CALLAWAY GOLF CO /CA, 10-Q, 1997-08-14

CALLAWAY GOLF CO /CA
10-Q, 1997-08-14
SPORTING & ATHLETIC GOODS, NEC

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<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
_____ SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997

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

Commission file number 1-10962

CALLAWAY GOLF COMPANY
(Exact name of registrant as specified in its charter)

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

2285 Rutherford Road, Carlsbad, CA 92008-8815
(760) 931-1771

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

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 .
___ ___

The number of shares outstanding of the issuer's of Common Stock, $.01
par value, as of July 31, 1997 was 73,810,832.

1
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CALLAWAY GOLF COMPANY

INDEX
<TABLE>
<CAPTION>

Page

<S> <C>
Part I. Financial Information

Item 1. Financial Statements

Consolidated Condensed Balance Sheet at June 30, 1997
and December 31, 1996 3

Consolidated Condensed Statement of Income for the three
and six months ended June 30, 1997 and 1996 4

Consolidated Condensed Statement of Cash Flows for the six
months ended June 30, 1997 and 1996 5

Consolidated Condensed Statement of Shareholders' Equity for
the six months ended June 30, 1997 6

Notes to Consolidated Condensed Financial Statements 7

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9

Part II. Other Information 16
</TABLE>

2
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements

CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands, except share and per share data)
<TABLE>
<CAPTION>

June 30, December 31,
1997 1996
----------- -------------
<S> <C> <C>
(Unaudited)
ASSETS
- - ------

Current assets:
Cash and cash equivalents $ 150,849 $ 108,457
Accounts receivable, net 127,375 74,477
Inventories, net 69,353 98,333
Deferred taxes 25,328 25,948
Other current assets 13,751 4,298
--------- ---------
Total current assets 386,656 311,513

Property, plant and equipment, net 114,567 91,346
Other assets 21,559 25,569
--------- ---------
$ 522,782 $ 428,428
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY
- - ------------------------------------

Current liabilities:
Accounts payable and accrued expenses $ 33,167 $ 14,996
Accrued employee compensation and 25,363 16,195
benefits
Accrued warranty expense 27,892 27,303
Income taxes payable 12,651 2,558
--------- ---------
Total current liabilities 99,073 61,052

Long-term liabilities 5,821 5,109

Commitments and contingencies (Note 6)

Shareholders' equity:
Preferred Stock, $.01 par value,
3,000,000 shares authorized, none
issued and outstanding at June 30,
1997 and December 31, 1996,
respectively

Common Stock, $.01 par value,
240,000,000 shares authorized,
73,190,382 and 72,855,222 issued and
outstanding at June 30, 1997 and
December 31, 1996, respectively 732 729
Paid-in capital 342,910 278,669
Unearned compensation (4,148) (3,105)
Retained earnings 266,544 238,349
Less: Grantor Stock Trust (5,300,000
shares) at market (188,150) (152,375)
--------- ---------
Total shareholders' equity 417,888 362,267
--------- ---------
$ 522,782 $ 428,428
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.

3
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CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF INCOME (UNAUDITED)
(In thousands, except per share data)

Three months ended Six months ended
-------------------------------- ----------------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $253,032 100% $210,002 100% $422,105 100% $345,140 100%
Cost of goods sold 118,290 47% 98,919 47% 200,360 47% 165,425 48%
-------- -------- -------- --------
Gross profit 134,742 53% 111,083 53% 221,745 53% 179,715 52%

Operating expenses:
Selling expense 36,016 14% 21,853 10% 62,595 15% 39,998 12%
General and administrative 16,074 6% 24,925 12% 32,328 8% 42,116 12%
Research and development 8,089 3% 3,245 2% 14,042 3% 6,407 2%
-------- -------- -------- --------
Income from operations 74,563 29% 61,060 29% 112,780 27% 91,194 26%
Other income, net 1,031 1,470 2,414 2,333
-------- -------- -------- --------

Income before income taxes 75,594 30% 62,530 30% 115,194 27% 93,527 27%
Provision for income taxes 28,773 23,593 43,906 35,135
-------- -------- -------- --------

Net income $ 46,821 19% $ 38,937 19% $ 71,288 17% $ 58,392 17%
======== ======== ======== ========

Earnings per common share: $ .66 $ .55 $ 1.00 $ .83
======== ======== ======== ========

Common equivalent shares: 70,728 70,504 71,244 70,049
======== ======== ======== ========

Dividends paid per share: $ .07 $ .06 $ .14 $ .12
======== ======== ======== ========

</TABLE>

See accompanying notes to consolidated condensed financial statements.

4
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CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>

Six months ended
----------------------
June 30, June 30,
1997 1996
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 71,288 $ 58,392
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 7,355 6,205
Non-cash compensation 4,773 2,202
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net (53,222) (14,920)
Inventories, net 28,204 (25,554)
Deferred taxes 173 (2,974)
Other assets (5,544) (9,336)
Accounts payable and accrued expenses 17,573 5,889
Accrued employee compensation and benefits 10,732 10,617
Accrued warranty expense 589 3,225
Income taxes payable 10,149 15,690
Other liabilities 712 781
-------- --------
Net cash provided by operating activities 92,782 50,217
-------- --------
Cash flows used in investing activities:
Capital expenditures (30,655) (12,361)
Proceeds from sale of fixed assets 60 0
-------- -------
Net cash used in investing activities (30,595) (12,361)
-------- -------

Cash flows (used in) provided by financing activities:
Issuance of Common Stock 10,361 8,812
Tax benefit from exercise of stock options 12,303 7,963
Dividends paid, net (9,484) (7,960)
Retirement of Common Stock (33,010) 0
-------- --------

Net cash (used in) provided by financing activities (19,830) 8,815
-------- --------
Effect of exchange rate changes on cash 35 26
-------- --------

Net increase in cash and cash equivalents 42,392 46,697
Cash and cash equivalents at beginning of period 108,457 59,157
-------- --------

Cash and cash equivalents at end of period $150,849 $105,854
======== ========

</TABLE>
See accompanying notes to consolidated condensed financial statements.

5
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CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands)

Common Stock Paid-in Unearned Retained
Shares Amount Capital Compensation Earnings GST Total
------- ------- -------- ------------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 72,855 $729 $278,669 $(3,105) $238,349 $(152,375) $362,267
Exercise of stock options 1,233 12 10,349 10,361
Tax benefit from exercise of
stock options 12,303 12,303

Compensatory stock options 2,125 (1,043) 1,082
Employee stock purchase plan 233 2 3,689 3,691
Stock retirement (1,131) (11) (32,999) (33,010)
Cash dividends (10,226) (10,226)
Dividends on shares held by GST 742 742
Equity adjustment from foreign
currency translation (610) (610)
Adjustment of GST shares to
market value 35,775 (35,775) 0
Net income 71,288 71,288
------ ---- -------- ------------ -------- --------- --------
Balance, June 30, 1997 73,190 $732 $342,910 $(4,148) $266,544 $(188,150) $417,888
====== ==== ======== ============ ======== ========= ========

</TABLE>
See accompanying notes to consolidated condensed financial statements.

