UNITED STATES

FORM 10-K

Commission file number: 001-14547

Ashworth, Inc.

2765 LOKER AVENUE WEST, CARLSBAD, CA 92008
(Address of Principal Executive Office, including Zip 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  þ  No  o

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

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

     The aggregate market value of the Registrant’s common stock held by nonaffiliates based upon the last reported sales price of its common stock on April 30, 2004 as reported on the NASDAQ National Market was $113,976,517.

     There were 13,710,869 shares of common stock, $.001 par value, outstanding at the close of business on December 31, 2004.

Table of Contents

DOCUMENTS INCORPORATED BY REFERENCE

     PART III incorporates certain information by reference from the Registrant’s definitive proxy statement for its 2005 Annual Meeting of Stockholders to be filed with the Commission within 120 days of October 31, 2004, which information is incorporated herein by reference.

CAUTIONARY STATEMENTS AND RISK FACTORS

This report contains certain forward-looking statements, including without limitation those regarding Ashworth, Inc.’s (the “Company”) plans and expectations for revenue growth, product lines, strategic alliances, domestic and foreign distribution centers, designs and seasonal collections, capital spending, 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. Readers are cautioned not to 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 herein. 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:

ú	Demand for the Company’s products may decrease significantly if the economy weakens, if the popularity of golf decreases or if unusual weather conditions cause a reduction in rounds played.
ú	Like other apparel manufacturers, the Company must correctly anticipate and help direct fashion trends within its industry. The Company’s results of operations would suffer if the Company fails to develop fashions or styles that are well received in any season.
ú	The Company is party to a multi-year licensing agreement to design, source and sell Callaway Golf apparel primarily in the United States, Europe and Canada. The Company must correctly anticipate the fashion trends and demand for these product lines. The Company’s results of operations would suffer if it fails to develop fashions or styles for the Callaway Golf apparel product line that are well received in any season.
ú	The market for golf apparel and sportswear is extremely competitive. The Company 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.
ú	In July 2004, Ashworth, Inc. acquired Gekko Brands, LLC (“Gekko”), a leading designer, producer and distributor of headwear and apparel under The GameÒ and KudzuÒ brands. The Company must successfully integrate the acquisition to realize the expected growth in new, quality channels of distribution for the AshworthÒ and Callaway Golf apparel brands as well as further growth from The Game and Kudzu brands’ sales into the Company’s current distribution channels. The Company’s results of operations would be adversely affected if it fails to successfully integrate the new operations as anticipated or the expected synergies are not realized.
ú	The Company has not yet been able to quantify the full effect of the recent catastrophic tsunami on its suppliers in Asia. Manufacture of the Company’s products may be adversely affected, our international production and shipments may be limited, and the Company could lose sales.

2

ú	The outbreak of Severe Acute Respiratory Syndrome (“SARS”) affected travel to countries where the Company’s products are manufactured. Visiting manufacturers in the affected countries is an important part of the product development process for the Company. If travel to these countries is again restricted by a similar outbreak of SARS or other life threatening communicable diseases, the Company’s product development process and reputation as a designer and manufacturer of innovative products may be adversely affected, our international production and shipments may be limited, and the Company could lose sales. The Company’s foreign suppliers’ ability to deliver products may be adversely affected by future changes in tariffs, quotas and other trade barriers imposed by the foreign countries, as well as by the United States. In particular the suppliers for the Company’s newly acquired subsidiary are concentrated in China.
ú	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 and its reputation could suffer.
ú	The Company’s domestic and foreign suppliers rely on readily available supplies of raw materials at reasonable prices. If these raw materials are in short supply or are only available at inflated prices, the contractors may be unable to deliver the Company’s products in sufficient quantities or at expected prices and the Company could lose sales and have lower gross profit margins.
ú	An increase in terrorist activities, as well as the continued conflicts around the world, 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.
ú	The Company’s results of operations would be adversely affected if the new Oceanside distribution center is not operational as anticipated or functionality problems are encountered. Any such delay or operation problems may cause the Company to incur additional expense, experience delays in customer shipments, require the Company to lease additional distribution space. 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 facilities as soon as, or in the amounts, anticipated.
ú	If economic conditions deteriorate, the ability of the Company’s customers to pay current obligations may be adversely impacted and the Company may experience an increase in delinquent and uncollectable accounts.
ú	The Company is from time to time party to claims and litigation proceedings. Such matters include the specific litigation described in this report and other litigation arising in the ordinary course of business. See “Legal Proceedings,” below. Such matters are subject to many uncertainties and the Company cannot predict with assurances the outcomes and ultimate financial impacts of them. There can be no guarantees that actions that have been or may be brought against the Company in the future will be resolved in the Company’s favor or that insurance carried by the Company will be available or paid to cover any litigation exposure. Any losses resulting from settlements or adverse judgments arising out of these claims could materially and adversely affect the Company’s consolidated financial position and results of operations.

