 at October 31, 2002 compared to $716,000 at October 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 October 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 receivables 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. In October 2002, the Company acquired credit insurance to cover many of its major accounts. Our trade accounts receivable balance was $33.6 million, net of allowances for doubtful accounts of $3.2 million, at October 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.

     Inventory. The Company writes down its inventory by amounts equal to the difference between the cost of inventory and the estimated net realizable value based on assumptions about the age of the inventory, future demand and market conditions. This process provides for a new basis for the inventory until it is sold. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Our inventory balance was $41.2 million, net of inventory write-downs of $1.0 million, at October 31, 2002, as compared to an inventory balance of $35.8 million, net of inventory write-downs of $1.0 million at October 31, 2001. The inventory balance increased as compared to the prior fiscal year-end due to the addition of the Callaway Golf apparel product line. The Ashworth brand inventory declined approximately 5% as compared to the prior fiscal year.

     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 October 31, 2002, the Company had $905,000 of the APCs remaining and management expects to fully utilize them over their remaining life.

     At October 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.

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Fiscal 2002 Compared To Fiscal 2001

     Consolidated net revenues were $127,545,000 for fiscal 2002, an increase of 2.3% from net revenues of $124,727,000 in fiscal 2001. During the fourth quarter of fiscal 2002, net revenues increased $8,655,000 as compared to the same period of the prior year due to the addition of the Callaway Golf apparel line and increased sales of Ashworth branded product in various channels of distribution. Domestic net revenues for fiscal 2002 increased 2.1% to $109,962,000 from $107,684,000 in fiscal 2001 primarily due to increased net revenues in green grass and off-course specialty stores, which increased by $5,461,000 or 7.8%, and corporate, which increased by $3,205,000 or 18.9%. The increase was partially offset by lower net revenues in retail channels, including the Company owned stores, which decreased by $6,388,000 or 31.3% as compared to fiscal 2001, due primarily to lower consumer traffic and spending resulting in continued cautious purchasing by department store buyers. International net revenues increased by 3.2% to $17,583,000 in fiscal 2002 from $17,043,000 in fiscal 2001. Net revenues from the Company’s U.K. subsidiary in fiscal 2002 increased by $1,918,000 or 21.0% as compared to net revenues in fiscal 2001 primarily due to the addition of the Callaway golf apparel line. Decreased net revenues from the Pacific Rim, Australia and other countries were partially offset by increased net revenues from Mexico and Canada.

     The gross profit margin for fiscal 2002 increased to 39.6% as compared to 38.7% in fiscal 2001. The increase was primarily due to improved sourcing and inventory management systems.

     Selling, general and administrative (“SG&A”) expenses increased 8.1% to $45,538,000 in fiscal 2002 compared to $42,118,000 in fiscal 2001. As a percent of net revenue, SG&A expenses increased to 35.7% of net revenues in fiscal 2002 as compared to 33.8% in fiscal 2001. Excluding the additional $4.25 million pre-tax bad debt reserve taken in the third quarter of fiscal 2002, the SG&A expenses would have decreased in both total expenditures and as a percent of net revenues despite additional investment in infrastructure to support the launch of the Callaway Golf apparel product line.

     Net other expenses were $728,000 for fiscal 2002 compared to $1,448,000 in fiscal 2001 primarily due to reduced interest expense in fiscal 2002. Interest expense decreased to $842,000 in fiscal 2002 from $1,352,000 in fiscal 2001 due primarily to lower interest rates on slightly lower annual average borrowing on the Company’s line of credit with its bank. In fiscal 2002 the Company had foreign exchange gains of $74,000 as compared to foreign exchange losses of $90,000 in fiscal 2001 primarily due to the consolidation of various European currencies to the Euro as well as a more stable British pound.

     The effective income tax rate for fiscal 2002 remained at 40.0%.

     During fiscal year 2002, the Company earned net income of $2,509,000 as compared to net income of $2,828,000 in the prior year. The decrease in net income for fiscal year 2002 was primarily attributable to higher SG&A expenses as outlined above.

Fiscal 2001 Compared To Fiscal 2000

     Consolidated net revenues were $124,727,000 for fiscal 2001, a decrease of 1.0% from net revenues of $125,947,000 in fiscal 2000. The decrease in consolidated net revenues was primarily due to unusually cold and wet weather and the generally poor economic conditions in the second half of the year. During the fourth quarter of fiscal 2001, net revenues decreased $6,824,000 as compared to the same period of the prior year primarily due to overall weakness in the economy and the effects of the September 11, 2001 tragedy. Domestic net revenues for fiscal 2001 decreased 1.9% to $107,684,000 from $109,743,000 in fiscal 2000 primarily due to decreased net revenues in green grass and off-course specialty stores which decreased by $2,470,000 or 3.4% and retail which decreased by $284,000 or 2.1%. The decrease was partially offset by higher net

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revenues in corporate which increased $604,000 or 3.7%. International net revenues increased by 5.2% to $17,043,000 in fiscal 2001 from $16,204,000 in fiscal 2000. Net revenues from the Company’s U.K. subsidiary in fiscal 2001 increased by $603,000 or 7.1% as compared to net revenues in fiscal 2000 primarily due to contracted sales to The Open at Royal Lytham and St. Anne’s. Increased net revenues from the Pacific Rim and Australia were partially offset by decreased net revenues from Africa, the Caribbean, Canada and other countries.

     The gross profit margin for fiscal 2001 was 38.7% and remained relatively flat as compared to 38.9% in fiscal 2000. The slight decrease was primarily due to industry wide price pressure for basic pique shirts.