6
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CALLAWAY GOLF COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of presentation
---------------------

The accompanying financial information for three and six months ended June
30, 1997 and 1996 have been prepared by Callaway Golf Company (the
"Company") and have not been audited. These financial statements, in the
opinion of management, include all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the financial
position, results of operations and cash flows for all periods presented.

Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K filed
for the year ended December 31, 1996. Interim operating results are not
necessarily indicative of operating results for the full year.

Certain prior period amounts have been reclassified to conform with the
current period presentation.

2. Inventories
-----------

Inventories at June 30, 1997 and December 31, 1996 (in thousands):

June 30, December 31,
1997 1996
----------- -------------
<S> <C> <C>
(Unaudited)

Inventories, net:
Raw materials $35,407 $ 50,012
Work-in-process 1,889 1,651
Finished goods 37,109 51,954
------- --------
74,405 103,617
Less reserve for obsolescence (5,052) (5,284)
------- --------

Net inventories $69,353 $ 98,333
======= ========
</TABLE>

3. Foreign currency exchange contracts
-----------------------------------

During the six months ended June 30, 1997, the Company entered into forward
foreign currency exchange rate contracts to hedge payments due on
intercompany transactions from a wholly-owned foreign subsidiary. The
effect of this practice is to minimize variability in the Company's
operating results arising from foreign exchange rate movements. The
Company does not engage in foreign currency speculation. These foreign
exchange contracts do not subject the Company to risk due to exchange rate
movements because gains and losses on these contracts offset losses and
gains on the intercompany transactions being hedged, and the Company does
not engage in hedging contracts which exceed the amount of the intercompany
transactions. At June 30, 1997, the Company had approximately $7.8 million
of foreign exchange contracts outstanding. The contracts mature between
July and October of 1997. Gains and losses on these contracts are recorded
in net income. The net realized and unrealized gains from foreign exchange
contracts for the six months ended June 30, 1997 totaled approximately
$195,000.

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4. Cash and cash equivalents
-------------------------

At June 30, 1997, the Company held investments in U.S. Treasury bills with
maturities of three months or less in the aggregate amount of $127.1
million. Management determines the appropriate classification of its U.S.
Government and other debt securities at the time of purchase and
reevaluates such designation as of each balance sheet date. The Company
has included these securities, net of amortization, in cash and cash
equivalents and has designated them as "held-to-maturity."

5. Earnings per share
------------------

Earnings per share are based upon the weighted average number of shares
outstanding during the period increased by the effect of dilutive stock
options, when applicable, using the treasury stock method. Earnings per
common share and common equivalent shares as presented on the face of the
consolidated condensed statement of income represent primary earnings per
share. Dual presentation of primary and fully diluted earnings per share
has not been made because the differences are insignificant.

In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share." SFAS
No. 128 will be adopted by the Company as required in the fourth quarter of
1997. Upon adoption of SFAS No. 128, the Company will present basic
earnings per share and diluted earnings per share. Basic earnings per
share will be computed based on the weighted average number of shares
outstanding during the period. Diluted earnings per share will be computed
based on the weighted average number of shares outstanding during the
period increased by the effect of dilutive stock options using the treasury
stock method. Pro forma basic and diluted earnings per share for the three
and six months ended June 30, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>

Three months ended Six months ended
------------------- -------------------
June 30, June 30, June 30, June 30,
Pro forma: 1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic $ .69 $ .58 $1.05 $ .88
Diluted $ .66 $ .55 $1.00 $ .83

</TABLE>

6. Commitments and contingencies
-----------------------------

In the normal course of business, the Company enters into certain long term
purchase commitments with various vendors. The Company has agreements with
one of its suppliers which require the Company to purchase, under certain
conditions, a minimum of 25% of all graphite shafts required in the
manufacture of its golf clubs through May 1998.

The Company has committed to purchase titanium golf club heads costing
approximately $88.1 million from one of its vendors. These heads are to be
shipped to the Company in accord with a production schedule that extends
into 1999.

Effective June 1995, the Company agreed to form a joint venture with Sturm,
Ruger & Company, Inc. ("Sturm, Ruger"), its main supplier of Great Big
Bertha(R) titanium heads, to construct a foundry to produce heads. Under
terms of the joint venture agreement, the Company had a 50% equity interest
in the new foundry. In June 1997, the Company sold its interest in the
joint venture to Sturm, Ruger for $7.0 million, which was equal to the
Company's capital contributions. The Company's share of losses resulting
from the joint venture's operations and gain on the sale of its interest to
Sturm, Ruger were not material.

During June 1997, the Company entered into an agreement with Saint Andrews
Golf Corporation to form All-American Golf LLC ("All-American") whereby the
Company is a 20% equity owner in All-American, a nine-hole golf course,
performance center, training facility and driving range located in Las
Vegas, Nevada. As of June 30, 1997, the Company has made capital
contributions of $750,000. Additionally, the Company has agreed to loan
All-

8
<PAGE>

American up to $5.3 million, pursuant to a secured promissory note,
for purposes of construction and various other start-up costs. The note,
which is secured by certain assets of All-American, bears interest of 10%
per annum and is payable in monthly installments. As of June 30, 1997 the
Company has advanced All-American approximately $1.3 million under the
secured promissory note. The balance of the note will be advanced in three
additional installments upon the completion of certain milestones.

On May 30, 1996, a lawsuit was filed against Callaway Golf Company and two
of its officers by a former officer of the Company, captioned Glenn Schmidt
-------------
v. Callaway Golf Company, et al., Case No. N 71548, in the Superior Court
--------------------------------
for the State of California, County of San Diego (the "Schmidt
Litigation"). The original complaint asserted claims for breach of oral
contract, fraud, negligent misrepresentation, declaratory judgment,
rescission, restitution and accounting, arising out of an alleged oral
promise in connection with the assignment of a patent for certain tooling
designs. On January 23, 1997, plaintiff filed a first amended complaint
adding claims for wrongful termination and termination in violation of
public policy. On April 16, 1997, the plaintiff filed a second amended
complaint. Plaintiff's second amended complaint seeks damages for unjust
enrichment of $290.0 million, or a royalty of $27.5 million plus
consequential damages exceeding $13.0 million (based on lost compensation
and stock options) for the breach of contract, negligent misrepresentation
and fraud claims. Plaintiff seeks to recover the same $13.0 million as the
measure of damages for the wrongful termination claims. Plaintiff's second
amended complaint also seeks unspecified punitive damages for fraud and
wrongful termination in violation of public policy. Plaintiff's damages
will be updated and amended at the time of trial. When this is done, the
Company expects that plaintiff will eventually seek damages in excess of
$500.0 million for unjust enrichment, or a royalty claim of $45.0 million
plus consequential damages of $14.0 million (for lost compensation and
stock options) for breach of contract, negligent misrepresentation and
fraud; as well as the same $14.0 million as damages for the wrongful
termination claims. Formal discovery has commenced in preparation for
trial. The trial is currently scheduled to commence on October 20, 1997.
Following the Company's tender of the Schmidt Litigation to its insurers,
the carriers denied coverage. On April 11, 1997, the Company initiated
litigation against these carriers seeking a judicial declaration that such
coverage is afforded under the applicable insurance policies (the
"Insurance Litigation"). The Company believes there are meritorious
defenses to the Schmidt Litigation, and thus no provision for liability has
been made in the Company's financial statements. The Company also believes
it is entitled to coverage by its insurers for all or some of the costs and
claims asserted in the Schmidt Litigation. The ultimate resolution of the
Schmidt Litigation and the Insurance Litigation, however, could result in a
material liability and income statement charge.