3

ú	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.
ú	The Company maintains high levels of inventory to support its AuthenticsTM program as well as the Callaway Golf apparel basics. 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 increases.

2005 ANNUAL MEETING OF STOCKHOLDERS

     The 2005 annual meeting of stockholders will be held at the Company’s new Embroidery Distribution Center (“EDC”) at 4010 Ocean Ranch Boulevard, Oceanside, California 92056, on Wednesday, March 23, 2005, at 8:00 a.m. local time.

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, and Canada.

          During the second quarter of fiscal 2004, the Company established Ashworth EDC, LLC, a special purpose entity and a wholly owned, consolidated subsidiary which is the purchaser and mortgagor of its newly acquired distribution center in Oceanside, California.

          During the third quarter of, 2004, the Company completed the acquisition of all of the membership interests in Gekko Brands, LLC (the “Acquisition”), a leading designer, producer and distributor of headwear and apparel under The Game® and Kudzu® brands, pursuant to that certain Membership Interests Purchase Agreement entered into on July 6, 2004 by and among Ashworth Acquisition Corp., a Delaware corporation and wholly owned subsidiary of the Company, and the selling members, identified therein. Ashworth intends that the operations of the newly acquired subsidiary will continue to focus on designing, producing and distributing headwear and apparel.

          The Company has wholly-owned subsidiaries that currently own and operate nine Company outlet stores. A wholly-owned United Kingdom subsidiary distributes our products in Europe. In fiscal 2003, the Company completed the dissolution of its wholly-owned subsidiary in the Virgin Islands 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

4

apparel in Canada.

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

Available Information

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

ASHWORTH PRODUCTS

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

          The Ashworth Women’s Division designs Authentics^TM, 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.

          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.

          In July 2004, the Company completed its acquisition of Gekko Brands, LLC. Gekko Brands, LLC designs, produces and distributes headwear and apparel under The Game and Kudzu brands.

5

DISTRIBUTION CHANNELS

          The Company warehouses and ships the majority of its products from its distribution centers in Carlsbad, California, Phenix City, Alabama and Essex, England. Product is also drop-shipped from off-shore factories directly to our international distributors, Ashworth Canada and Ashworth Golf Apparel Canada.

          On April 2, 2004, the Company completed the purchase of land and an approximately 200,000 square foot distribution center built to the Company’s specifications on a 15.5 acre site in Oceanside, California. The new distribution center was placed into service in November 2004, effectively replacing the Company’s Carlsbad distribution facilities.

          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. The Company refers to this channel as the green grass distribution channel. According to the 2004 Darrell Survey, a leading golf industry consumer usage survey, Ashworth was the leading golf apparel company in the United States with a 12.5% share in shirt usage among golfers. The Company currently distributes its products in nearly all of the 50 states.

U.S. Collegiate Bookstores

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

U.S. NASCAR and Outdoor Market

          The Kudzu brand products are sold into NASCAR/racing markets and through outdoor sports distribution channels, including fishing and hunting.

U.S. Department Stores and Specialty Stores

          The Company currently sells its Ashworth and Callaway Golf apparel products to selected upscale department and specialty stores, including Parisian, Belk, Bloomingdale’s, Marshall Fields, Lord & Taylor and Nordstrom.

U.S. Corporate Market

          The Company markets its products to top specialty-advertising firms that re-sell the Company’s products to Fortune 500 companies and other 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.

6

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. Effective October 31, 2004, the Company concluded its management agreement with S&P Apparel, Inc. and on November 1, 2004, the Company retained Almec Leisure to operate its Canadian Callaway Golf apparel division.

          The Company has entered into licensing and distribution agreements with various partners in countries such as China, 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 United Arab Emirates and Mexico.

Ashworth Retail Stores

          The Company operates, through wholly-owned subsidiaries, nine retail stores in California, Texas, Colorado, Arizona, Utah, Nevada and Georgia. 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 from time to time through better clearance retailers.

          The Company has plans to add four to six new retail stores in fiscal 2005.

Ashworth Concept Store

          The Company opened an Ashworth Concept Store in Costa Mesa, California in October 1997 to sell lifestyle products. The Company closed the store in Costa Mesa on October 1, 2003 and is in the process of dissolving the subsidiary in fiscal 2004.