     SG&A expenses increased 15.1% to $42,118,000 in fiscal 2001 compared to $36,603,000 in fiscal 2000 primarily reflecting additional investment in infrastructure and startup costs for launching the Callaway Golf apparel product line. In addition, because of weakness in the economy, the Company has increased its allowance for doubtful accounts in fiscal 2001. As a percent of net revenue, SG&A expenses increased to 33.8% of net revenues in fiscal 2001 as compared to 29.1% in fiscal 2000.

     Net other expenses were $1,448,000 for fiscal 2001 compared to $1,393,000 in fiscal 2000. Foreign exchange losses decreased to $90,000 in fiscal 2001 from $939,000 in fiscal 2000 as a result of management action to consolidate the use of various European currencies to the Euro as well as a more stable British pound. Interest expense increased to $1,352,000 in fiscal 2001 from $640,000 in fiscal 2000 due primarily to increased average borrowing on the Company’s line of credit with the bank.

     The effective income tax rate for fiscal 2001 remained at 40.0%.

     During fiscal year 2001, the Company earned net income of $2,828,000 as compared to net income of $6,597,000 in the prior year. The decrease in net income for fiscal year 2001 was primarily attributable to lower revenues and higher SG&A expenses as outlined above.

LIQUIDITY AND CAPITAL RESOURCES

     The Company’s primary sources of liquidity are expected to be cash flows from operations, a working capital line of credit with its bank, and other financial alternatives such as leasing. Ashworth’s need for working capital is seasonal with the greatest requirements from approximately December through the end of July each year. The inventory build-up during this period is to provide product for shipment for the spring/summer selling season. Management believes that cash from operations, the bank line of credit and leasing alternatives will be sufficient to meet our working capital requirements for the next 12 months.

     Operations in fiscal 2002 produced a negative cash flow of $620,000, compared to a positive cash flow of $2,156,000 in fiscal 2001. The primary reasons for the negative cash flow from operations were increases in both accounts receivable and inventories. Accounts receivable increased by 25.2% to $33,572,000 at October 31, 2002 compared to $26,817,000 at October 31, 2001. The accounts receivable increased primarily due to the 42.5% increase in net revenues in the fourth quarter of fiscal 2002 compared to the same quarter in fiscal 2001. Inventory increased by 14.9% to $41,188,000 at October 31, 2002 compared to $35,841,000 at October 31, 2001. The inventory increased due to the addition of the Callaway Golf apparel product line.

     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. On November 25, 2002, the Company negotiated an amendment to the loan agreement that accelerated the increase in line of credit limit to $35,000,000, effective November 25, 2002. Interest is charged

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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 compliance with, or has obtained a waiver for, all such covenants as of October 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 agreement totaled $11,227,000 at October 31, 2002 and $10,794,000 at December 31, 2002. Additionally, the agreement allows the Company to enter into spot and forward foreign exchange contracts. (See “Note 1 to Consolidated Financial Statements, Foreign Currency” and Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” below). At October 31, 2002, the Company had a loan balance of $11,125,000 outstanding with the bank and $2,648,000 was available for borrowings under this loan agreement. At December 31, 2002, the loan balance outstanding was $16,465,000.

     During fiscal 2002, the Company invested $2,613,000 in property and equipment, primarily for upgrades of computer systems and equipment, warehouse automation, and sales fixtures. For fiscal 2003, Ashworth management anticipates spending approximately $4,200,000 primarily for upgrades of computer systems and equipment, production equipment, warehouse automation, and sales fixtures. Management 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 appropriate.

     Ashworth’s long-term debt on October 31, 2002, including the current portion, is comprised of a mortgage on the two buildings it owns at 2791 and 2793 Loker Avenue West, Carlsbad, California, which had a balance outstanding of $2,770,000, notes payable on equipment purchases totaling $265,000 and capitalized leases with principal sum liabilities of $439,000. The mortgage was refinanced on December 1, 2000 for $3,000,000 amortized over 25 years but is due and payable in five years on December 1, 2005.

     During fiscal 2002, common stock and capital in excess of par value decreased by $774,000. An increase of $1,062,000 due to the issuance of 152,000 shares on exercise of options was offset by a decrease of $1,836,000 as a result of the Company repurchasing 351,000 shares of its common stock in the open market at an average price of $5.23 per share.

     On October 25, 2002, the Company entered into an agreement to purchase the land and building, to be built to the Company’s specifications, in the Ocean Ranch Corporate Center in Oceanside, California. The building, to be constructed with approximately 200,000 square feet of useable space, will be used by the Company to warehouse, embroider, finish, package and distribute clothing products and related accessories. Subject to timely completion of construction, the purchase agreement obligates the Company to purchase the land and building in early fiscal year 2004 for approximately $15.0 million. The Company has also entered into a contingent lease agreement which obligates the Company to pay a monthly base rent plus standard common area maintenance (“CAM”) charges for a term of ten years. The lease would take effect only if the land and building purchase is not completed due to certain defaults by the Company, as specified in the purchase agreement. The base rent and CAM payments under the conditional lease would start on the date thirty days after substantial completion of the improvements. The base rent would be calculated according to a specified formula based on the purchase price under the purchase agreement, expected interest rates and other criteria. If the Company were to default on the purchase agreement, monthly rental under the lease agreement is currently estimated to commence at approximately $132,000 and the monthly CAM charges are currently estimated to commence at approximately $27,000. The Company is not obligated to make any deposits or progress payments under the purchase agreement unless the Company makes change requests which require a deposit that exceeds a certain dollar limit. The Company plans to, and management believes it will be able to, obtain a long-term loan separate from the line of credit agreement to finance the purchase of the land and the building.

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Currency Fluctuations

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

     Ashworth