The Company and its subsidiaries, incident to their business activities,
from time to time are parties to a number of legal proceedings in various
stages of development, including but not limited to those described above.
The Company believes that the majority of these proceedings involve matters
as to which liability, if any, will be adequately covered by insurance.
Except as noted above, with respect to litigation outside the scope
of applicable insurance coverage and to the extent insured claims may
exceed liability limits, it is the opinion of the management of the Company
that the probable result of these matters individually and in the aggregate
will not have a material adverse effect upon the Company's financial
position, results of operations or cash flows.

7. Subsequent events
-----------------

On August 8, 1997, the Company purchased substantially all the assets and
certain obligations and liabilities of Odyssey Sports, Inc. ("Odyssey") for
$130.0 million from Odyssey and its parent company, U.S. Industries, Inc.,
subject to certain adjustments as of the closing date. The Company has
accounted for the transaction using the purchase method.

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Statements used in this discussion that relate to future plans, events,
financial results or performance are forward-looking statements as defined
under the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties which could cause actual
results to differ materially from those anticipated. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak
only as of the date hereof. The Company undertakes no obligation to
republish revised forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Readers are also urged to carefully review and
consider the various disclosures made by the Company which describe certain
factors which

9
<PAGE>

affect the Company's business, including the disclosures made under the
caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Certain Factors Affecting Callaway Golf Company"
below, as well as the Company's other periodic reports on Forms 10-K, 10-Q
and 8-K filed with the Securities and Exchange Commission.

Certain Factors Affecting Callaway Golf Company

Growth in sales; seasonality

The Company believes that the growth rate in the golf equipment industry in
the United States has been modest for the past several years, and this
trend is likely to continue through 1997. Sales of all golf clubs in
Japan, the world's second largest consumer of golf clubs next to the United
States, appeared to be declining during 1996, but recent trends indicate
the market may be stabilizing. Although demand for the Company's products
has been generally strong during the quarter ended June 30, 1997, no
assurances can be given that the demand for the Company's existing products
or the introduction of new products will continue to permit the Company to
experience its historical growth or maintain its historical profit margin.
Additionally, given the Company's current size and market position, it is
possible that further market penetration will prove more difficult.

In the golf equipment industry, sales to retailers are generally seasonal
due to lower demand in the retail market in the cold weather months covered
by the fourth and first quarters. Although the Company's business
generally follows this seasonal trend, the Company's increasing sales
volume in many years has tended to mitigate the impact of seasonality on
the Company's operating results. However, in recent years, the Company's
operating results have been more significantly affected by seasonal buying
trends, and the Company expects this trend to continue.

Competition

The market in which the Company does business is highly competitive, and is
served by a number of well-established and well-financed companies with
recognized brand names. New product introductions by competitors
continue to generate increased market competition. For example, in 1997
Taylor Made introduced two new products, the "Ti Bubble 2" Metal Wood
Driver and the "Ti Bubble 2" Irons, and other competitors have increased
their marketing activities with respect to existing products. While the
Company believes that its products and its marketing efforts continue to be
competitive, there can be no assurance that successful marketing activities
by competitors will not negatively impact the Company's future sales.

Additionally, the golf club industry, in general, has been characterized by
widespread imitation of popular club designs. A manufacturer's ability to
compete is in part dependent upon its ability to satisfy the various
subjective requirements of golfers, including the golf club's look and
"feel," and the level of acceptance that the golf club has among
professional and other golfers. The subjective preferences of golf club
purchasers may also be subject to rapid and unanticipated changes. There
can be no assurance as to how long the Company's golf clubs will maintain
market acceptance.

New product introduction

The Company believes that the introduction of new, innovative golf
equipment will be important to its future success. As a result, the
Company faces certain risks associated with such a strategy. For example,
new models and basic design changes in golf equipment are frequently met
with consumer rejection. In addition, prior successful designs may be
rendered obsolete within a relatively short period of time as new products
are introduced into the marketplace. New designs must satisfy the
standards established by the United States Golf Association ("USGA") and
the Royal and Ancient Golf Club of St. Andrews ("R&A") because these
standards are generally followed by golfers within their respective
jurisdictions. There is no assurance that new designs will receive USGA
and/or R&A approval, or that existing USGA and/or R&A standards will not be
altered in ways that adversely affect the sales of the Company's products.
Moreover, the Company's new products have tended to incorporate significant
innovations in design and manufacture, which have resulted in increasingly
higher prices for the Company's products relative to products already in
the marketplace. There can be no assurance that a significant percentage
of the public will always be willing to pay such prices for golf equipment.
In addition, the materials and unique clubhead designs incorporated in the
Company's Great Big Bertha(R) Tungsten.Titanium(TM) Irons require more
sophisticated and lengthy manufacturing processes than the Company's
existing products. To date, the Company has been unable to supply the Great
Big Bertha(R) Tungsten.Titanium(TM) Irons in sufficient quantities to meet
fully the demand for this new product. Thus, although the Company has
achieved certain successes

10
<PAGE>

in the introduction of its golf clubs in the past, no assurances can be
given that the Company will be able to continue to design and manufacture
golf clubs that achieve market acceptance in the future.

Product breakage

Since the Company does not rely upon traditional designs in the development
of its golf clubs, its products may be more likely to develop unanticipated
problems than those of many of its competitors which use traditional
designs. For example, clubs have been returned with cracked clubheads,
broken graphite shafts and loose medallions. While any breakage or
warranty problems are deemed significant to the Company, the incidence of
clubs returned as a result of cracked clubheads, broken graphite shafts,
loose medallions and other product problems has not to date been material
in relation to the volume of Callaway Golf clubs which have been sold. The
Company monitors closely the level and nature of any product breakage and,
where appropriate, seeks to incorporate design and production changes to
assure its customers of the highest quality available in the market. A
significant increase in the incidence of breakage or other product problems
may adversely affect the Company's sales and image with golfers.