SALES AND MARKETING

          The Company’s products are sold in the United States, Europe and Canada largely by independent sales representatives who are not employees of the Company or its subsidiaries. The Company currently has approximately 183 independent sales representatives worldwide. The Company also uses several different distributors and licensees in various international locations.

          In an effort to add exposure and consumer credibility to its Ashworth brand, the Company has golf celebrities who wear and endorse the Company’s products. At October 31, 2004, these players included: Fred Couples, Stuart Appleby, Rich Beem, Chris DiMarco and others. The Company uses these players and celebrities in advertisements, in-store displays, and for trade shows, store and other special appearances.

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

          Ashworth continued its in-store shop program in 2005 and now has a distinct in-store presence in many department stores 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.

7

          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 whereby the Company makes an annual cash contribution and provides shirts for the participants in four specific events.

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

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

          Net revenues in fiscal 2004 were $173,102,000, an increase of 15.8% from net revenues of $149,438,000 in fiscal 2003. During the last three fiscal years, the Company had the following domestic and international revenues:

          See “Note 1 of Notes to Consolidated Financial Statements, The Company and Summary of Significant Accounting Policies, Business,” for revenues, operating income and identifiable assets of Ashworth U.K., Ltd., and “Note 13, Segment Information” 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 — Foreign Currency Exchange Rate Risk,” and “Note 1 of Notes to Consolidated Financial Statements, Foreign Currency.”

          At December 31, 2004, we had a sales order backlog of approximately $57,658,000 from independent

8

third parties, which is approximately $1,607,000 higher than the comparable backlog last year. Backlog reflects sales orders that are placed with the Company prior to the period in which the goods are to be shipped, as opposed to “at-once” sales orders that are received in the period in which the goods are expected to be shipped. The current backlog covers orders for goods expected to be shipped through approximately June 2005. 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 sufficient 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. Certain 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.

COMPETITION

          According to the 2004 Darrell Survey, the Ashworth brand was the leader in the Company’s core green grass market in 2004, with a 12.5% 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 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:

          Ready-Made Finished Goods: During fiscal 2004, 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 2004, approximately 88% of the Company’s finished goods were made in Asian countries while approximately 12% were made in the Caribbean Basin, Central and South America, Europe and the United States. Asian countries where our goods were manufactured included China, Hong Kong, Indonesia, Korea, Macau, Malaysia, the Philippines, Sri Lanka, Taiwan, Thailand, India, Brunei and Bahrain. The Company purchases nearly all of its headwear from off-shore factories in Asian countries.

          In-House Embroidery: Ashworth embroiders custom golf course, tournament and corporate logos in-house using approximately 98 multi-head, computer-controlled embroidery machines with a total of approximately 737 sewing heads. The embroidery design library contains over 107,000 Ashworth and customer designs. Embroidery is applied to both garments and finished headwear. On average, the Company embroiders 116,000 logos per week on approximately 94,600 garments.

9

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

          The Company has EZ-TECHÔ as a registered trademark in the United States, Canada and the United Kingdom. The Company also has ASHWORTH 7Ô as a registered mark in the United States and Japan and several pending applications in other countries.

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

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

          Callaway Golf is a trademark of Callaway Golf Company. The Company is an Official Apparel Licensee of Callaway Golf Company. The Company has licensed the use of the Callaway Golf trademark pursuant to a multi-year licensing agreement to design, source and sell Callaway Golf brand apparel primarily in the United States, Europe and Canada. The agreement is effective until December 31, 2010 and, at Ashworth’s sole discretion, may be extended for one five-year term provided that Ashworth meets or exceeds certain minimum requirements for calendar years 2008 and 2009, that Ashworth gives notice of its intention to renew by January 1, 2010, and that Ashworth is not in material breach of the agreement.

EMPLOYEES

          At December 31, 2004, Ashworth had approximately 532 regular employees and 188 seasonal temporary employees. Ashworth considers its labor relations to be generally good.

Item 2. PROPERTIES.