Dependence on certain vendors

The Company is dependent on a limited number of suppliers for its club
heads and shafts. In addition, some of the Company's products require
specifically developed techniques and processes which make it difficult to
identify and utilize alternative suppliers quickly. Consequently, if any
significant delay or disruption in the supply of these component parts
occurs, it may have a material adverse effect on the Company's business.
In the event of a significant delay or disruption, the Company believes
that suitable heads and shafts could be obtained from other manufacturers,
although the transition to another supplier, particularly with respect to
the Great Big Bertha(R) Tungsten.Titanium(TM) Irons, could result in
significant production delays and would likely have an adverse impact on
results of operations during the transition.

The Company uses United Parcel Service ("UPS") for substantially all ground
shipments of products to its domestic customers. The current strike by the
Teamsters Union may have a material adverse impact on the Company's sales.
While the Company is seeking to arrange alternative methods of ground
shipping to reduce its reliance on UPS, there can be no assurance that the
Company will be successful in doing so.

Intellectual property and proprietary rights

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

An increasing number of the Company's competitors have, like the Company
itself, sought to obtain patent, trademark or other protection of their
proprietary rights and designs. From time to time others have or may
contact the Company to claim that they have proprietary rights which have
been infringed by the Company and/or its products. The Company evaluates
any such claims and, where appropriate, has obtained or sought to obtain
licenses or other business arrangements. To date, there have been no
interruptions in the Company's business as the result of any claims of
infringement. No assurance can be given, however, that the Company will
not be adversely affected in the future by the assertion of intellectual
property rights belonging to others. This effect could include alteration
of existing products, withdrawal of existing products and delayed
introduction of new products.

Various patents have been issued to the Company's competitors in the
golf ball industry. As Callaway Golf Ball Company develops a new golf ball
product, it must avoid infringing on these patent or other intellectual
property

11
<PAGE>

rights, or it must obtain licenses to use them lawfully. If any
new golf ball product was found to infringe on protected technology, the
Company could incur substantial costs to redesign its golf ball product or
to defend legal action taken against it. Despite its efforts to avoid such
infringements, there can be no assurance that Callaway Golf Ball Company
will not infringe on the patents and other intellectual property rights of
third parties in its development efforts, or that it will be able to obtain
licenses to use any such rights, if necessary.

"Gray market" distribution

While the Company seeks to control the distribution of its products to the
extent permitted by law, it is still the case that quantities of the
Company's products find their way to unapproved outlets or distribution
channels. This "gray market" in the Company's products can undermine
approved retailers and distributors who promote and support the Company's
products, and can injure the Company's image in the minds of its customers
and consumers. On the other hand, stopping such commerce could result in
an increase in sales returns over historical levels, and/or a potential
decrease in sales to those customers who are selling Callaway Golf products
to unauthorized distributors. While the Company has taken some lawful
steps to limit commerce in its products in the "gray market" in both
domestic and international markets, it has not been successful in stopping
such commerce to date.

Professional endorsements

The Company also establishes relationships with professional golfers in
order to promote the Callaway Golf brand among both professional and
amateur golfers. The Company has entered into endorsement arrangements
with members of the Senior Professional Golf Association's Tour, the
Professional Golf Association's Tour, the Ladies Professional Golf
Association's Tour, the European Professional Golf Association's Tour and
the Nike Tour. While most professional golfers fulfill their contractual
obligations, some have been known to stop using a sponsor's products
despite contractual commitments. If one or more of Callaway Golf's pro
endorsers were to stop using Callaway Golf's products contrary to their
endorsement agreements, the Company's business could be adversely affected
in a material way by the negative publicity.

New business ventures

Beginning in 1995, the Company began to evaluate and pursue new business
ventures which it believes constitute potential growth opportunities in and
outside of the golf equipment industry. The Company has invested, and
expects to continue to invest, significant capital resources in these new
ventures in the form of research and development, capital expenditures and
the hiring of additional personnel. There can be no assurance that new
ventures will lead to new product offerings or otherwise increase the
revenues and profits of the Company. Like all new businesses, these
ventures require significant management time, involve a high degree of risk
and will present many new challenges for the Company. There can be no
assurance that these activities will be successful, or that the Company
will realize appropriate returns on its investments in these new ventures.

International distribution

The Company's management believes that controlling the distribution of
its products throughout the world will be an element in the future
growth and success of the Company. Executing a business strategy to
achieve this has and will result in additional investments in inventory,
accounts receivable, corporate infrastructure and facilities. It could
also result in disruptions in the distribution of the Company's products in
some areas. There can be no assurance that the acquisition of some or all
of the Company's foreign distributors will be successful, and it is
possible that an attempt to do so will adversely affect the Company's
business.

The Company, through a distribution agreement, appointed Sumitomo Rubber
Industries, Ltd. ("Sumitomo") as the sole distributor of the Company's golf
clubs in Japan. The distribution agreement requires Sumitomo to purchase
specified minimum quantities. The current distribution agreement began in
February 1993 and has an initial term of seven years. The Company has been
engaged in discussions regarding a possible restructuring of the Company's
distribution arrangements with Sumitomo, which is intended to streamline
the distribution of the Company's products in Japan. There can be no
assurance, however, that such a restructuring will occur, or if
consummated, that the proposed restructuring will achieve its intended
goals. It is possible that the attempt to restructure the Company's

12
<PAGE>

distribution arrangements in Japan, or the failure to succeed in that
attempt, will adversely affect the Company's business in Japan.

Golf ball development

In June 1996, the Company formed Callaway Golf Ball Company, a wholly-owned
subsidiary of the Company, for the purpose of designing, manufacturing and
selling golf balls. The Company has previously licensed the manufacture
and distribution of a golf ball product in Japan and Korea. The Company
also distributed a golf ball under the trademark "Bobby Jones." These golf
ball ventures were not commercially successful.

The Company has determined that Callaway Golf Ball Company will enter the
golf ball business by developing a new product in a new plant to be
constructed just for this purpose. The successful implementation of the
Company's strategy could be adversely affected by various risks, including,
among others, delays in product development, construction delays and
unanticipated costs. There can be no assurance if and when a successful
golf ball product will be developed or that the Company's investments will
ultimately be realized.

The Company's golf ball business is in the early stages of development. It
is expected, however, that it will have a negative impact on the Company's
future cash flow and income from operations for several years. The Company
believes that many of the same factors which affect the golf equipment
industry, including growth rate in the golf equipment industry,
intellectual property rights of others, seasonality and new product
introduction, also apply to the golf ball business. In addition, the golf
ball business is highly competitive with a number of well-established and
well-financed competitors, including Titleist, Spalding, Sumitomo Rubber
Industries, Bridgestone and others. These competitors have established
market share in the golf ball business which will need to be penetrated in
order for the Company's golf ball business to be successful.