          The Company previously owned land and two buildings located in Carlsbad, California that were purchased on December 9, 1993 for $3,500,000 and were reported in the domestic segment. On February 24, 2004, the Company completed the sale of the land, buildings and other assets for approximately $5,747,000 and paid off the $2,610,000 balance due on the existing mortgage. Net of selling costs, the Company realized cash proceeds on the sale of $5,272,000. The property was sold as a unit on an “as is” basis for a price which exceeded its carrying value. The gain on the sale of the property was recorded in the second

10

quarter of fiscal 2004. The Company also entered into a lease agreement to lease the facility from the new owner commencing on February 24, 2004 and terminating on December 31, 2004, with an option to renew the term of the lease for a period of 60 days. The Company did not exercise its option to renew the lease past the expiration date of December 31, 2004. Under the terms of the lease agreement, the Company paid monthly rent of approximately $47,000 plus taxes, insurance and utilities.

          On October 25, 2002, the Company entered into an agreement to purchase the land and building, to be built to the Company’s specifications for its new distribution center, in the Ocean Ranch Corporate Center in Oceanside, California. The building was constructed with approximately 200,000 square feet of useable office and warehouse space and will be used by the Company to warehouse, embroider, finish, package and distribute clothing products and related accessories. On April 2, 2004, the Company completed the purchase of the new distribution center in Oceanside, California for approximately $13,686,000 and entered into a secured loan agreement with a bank to finance $11,650,000 of the purchase price. The loan carries a fixed interest rate of 5% and will be amortized over 30 years, but is due and payable on May 1, 2014. The new distribution center was placed into service in November 2004, effectively replacing the Company’s Carlsbad distribution facilities.

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

          The Company and its subsidiaries also lease a total of approximately 27,000 square feet of retail space for its nine retail stores. The leases expire through August 2014 and require total current base rent per month of approximately $50,000 and total maximum base rent per month of approximately $53,000. The Company also pays percentage rent based on revenues that exceed certain breakpoints for all of the retail 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 alleged 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

11

and inventory levels. It further alleged that certain Company executives made false or misleading statements or omissions concerning product demand and that two former executives engaged in insider trading. On November 8, 2004, the U.S. District Court entered a Final Approval of Settlement. Under the settlement, all claims will be dismissed and the litigation will be concluded in exchange for a payment of $15.25 million, approximately 82% of which will be paid by Ashworth’s insurance carriers. As part of the settlement, Ashworth also agreed to adopt modifications to certain corporate governance policies. Ashworth recorded a pre-tax charge of $3 million in the third quarter of fiscal year 2004 related to settlement of this suit.

          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 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

          The Company has only one class of common stock. As of December 31, 2004, there were 493 stockholders of record and approximately 4,496 beneficial owners of the Company’s common stock.

12

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.

          There were no stock repurchases made during the quarter ended October 31, 2004.

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, 2004, 2003 and 2002 and the balance sheet data as of October 31, 2004 and 2003 are derived from, and should be read in conjunction with, the audited Consolidated Financial Statements and the Notes thereto included elsewhere in this report. The statement of income data set forth below with respect to the fiscal years ended October 31, 2001 and 2000 and the balance sheet data as of October 31, 2002, 2001 and 2000 are derived from audited financial statements not included in this report. No dividends have been paid for any of the periods presented.

13

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

RESULTS OF OPERATIONS

General

          The Company operates in an industry that is highly competitive and must accurately anticipate fashion trends and consumer demand for its products. There are many factors that could cause actual results to differ materially from the projected results contained in certain forward-looking statements in this 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.

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

          Sales Returns, Markdowns and Other Allowances. Management must make estimates of potential future product returns 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, markdowns and other allowances amounted to $1.3 million at October 31, 2004 compared to $.7 million at October 31, 2003. The increase is primarily related to providing additional markdown allowances for the additional retail sales, as well as the allowances acquired in the acquisition of Gekko. During the year ended October 31, 2004, the Company adjusted the assumptions underlying the estimate for markdown allowances for its retail sales to provide additional markdown allowances based on the historical experience in the retail channel.

          Allowance for Doubtful Accounts. Management must also make estimates of the collectability of accounts receivable. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, which results in bad debt expense. Management determines the adequacy of this allowance by analyzing current economic conditions, historical bad debts and continually evaluating individual customer receivables while considering the customer’s financial condition. The Company has credit insurance to cover many of its major accounts. Our trade accounts receivable balance

14

was $39.3 million, net of allowances for doubtful accounts of $1.2 million, at October 31, 2004 as compared to the balance of $31.3 million, net of allowances for doubtful accounts of $1.3 million at October 31, 2003. Allowances for doubtful accounts as a percentage of trade accounts receivable decreased to 3.1% at October 31, 2004 from 4.2% at October 31, 2003. The decrease in allowances for doubtful accounts as a percentage of trade accounts receivable during fiscal 2004 was primarily the result of a decrease in the dollar amount of delinquent accounts.

          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 $49.2 million, net of inventory write-downs of $.8 million at October 31, 2004, as compared to an inventory balance of $44.5 million, net of write-downs of $1.0 million at October 31, 2003. Without the addition of Gekko Brands, LLC, (“Gekko”), the inventory balance would have remained relatively unchanged compared to the prior fiscal year. The decrease in the inventory write-downs is primarily attributed to a decrease in the domestic noncurrent level of the Ashworth and Callaway Golf apparel inventory.

          Asset Purchase Credits. In November 2000, the Company entered into an agreement with a third party whereby prior seasons’ slower selling inventory which was not damaged was exchanged for future asset purchase credits (“APCs”), which may be utilized by the Company to purchase future goods and services over a four-year period. The original value of the inventory exchanged (at cost) was $1.4 million resulting in $1.4 million in future APCs. In December 2003, the Company amended its agreement with the third party to exchange $0.9 million of additional prior seasons’ slower selling inventory (at cost) for an additional $0.9 million in future APCs and an extension of the original November 2000 agreement through December 2007. The Company has entered into contracts with several third party suppliers who have agreed to accept these APCs, in part, as payment for goods and services. The Company purchases products such as sales fixtures, office and packaging supplies, as well as temporary help, freight and printing services from such third party suppliers. From time to time the Company may enter into additional contracts with such third party suppliers to use the APCs. Management reviews and estimates the likelihood of fully utilizing the APCs on a periodic basis. If the Company is unable to find suppliers who agree to accept the APCs in quantities as projected by management, a write-down of the value of the APCs may be required. At October 31, 2004, the Company had $0.7 million of the APCs remaining and management expects to fully utilize them over the remaining life of the contract through December 2007.

Off-Balance Sheet Arrangements

          At October 31, 2004 and 2003, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, the Company does not engage in trading activities involving non-exchange traded contracts that rely on estimation techniques to calculate fair value. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships.

Overview

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

15

Company’s apparel production in fiscal 2004 was through “full package” purchases of ready-made goods with approximately 88% of the apparel and all of the headwear being manufactured in Asian countries. The Company embroiders a majority of these garments with custom golf course, tournament, collegiate and corporate logos for its customers.

          During the second quarter of fiscal 2004 the Company completed two transactions relating to its distribution facilities. In February 2004, the Company completed the sale and lease-back of its old distribution center located in Carlsbad, California. The Company sold the distribution center for $5,747,000 and realized a gain on sale of fixed assets of $1,589,000. Net of selling costs, the Company realized cash proceeds from the sale totaling $5,272,000. In April 2004, the Company completed the purchase of the new distribution facility in Oceanside, California for approximately $13,686,000. The Company applied the tax deferred gain on sale of the old facility to reduce the cost basis of the new facility, for tax purposes, utilizing a tax-deferred exchange under Internal Revenue Code section 1031.

          In fiscal 2004, we continued implementing our multi-brand, multi-channel business model. We upgraded the Ashworth brand while successfully completing the second full year of operation with the new Callaway Golf apparel line. During the third quarter, the Company completed the acquisition of all of the membership interests in Gekko, a leading designer, producer and distributor of headwear and apparel under The GameÒ and KudzuÒ brands. Ashworth intends that a majority of the selling members remain with Ashworth and continue to operate the newly acquired subsidiary both as it previously existed and with the additional opportunity to sell the Ashworth and Callaway Golf apparel brands into their markets.

          The purchase price for the acquisition was $24 million consisting of $23 million in cash and a $1 million promissory note with up to an additional $6.5 million paid to the remaining members of Gekko management if the subsidiary achieves certain specific EBIT, as defined in the Members Interest Purchase Agreement, and other operating targets over approximately the next four years or through Ashworth’s fiscal year 2008.

          In connection with the acquisition, Ashworth entered into a new, secured 5-year bank facility comprised of a $20 million term loan and a $35 million line of credit replacing its then existing $55 million facility. To finance the cash purchase price of the acquisition, Ashworth utilized the term loan together with part of the new line of credit.

          Also during the third quarter, the Company recorded a pretax charge of approximately $3 million related to a settlement to conclude the securities class action lawsuit brought in 1999 against the Company and certain current and former directors and officers in the United States District Court for the Southern District of California. The litigation was brought on behalf of a class of investors who purchased the Company’s stock in the open market between September 4, 1997 and July 15, 1998. Under the settlement, all claims will be dismissed and the litigation will be concluded in exchange for a payment of $15.25 million, approximately 82% of which was paid by Ashworth’s insurance carriers. As part of the settlement, the Company also agreed to adopt modifications to certain corporate governance policies.