Acquisition of Odyssey

On August 8, 1997, the Company consummated its acquisition of substantially
all of the assets and certain obligations and liabilities of Odyssey
Sports, Inc., a leading manufacturer of premium putters. The integration
of Odyssey's operations will require the dedication of management resources
which may temporarily detract from attention to the day-to-day business of
the Company. There can be no assurance that the Company's integration of
Odyssey's operations will not result in a loss of key Odyssey personnel, a
decrease in Odyssey's revenues and profitability, or other material adverse
effects on the financial performance and business operations of Odyssey
and/or the Company.

Odyssey's products are currently manufactured and shipped on behalf of
Odyssey by Tommy Armour Golf Company ("Tommy Armour"). The Company and
Tommy Armour have entered into a transition agreement, pursuant to which
Tommy Armour will continue to provide these manufacturing and shipping
services through at least February 8,1998. At the conclusion of the
transition agreement, the Company will have to make satisfactory
arrangements for the manufacturing and shipping of Odyssey's products. The
Company has not yet determined how or where this product manufacturing and
shipping will be accomplished. There can be no assurance that the
Company's ability to deliver Odyssey's products to the market place in
sufficient quantities and quality will not be adversely affected by these
transitions.

Results of Operations

Three-month periods ended June 30, 1997 and 1996:

Net sales increased 20% to $253.0 million for the three months ended June
30, 1997 compared to $210.0 million for the comparable period in the prior
year. The increase was primarily attributable to sales generated by the
introduction of Biggest Big Bertha(TM) Titanium Drivers and Great Big
Bertha(R) Tungsten.Titanium(TM) Irons, as well as increased sales of Big
Bertha Gold(TM) Irons, and Big Bertha(R) Tour Series Wedges. The increase
was partially offset by a decrease in sales of Great Big Bertha(R) Titanium
Drivers, Big Bertha(R) War Bird(R) Metal Woods and Big Bertha(R) Irons.

For the three months ended June 30, 1997, gross profit increased 21% to
$134.7 million from $111.1 million for the comparable period in the prior
year, while gross margin remained constant at 53%.

13
<PAGE>

Selling expenses increased to $36.0 million in the second quarter of 1997
compared to $21.9 million in the second quarter of 1996. As a percentage
of net sales, selling expenses increased to 14% from 10% during the second
quarter of 1997 over the second quarter of 1996. The $14.1 million
increase was primarily the result of increased employee compensation
expense, pro tour expenses and promotional expenses.

General and administrative expenses decreased to $16.1 million for the
three months ended June 30, 1997 from $24.9 million for the comparable
period in the prior year. As a percentage of net sales, general and
administrative expenses in the second quarter of 1997 decreased to 6% from
12% in the second quarter of 1996. The $8.8 million decrease was primarily
attributable to decreased profit sharing and bonus accruals, lower computer
support expenses and decreased consulting fees.

Research and development expenses increased to $8.1 million in the second
quarter of 1997 compared to $3.2 million in the comparable period of the
prior year. As a percentage of net sales, research and development expenses
in the second quarter of 1997 increased to 3% from 2% in the second quarter
of 1996. The $4.9 million increase was primarily the result of increased
employee compensation expense, increased product engineering and product
design costs, the Company's interactive golf efforts and costs associated
with golf ball development.

Six-month periods ended June 30, 1997 and 1996:

For the six months ended June 30, 1997, net sales increased 22% to $422.1
million compared to $345.1 million for the comparable period of the prior
year. The increase was primarily attributable to sales generated by the
introduction of Biggest Big Bertha(TM) Titanium Drivers, Great Big Bertha
(R) Tungsten.Titanium(TM) Irons, Big Bertha Gold(TM) Irons and Big
Bertha(R) Tour Series Wedges, as well as increased sales of Great Big
Bertha(R) Titanium Metal Woods. This increase was partially offset by a
decrease in sales of Big Bertha(R) War Bird(R) Metal Woods and Big
Bertha(R) Irons.

For the six months ended June 30, 1997, gross profit increased 23% to
$221.7 million from $179.7 million for the comparable period in the prior
year and gross margin increased to 53% from 52%. The increase in gross
margin was primarily the result of decreased component costs.

Selling expenses increased to $62.6 million for the six months ended June
30, 1997 from $40.0 million for the comparable period in the prior year.
As a percentage of net sales, selling expenses in the first half of 1997
increased to 15% from 12% for the comparable period in 1996. The $22.6
million increase was primarily the result of increased employee
compensation expense, pro tour expenses and promotional expenses.

General and administrative expenses decreased to $32.3 million for the six
months ended June 30, 1997 from $42.1 million for the comparable period in
the prior year. As a percentage of net sales, general and administrative
expenses in the first half of 1997 decreased to 8% from 12% in the first
half of 1996. The $9.8 million decrease resulted primarily from a decrease
in profit sharing and bonus accruals, consulting fees, and charitable
contributions as well as lower computer support expenses. These decreases
were partially offset by increases in salary expense and costs associated
with the Company's business development initiatives.

Research and development expenses increased to $14.0 million for the six
months ended June 30, 1997 from $6.4 million for the comparable period in
the prior year. As a percentage of net sales, research and development
expenses for the first half of 1997 increased to 3% from 2% in the first
half of 1996. The $7.6 million increase was primarily attributable to
increased employee compensation expense, increased product engineering and
product design costs, the Company's interactive golf efforts and costs
associated with golf ball development.

Liquidity and Capital Resources

At June 30, 1997, cash and cash equivalents increased to $150.8 million
from $108.5 million at December 31, 1996 primarily due to $92.8 million
provided by cash flows from operations. The increase in cash flows
provided by operations was primarily attributable to a decrease in net
inventory to $69.3 million at June 30, 1997 from $98.3 million at December
31, 1996, as a result of an increase in net sales, current high demand for
the Company's new

14
<PAGE>

product lines and seasonal sales demand. Also contributing to the increase
in cash flows from operations was an increase in current liabilities to
$99.1 million at June 30, 1997 from $61.1 million at December 31, 1996, due
to purchases of inventory to meet production requirements, accrued bonus
and profit sharing and income taxes payable. These factors were partially
offset by an increase in net accounts receivable to $127.4 million at June
30, 1997 from $74.5 million at December 31, 1996 as a result of an increase
in net sales.

The increase in cash flows from operations was partially offset by $19.8
million used by financing activities, associated primarily with retirement
of the Company's Common Stock and dividends paid, as well as $30.6 million
used by investing activities, primarily related to capital expenditures
associated with the purchase of computer equipment and software, research
and development equipment, machinery and equipment, building improvements
and a building.

The Company has available a $50.0 million line of credit as of June 30,
1997. The Company paid $130.0 million for the assets and certain
obligations and liabilities of Odyssey (Note 7) on August 8, 1997. At this
time, management believes the Company has sufficient liquidity with the
inclusion of its line of credit and cash generated from future operations
to maintain its current level of operations, including capital expenditures
and planned operations for the foreseeable future.