          Innovation. The Company continues to emphasize innovation and new products. Staying ahead of the curve and giving its customers new and better products enables the Company to remain strong in very competitive industry conditions and during tough economic times. Launched in 2002, the EZ-TECH™ product, which is 100% cotton, resists fading, pilling and wicks moisture, has continued to sell well. This fabrication was purchased by over 70% of the Company’s domestic account base in fiscal 2004.

          Global Distribution. The Ashworth brand truly has global distribution. Within the last few years the Company’s subsidiaries, distributors and licensees are now selling Ashworth product in China, Russia, Poland, Slovakia, Mexico, Southeast Asia, South Korea, and Japan. The Company’s Callaway Golf apparel license is

16

primarily focused in the United States, Europe and Canada.

          Preparing For Additional Growth. The Company designed and developed a new embroidery and distribution center in Oceanside, California, near our global headquarters. Our goal is to complete our move into this facility during the first quarter of fiscal 2005 and begin processing units using our new automated and technology enhanced equipment and processes.

Fiscal 2004 Compared To Fiscal 2003

          Consolidated net revenues were $173,102,000 for fiscal 2004, an increase of 15.8% from net revenues of $149,438,000 in fiscal 2003. The increase resulted primarily from the 27.1% increase for the Callaway Golf apparel product line to $39,183,000 from $30,822,00 in fiscal 2003 and approximately four months revenue of $13,571,000 from the acquisition of Gekko. Excluding Gekko, domestic net revenues for fiscal 2004 increased 3.5% to $130,824,000 from $126,377,000 in fiscal 2003 primarily due to increased net revenues in the retail channel, which increased by $3,664,000 or 26.3%. The increase in the retail channel is attributed to improved floor presentations, floor space, and balanced assortments that drove increased market share within the stores and thus increased the average order size. International net revenues increased by $5,648,000 or 24.5% to $28,706,000 in fiscal 2004 from $23,058,000 in fiscal 2003. The increase was primarily due to higher revenues in the Company’s U.K. subsidiary and Canadian divisions, of which $2,603,000 was due to the weakening of the U.S. dollar against the British pound and Canadian dollar during fiscal 2003. The remaining increase was primarily due to higher revenues in the Company’s U.K. subsidiary where the operation expanded from 23 to 29 European countries, expanded their product line and moved into a new distribution center facility which allowed operations to process orders more efficiently. Net revenues from the Company’s U.K. subsidiary in fiscal 2004 increased by $4,871,000 or 34.2% and revenue from the Canadian divisions increased by $579,000 or 10.1% as compared to net revenues in fiscal 2003.

          The gross profit margin for fiscal 2004 increased to 41.7% as compared to 40.7% in fiscal 2003 primarily due to improved sourcing and inventory management systems as well as a favorable mix introduced by Gekko’s higher gross margin product lines.

          Selling, general and administrative (“SG&A”) expenses increased 12.4% to $54,087,000 in fiscal 2004 compared to $48,122,000 in fiscal 2003. As a percent of net revenue, SG&A expenses decreased to 31.2% of net revenues in fiscal 2004 as compared to 32.2% in fiscal 2003. The decrease in SG&A as a percent of net revenues was primarily due to net gains on disposal of fixed assets of $1,525,000 in fiscal 2004 compared to net losses on disposal of fixed assets of $42,000 in fiscal 2003 as well as fixed expenses being spread over higher net revenues partially offset by higher costs associated with preparing for the opening of the new distribution center.

          Net other expenses were $4,371,000 for fiscal 2004 compared to $475,000 in fiscal 2003 primarily due to the $3,000,000 charge related to the settlement of the class action lawsuit booked in the third quarter of fiscal 2004, a $477,000 increase in interest expense as well as a decrease in foreign currency gain in fiscal 2004 as compared to fiscal 2003 of approximately $152,000. Interest expense increased to $1,353,000 in fiscal 2004 from $876,000 in fiscal 2003 due primarily to additional interest of $340,000 related to the $11,650,000, 10 year, fixed rate term loan for the purchase of the new distribution center building, as well as additional interest of $358,000 related to the $20,000,000 five-year, fixed rate term loan for financing of the Gekko Brands, LLC acquisition.

          The effective income tax rate applicable to the Company for fiscal 2004 remained at 40.0% as compared to fiscal 2003.