15
<PAGE>

PART II. OTHER INFORMATION

Item 1. Legal Proceedings:

The Company, incident to its business activities, is the plaintiff in
several legal proceedings, both domestically and abroad, in various stages
of development. In conjunction with the Company's program of enforcing its
proprietary rights, the Company has initiated a number of actions against
alleged infringers under the Lanham Act, 15 USCA Sections 1051-1127, the
U.S. Patent Act, 35 USCA Sections 1-376, and other pertinent laws. Some
defendants in these actions have, among other things, contested the
validity and/or the enforceability of some of the Company's patents and/or
trademarks. Others have asserted counterclaims against the Company. The
Company believes that the outcome of these matters individually and in the
aggregate will not have a material adverse effect upon the financial
position or results of operations of the Company. It is possible, however,
that in the future one or more defenses or claims asserted by defendants in
those actions may succeed, resulting in the loss of all or part of the
rights under one or more patents, loss of a trademark, a monetary award
against the Company, or some other loss to the Company. One or more of
these results could adversely affect the Company's overall ability to
protect its product designs and ultimately limit its future success in the
market place.

In addition, the Company from time to time receives information claiming
that products sold by the Company infringe or may infringe patent or other
intellectual property rights of third parties. To date, the Company has
not experienced any material expense or disruption associated with any such
potential infringement matters. It is possible, however, that in the
future one or more claims of potential infringement could lead to
litigation, the need to obtain additional licenses, the need to alter a
product to avoid infringement, or some other action or loss by the Company.

16
<PAGE>

there are meritorious defenses to the Schmidt Litigation, and thus no
provision for liability has been made in the Company's financial
statements. The Company also believes it is entitled to coverage by its
insurers for all or some of the costs and claims asserted in the Schmidt
Litigation. The ultimate resolution of the Schmidt Litigation and the
Insurance Litigation, however, could result in a material liability and
income statement charge.

Item 2. Changes in Securities:

None

Item 3. Defaults Upon Senior Securities:

None

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

On April 17, 1997, the Company held its Annual Meeting of Shareholders near
the Company's headquarters in Carlsbad, California. Ely Callaway, Donald
H. Dye, William C. Baker, Bruce Parker, Aulana L. Peters, Frederick R.
Port, Richard Rosenfield, William A. Schreyer, Michael Sherwin, Elmer Ward
and Charles J. Yash were elected to the Board of Directors. Additionally,
the Company's shareholders approved: (i) an amendment to the Callaway Golf
Company 1995 Employee Stock Purchase Plan, in order to increase the number
of shares of Common Stock issuable thereunder by 1,000,000 shares to an
aggregate of 1,500,000 shares; (ii) an amendment to the Callaway Golf
Company 1996 Stock Option Plan, in order to increase the number of shares
of the Company's Common Stock reserved for issuance thereunder by 1,000,000
shares to an aggregate of 3,000,000 shares; and (iii) the adoption of the
Callaway Golf Company 1998 Executive Non-Discretionary Bonus Plan, which
would enable eligible officers' annual non-discretionary incentive awards
earned thereunder to qualify as performance-based compensation for purposes
of Section 162(m) of the Internal Revenue Code.

The voting results for the election of Directors were as follows:
<TABLE>
<CAPTION>

Name Votes For Votes Withheld
------------------- ---------- --------------
<S> <C> <C>
Ely Callaway 67,653,007 1,145,603
Donald H. Dye 67,670,489 1,128,121
William C. Baker 67,846,515 952,095
Bruce Parker 67,667,764 1,130,846
Aulana L. Peters 66,830,899 1,967,711
Frederick R. Port 67,673,454 1,125,156
Richard Rosenfield 67,847,395 951,215
William A. Schreyer 67,834,682 963,928
Michael Sherwin 67,852,927 945,683
Elmer Ward 67,658,435 1,140,175
Charles J. Yash 67,843,414 955,196
</TABLE>

17
<PAGE>

The voting results for the proposal to amend the Callaway Golf Company 1995
Employee Stock Purchase Plan were as follows:
<TABLE>
<CAPTION>

Votes For Votes Against Abstain Broker Non-Vote
--------- ------------- ------- ---------------
<S> <C> <C> <C>
56,829,868 11,014,205 820,649 133,888
</TABLE>

The voting results for the proposal to amend the Callaway Golf Company 1996
Stock Option Plan were as follows:
<TABLE>
<CAPTION>

Votes For Votes Against Abstain Broker Non-Vote
---------- ------------- ------- ---------------
<S> <C> <C> <C>
48,998,629 18,075,423 781,935 942,623
</TABLE>

The voting results for the proposal to adopt the Callaway Golf Company 1998
Executive Non-Discretionary Bonus Plan were as follows:
<TABLE>
<CAPTION>
Votes For Votes Against Abstain Broker Non-Vote
---------- ------------- ------- ---------------
<S> <C> <C> <C>
65,090,107 1,996,197 909,762 802,544
</TABLE>

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K:

a. Exhibits:

10.1 Chairman and Founder Employment Agreement by and
between Callaway Golf Company and Ely Callaway
entered into as of January 1, 1997
11.1 Statement re: Computation of Earnings Per Share
27.1 Financial Data Schedule

b. Reports on Form 8-K:

None

18
<PAGE>

SIGNATURES

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

CALLAWAY GOLF COMPANY

Date: August 13, 1997 /s/ DONALD H. DYE
------------------------
Donald H. Dye
President and
Chief Executive Officer

/s/ DAVID A. RANE
-------------------------------------
David A. Rane
Executive Vice President, Golf Venues
and Chief Financial Officer

<PAGE>

Exhibit 10.1
------------

CHAIRMAN AND FOUNDER EMPLOYMENT AGREEMENT

This Chairman and Founder Employment Agreement ("Agreement") is
entered into as of January 1, 1997, by and between Callaway Golf Company, a
California corporation (the "Company"), and Ely Callaway ("Mr. Callaway").

1. TERM. The Company hereby employs Mr. Callaway and Mr. Callaway
----
hereby accepts employment pursuant to the terms and provisions of this Agreement
for the term commencing January 1, 1997 and terminating December 31, 1999 unless
this Agreement is earlier terminated as hereinafter provided. Unless such
employment is earlier terminated, upon the expiration of the term of this
Agreement, Mr. Callaway's status shall be one of at will employment.

2. SERVICES.
--------

(a) Mr. Callaway, who is the Chairman of the Board and Founder of the
Company and Chairman of the Board of Callaway Golf Ball Company, a wholly-owned
subsidiary of the Company, shall serve in addition as Chief of Advertising,
Press and Public Relations of the Company. Mr. Callaway's duties shall be the
usual and customary duties of the offices in which he serves. As Chief of
Advertising, Press and Public Relations, Mr. Callaway shall report to the Chief
Executive Officer of the Company.

(b) Mr. Callaway shall be required to comply with all policies and
procedures of the Company, as such shall be adopted, modified or otherwise
established by the Company from time to time.

3. SERVICES TO BE EXCLUSIVE. During the term hereof, Mr. Callaway
------------------------
agrees to devote his full productive time and best efforts to the performance of
Mr. Callaway's duties hereunder pursuant to the supervision and direction of the
Company's Board of Directors. Mr. Callaway further agrees, as a condition to
the performance by the Company of each and all of its obligations hereunder,
that so long as Mr. Callaway is employed by the Company, Mr. Callaway will not
directly or indirectly render services of any nature to, otherwise become
employed by, or otherwise participate or engage in any other business without
the Company's prior written consent. It is expressly understood that, to the
extent necessary, the Company has consented to Mr. Callaway's devotion of time
and effort to the preparation, writing, publication, sale and promotion of his
autobiography (working title "Big Bertha and Me"), and that the Company expects
and hopes that Mr. Callaway will be actively involved with the sale and
promotion of this book, and that Mr. Callaway will make personal appearances in
book promotional tours and events in the U.S. and internationally. Mr. Callaway
further agrees to execute such secrecy, non-disclosure, patent, trademark,
copyright and other proprietary rights agreements, if any, as the Company may
from time to time reasonably
<PAGE>

require. Nothing herein contained shall be deemed to preclude Mr. Callaway from
having outside personal investments and involvement with appropriate community
activities, and from devoting a reasonable amount of time to such matters,
provided that this shall in no manner interfere with or derogate from Mr.
Callaway's work for the Company.

4. COMPENSATION.
------------

The Company agrees to pay Mr. Callaway during the term of this
Agreement a base salary at the rate of $750,000.00 per year. In addition, Mr.
Callaway shall be considered annually for payment of a discretionary bonus, to
be set in such amount as shall be fixed by the Board of Directors or such other
entity or person as shall be specified by the Board of Directors.

5. EXPENSES AND BENEFITS.
---------------------

(a) Reasonable and Necessary Expenses. In addition to the
---------------------------------
compensation provided for in Section 4 hereof, the Company shall reimburse Mr.
Callaway for all reasonable, customary, and necessary expenses incurred in the
performance of Mr. Callaway's duties hereunder. Mr. Callaway shall first
account for such expenses by submitting a signed statement itemizing such
expenses prepared in accordance with the policy set by the Company for
reimbursement of such expenses. The amount, nature, and extent of such expenses
shall always be subject to the control, supervision, and direction of the
Company. Notwithstanding the foregoing, and in addition to any other
compensation and reimbursement of expenses pursuant to the Company's regular
policies and practices, the Company shall pay to Mr. Callaway a special expense
allowance of $35,000.00 per year for Company-related business expenses for which
Mr. Callaway shall have no obligations with respect to accounting and submitting
signed, itemized statements to the Company. Moreover, because of Mr. Callaway's
status as Founder of the Company, and the substantial travel demands placed upon
Mr. Callaway as Chairman and Chief of Advertising, Press and Public Relations,
as well as those demands associated with writing, preparing, publishing, selling
and promoting his autobiography, it is expected that the Company shall make
available for Mr. Callaway's business use a chartered Challenger aircraft, or
its equivalent, when and where practicable.

(b) Vacation. Mr. Callaway shall receive six (6) weeks paid vacation
--------
for each twelve (12) month period of employment with the Company. The vacation
may be taken any time during the year subject to prior approval by the Company,
such approval not to be unreasonably withheld. Any unused time will accrue from
year to year. The maximum vacation time Mr. Callaway may accrue shall be three
times Mr. Callaway's annual vacation benefit. The Company reserves the right to
pay Mr. Callaway for unused, accrued vacation benefits in lieu of providing time
off.

(c) Benefits. During Mr. Callaway's employment with the Company
--------
pursuant to this Agreement, the Company shall provide for Mr. Callaway to:

2
<PAGE>

(i) participate in the Company's health insurance and disability
insurance plans as the same may be modified from time to time;

(ii) receive, if Mr. Callaway is insurable under usual
underwriting standards and Mr. Callaway's physical condition does not prevent
him from reasonably qualifying for such insurance coverage, term life insurance
coverage on Mr. Callaway's life, payable to whomever he directs, in the face
amount of $2,000,000.00, such policies to be transferable to Mr. Callaway upon
the termination of employment without evidence of insurability;

(iii) participate in the Company's 401(k) pension plan pursuant to
the terms of the plan, as the same may be modified from time to time;

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

(v) participate in any other benefit plans the Company provides
from time to time to executive officers.

(d) Estate Planning and Other Perquisites. To the extent the Company
--------------------------------------
provides estate planning and related services, or any other perquisites and
personal benefits to other executive officers from time to time, such services
and perquisites shall be made available to Mr. Callaway on the same terms and
conditions.

(e) Stock Options.
--------------

Pursuant to a separate stock option agreement, the Company shall
provide to Mr. Callaway options to purchase up to 150,000 shares of the Common
Stock of the Company at the closing price on the NYSE on April 17, 1997. Such
options shall vest as follows:
<TABLE>
<CAPTION>

Shares Vesting Date
--------- -----------------
<S> <C>
50,000 December 31, 1997
50,000 December 31, 1998
50,000 December 31, 1999
</TABLE>

All shares of stock that are issuable upon the exercise of such options granted
to Mr. Callaway pursuant to this subsection shall be registered as promptly as
possible with the Securities and Exchange Commission, and shall be approved for
listing on the New York Stock Exchange upon notice of issuance. Except as
otherwise provided herein, in the separate stock option agreement, or in any
other written agreement between the Company and Mr. Callaway, vesting of these
stock options shall be conditioned upon Employee's continued employment with the
Company as of the vesting date. Such options shall expire ten (10) years
following vesting if not exercised prior thereto, and shall be

3
<PAGE>

transferable to the full extent permitted by the law and the Company's stock
option plan from which they are issued.

6. DISABILITY. If on account of any physical or mental disability
----------
Mr. Callaway shall fail or be unable to perform all or substantially all of Mr.
Callaway's duties under this Agreement for a continuous period of up to six (6)
months during any twelve month period during the term of this Agreement, Mr.
Callaway shall be entitled to his full compensation and benefits as set forth in
this Agreement. If Mr. Callaway's disability continues after such six (6) month
period, this Agreement is subject to termination pursuant to the provisions of
Section 8(e) hereof.

7. NONCOMPETITION.
--------------

(a) Other Business. To the fullest extent permitted by law, Mr.
--------------
Callaway agrees that, while employed by the Company, Mr. Callaway will not,
directly or indirectly (whether as agent, consultant, holder of a beneficial
interest, creditor, or in any other capacity), engage in any business or venture
which engages directly or indirectly in competition with the business of the
Company, or have any interest in any person, firm, corporation, or venture which
engages directly or indirectly in competition with the business of the Company.
For purposes of this section, the ownership of interests in a broadly based
mutual fund shall not constitute ownership of the stocks held by the fund.