          During fiscal 2004, the Company earned net income of $8,203,000 as compared to net income of

17

$7,328,000 in the prior year. The increase in net income for fiscal 2004 was primarily attributable to the higher net revenues, increased gross margins, lower SG&A expenses as a percentage of revenues, as outlined above, and the acquisition of Gekko on July 6, 2004.

Fiscal 2003 Compared To Fiscal 2002

          Consolidated net revenues were $149,438,000 for fiscal 2003, an increase of 15.6% from net revenues of $129,286,000 in fiscal 2002. The increase resulted primarily from the addition of the Callaway Golf apparel product line, which had its first full year of operation in fiscal 2003, as well as an increase in the retail distribution channel due to an increase in number of doors. During the fourth quarter of fiscal 2003, net revenues increased $2,954,000 as compared to the same period of the prior year due to increased sales of Ashworth and Callaway Golf apparel branded products in various channels of distribution. Domestic net revenues for fiscal 2003 increased 13.1% to $126,380,000 from $111,706,000 in fiscal 2002 primarily due to increased net revenues in green grass and off-course specialty stores, which increased by $6,914,000 or 8.9%, in retail channels, including the Company owned stores, which increased by $6,029,000 or 42.9%, and corporate, which increased by $1,731,000 or 8.6% as compared to fiscal 2002. International net revenues increased by $5,478,000 or 31.2% to $23,058,000 in fiscal 2003 from $17,580,000 in fiscal 2002. The increase was primarily due to higher revenues in the Company’s U.K. subsidiary and Canadian divisions, of which $1,635,000 was due to the weakening of the U.S. dollar against the British pound and Canadian dollar during fiscal 2003. Net revenues from the Company’s U.K. subsidiary in fiscal 2003 increased by $3,194,000 or 28.9% and revenue from the Canadian divisions increased by $1,922,000 or 50.6% as compared to net revenues in fiscal 2002.

          The gross profit margin for fiscal 2003 increased slightly to 40.7% as compared to 40.4% in fiscal 2002 primarily due to improved sourcing and inventory management systems.

          SG&A expenses increased 1.8% to $48,122,000 in fiscal 2003 compared to $47,279,000 in fiscal 2002. As a percent of net revenue, SG&A expenses decreased to 32.2% of net revenues in fiscal 2003 as compared to 36.6% in fiscal 2002. Excluding the additional $4.25 million pre-tax bad debt reserve taken in the third quarter of fiscal 2002, the SG&A expenses in fiscal 2003 would have increased 11.7% in total expenditures as compared to the same period in fiscal 2002 but would still have decreased as a percent of net revenues from 33.3% in fiscal 2002. The Company believes that excluding the effect of the increase in reserve for bad debts booked in the third quarter of fiscal 2002 for the single customer filing for protection under the U.S. bankruptcy laws provides additional information to investors to better understand the impact the transaction had on the Company’s performance for fiscal 2003 as compared to fiscal 2002 and, therefore, the adjusted SG&A measure is useful to investors. Total SG&A expenditures increased primarily due to the increase in sales related variable expenses related to commissions and royalties. The decrease in SG&A as a percent of net revenues resulted from the fixed expenses being spread over higher net revenues.

          Net other expenses were $475,000 for fiscal 2003 compared to $728,000 in fiscal 2002 primarily due to increased foreign exchange gains in fiscal 2003. Foreign exchange gains increased to $343,000 in fiscal 2003 from $74,000 in fiscal 2002 primarily due to the strengthening British pound and the Canadian dollar. Interest expense increased slightly to $876,000 in fiscal 2003 from $842,000 in fiscal 2002 due primarily to costs associated with the new line of credit facility negotiated with the Company’s bank.

          The effective income tax rate applicable to the Company for fiscal 2003 remained at 40.0% as compared to fiscal 2002.

          During fiscal 2003, the Company earned net income of $7,328,000 as compared to net income of $2,509,000 in the prior year. The increase in net income for fiscal 2003 was primarily attributable to the

18

higher net revenues and lower SG&A expenses as outlined above.

LIQUIDITY AND CAPITAL RESOURCES

Capital Resources and Liquidity

          The Company’s primary sources of liquidity 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. Ashworth’s need for working capital is seasonal with the greatest requirements existing from approximately December through the end of July each year. The Company typically builds up its inventory during this period to provide product for shipment for the spring/summer selling season.

          On July 6, 2004, the Company entered into a new business loan agreement with Union Bank of California, N.A., as the administrative agent, and two other lenders. The new loan agreement is comprised of a $20,000,000 term loan and a $35,000,000 revolving credit facility, which expires on July 6, 2009 and is collateralized by substantially all of the assets of the Company, other than the Company’s new distribution center in Oceanside, California.

          Under this loan agreement, interest on the $20,000,000 term loan is fixed at 5.4% for the term of the loan. Interest on the revolving credit facility is currently charged at the bank’s reference rate (prime). At October 31, 2004, the bank’s reference rate (prime) was 4.75%. The loan agreement also provides for optional interest rates based on London interbank offered rates (“LIBOR”) for periods of at least 30 days in increments of $500,000.

          On September 3, 2004, the Company entered into the First Amendment to the loan agreement to amend Section 6.12(a). The loan agreement, as amended, contains certain financial covenants that include a requirement that the Company maintain (1) a minimum tangible net worth of $74,000,000 plus the net proceeds from any equity securities issued (including net proceeds from stock option exercises) after the date of the loan agreement for the period ending October 31, 2004, and a minimum tangible net worth of $74,000,000, plus 90% of net income after taxes (without subtracting losses) earned in each quarterly accounting period commencing after January 31, 2005, plus the net proceeds from any equity securities issued (including net proceeds from stock option exercises) after the date of the loan agreement, (2) a minimum earnings before interest, income taxes, depreciation and amortization (“EBITDA”) determined on a rolling four quarter basis ranging from $16,500,000 at July 6, 2004 and increasing over time to $27,000,000 at October 31, 2008 and thereafter, (3) a minimum ratio of cash and accounts receivable to current liabilities of 0.75:1.00 for fiscal quarters ending January 31 and April 30 and 1.00:1.00 for fiscal quarters ending July 31 and October 31, and (4) a minimum fixed charge coverage ratio of 1.10:1.00 at July 31, 2004 and 1.25:1.00 thereafter. The loan agreement limits annual lease and equipment rental expense associated with the Company’s new distribution center in Oceanside, California as well as annual capital expenditures in any single fiscal year on a consolidated basis in excess of certain amounts allowed for the acquisition of real property and equipment in connection with the new distribution center. The loan agreement has an additional requirement where, for any period of 30 consecutive days, the total indebtedness under the revolving credit facility may not be more than $15,000,000. The loan agreement also limits the annual aggregate amount the Company may spend to acquire shares of its common stock. The Company was in compliance with all of the loan agreement’s financial covenants as of October 31, 2004.

          The line of credit under the loan agreement may also be used to finance commercial letters of credit

19

and standby letters of credit. Commercial letters of credit outstanding under this loan agreement totaled $4,106,000 at October 31, 2004 as compared to $5,524,000 outstanding at October 31, 2003 under the prior loan agreement. The Company had $2,500,000 outstanding against the revolving credit facility under this loan agreement at October 31, 2004, compared to $3,400,000 outstanding at October 31, 2003 under the prior agreement. The decrease in outstanding letters of credit and borrowings is primarily due to converting several vendors from letters of credit to open credit terms. The Company had $19,000,000 outstanding on the term loan under this loan agreement at October 31, 2004. At October 31, 2004, $29,394,000 was available for borrowings against the revolving credit facility under this loan agreement.

          On August 30, 2004, the Company agreed to a schedule with Key Equipment Finance, a Division of Key Corporate Capital, Inc. (“KEF” or the “Lessor”) thereby completing the Master Equipment Lease Agreement, dated as of June 23, 2003, previously entered into by Ashworth and KEF. Under the terms of the schedule, we will be leasing equipment for our distribution center in Oceanside, California. The aggregate cost of the equipment is approximately $10.4 million. The initial term of the lease is for ninety-one (91) months beginning on September 1, 2004 and the monthly rent payment is $128,800. At the end of the initial term, the Company will have the option to (1) purchase all, but not less than all, equipment on the initial term expiration date at a price equal to the greater of (a) the then fair market sale value thereof, or (b) 12% of the total cost of the equipment (plus, in each case, applicable sales taxes), (2) renew the lease on a month to month basis at the same rent payable at the expiration of the initial lease term; (3) renew the lease for a minimum period of not less than 12 consecutive months at the then current fair market rental value; or (4) return such equipment to the Lessor pursuant to, and in the condition required by, the lease.

          During fiscal year 2004, cash provided by operations was $12,168,000 as compared to $11,386,000 provided during the same period of the prior fiscal year. The 6.9% increase in cash flow from operations was primarily due to the 11.9% increase in net income to $8,203,000 from $7,328,000 in the prior year partially offset by working capital changes.