(b) Other Employees. Except as may be required in the performance of
---------------
his duties hereunder, Mr. Callaway shall not cause or induce, or attempt to
cause or induce, any person now or hereafter employed by the Company, or any
subsidiary, to terminate such employment, nor shall Mr. Callaway directly or
indirectly employ any person who is now or hereafter employed by the Company for
a period of one (1) year from the date Mr. Callaway ceases to be employed by the
Company.

(c) Suppliers. While employed by the Company, and for one (1) year
---------
thereafter, Mr. Callaway shall not cause or induce, or attempt to cause or
induce, any person or firm supplying goods, services or credit to the Company to
diminish or cease furnishing such goods, services or credit.

(d) Conflict of Interest. While employed by the Company, Mr. Callaway
--------------------
shall not engage in any conduct or enterprise that shall constitute an actual or
apparent conflict of interest with respect to Mr. Callaway's duties and
obligations to the Company.

4
<PAGE>

8. TERMINATION.
-----------

(a) Termination at the Company's Convenience. Mr. Callaway's
-----------------------------------------
employment under this Agreement may be terminated by the Company at its
convenience at any time upon the majority vote of the entire Board of Directors.
In the event of a termination at the Company's convenience, Mr. Callaway shall
be entitled to receive (i) any compensation accrued and unpaid as of the date of
termination; (ii) the continued payment of base salary at the same rate and on
the same schedule as in effect at the time of termination for a period of time
equal to the remainder of the term of this Agreement; (iii) the immediate
vesting of all unvested stock options held by Mr. Callaway as of such
termination date; (iv) the continuation of all benefits and perquisites provided
by Sections 5(c)(i) and (ii) hereof for a period of time equal to the remainder
of the term of this Agreement; and (v) no other severance. At Mr. Callaway's
option, Mr. Callaway may elect in writing up to 60 days prior to termination to
receive such payments and benefits as provided by subsection (iii) of this
section in a lump sum payment representing all future payments due, discounted
to their then present value at the prevailing major bank prime rate as of the
date of termination.

(b) Termination at Mr. Callaway's Convenience. Mr. Callaway's
------------------------------------------
employment under this Agreement may be terminated immediately by Mr. Callaway at
his convenience at any time. In the event of a termination at Mr. Callaway's
convenience, Mr. Callaway shall be entitled to receive (i) any compensation
accrued and unpaid as of the date of termination; and (ii) no other severance.

(c) Termination by the Company for Substantial Cause. Mr. Callaway's
-------------------------------------------------
employment under this Agreement may be terminated immediately by the Company for
substantial cause at any time. In the event of a termination by the Company for
substantial cause, Mr. Callaway shall be entitled to receive (i) any
compensation accrued and unpaid as of the date of termination; and (ii) no other
severance. "Substantial cause" shall mean for purposes of this subsection
breach of this Agreement, or misconduct, including but not limited to,
dishonesty, theft, use or possession of drugs or alcohol during work, disloyalty
and/or felony criminal conduct.

(d) Termination by Mr. Callaway for Substantial Cause. Mr. Callaway's
--------------------------------------------------
employment under this Agreement may be terminated immediately by Mr. Callaway
for substantial cause at any time. In the event of a termination by Mr.
Callaway for substantial cause, Mr. Callaway shall be entitled to receive (i)
any compensation accrued and unpaid as of the date of termination; (ii) the
continued payment of base salary at the same rate and on the same schedule as in
effect at the time of termination for a period of time equal to the remainder of
the term of this Agreement; (iii) the immediate vesting of all unvested stock
options held by Mr. Callaway as of such termination date; (iv) the continuation
of all benefits and perquisites provided by Sections 5(c)(i) and (ii) hereof for
a period of time equal to the remainder of the term of this Agreement; and (v)
no other severance. At Mr. Callaway's option, Mr. Callaway may elect in writing
up to 60 days prior to termination to receive such payments and benefits as
provided by

5
<PAGE>

subsection (iii) of this subsection in a lump sum payment representing all
future payments due, discounted to their then present value at the prevailing
major bank prime rate as of the date of termination. "Substantial cause" shall
mean for purposes of this subsection a diminution in Mr. Callaway's title or
duties or any material breach of this Agreement by the Company.

(e) Termination Due to Permanent Disability. Subject to all
----------------------------------------
applicable laws, Mr. Callaway's employment under this Agreement may be
terminated immediately by the Company in the event Mr. Callaway becomes
permanently disabled. In the event of a termination by the Company due to Mr.
Callaway's permanent disability, Mr. Callaway shall be entitled to (i) any
compensation accrued and unpaid as of the date of termination; (ii) the
continued payment of base salary at the same rate and on the same schedule as in
effect at the time of termination for a period of time equal to the remainder of
the term of this Agreement; (iii) the immediate vesting of outstanding but
unvested stock options held by Mr. Callaway as of such termination date in a
prorated amount based upon the number of days in the option vesting period that
elapsed prior to Mr. Callaway's termination; (iv) the continuation of all
benefits and perquisites provided by Section 5(c)(i) and (ii) hereof for a
period of time equal to the remainder of the term of this Agreement; and (v) no
other severance. Termination under this subsection shall be effective
immediately upon the date the Board of Directors of the Company formally
resolves that Mr. Callaway is permanently disabled. Subject to all applicable
laws, "permanent disability" shall mean the inability of Mr. Callaway, by reason
of any ailment or illness, or physical or mental condition, to devote
substantially all of his time during normal business hours to the daily
performance of Mr. Callaway's duties as required under this Agreement for a
continuous period of six (6) months. At Mr. Callaway's option, Mr. Callaway may
elect in writing up to 60 days prior to termination to receive such payments and
benefits as provided by subsection (ii) of this section in a lump sum payment
representing all future payments due, discounted to their then present value at
the prevailing major bank prime rate as of the date of termination.

(f) Termination Due to Death. Mr. Callaway's employment under this
-------------------------
Agreement may be terminated immediately by the Company in the event of Mr.
Callaway's death. In the event of a termination by the Company due to Mr.
Callaway's death, Mr. Callaway's estate shall be entitled to (i) any
compensation accrued and unpaid as of the date of termination; (ii) the
immediate vesting of outstanding but unvested stock options held by Mr. Callaway
as of such termination date in a prorated amount based upon the number of days
in the option vesting period that elapsed prior to Mr. Callaway's termination;
and (iii) no other severance. At Mr. Callaway's option, Mr. Callaway may elect
in writing at least 60 days prior to termination to receive such payments and
benefits as provided by subsection (ii) of this section in a lump sum payment
representing all future payments due, discounted to their then present value at
the prevailing major bank prime rate as of the date of termination.

(g) Unless otherwise provided, any severance payments or other amounts
due pursuant to this Section 8 shall be paid in cash within thirty (30) days of

6
<PAGE>

termination. Any severance payments shall be subject to usual and customary
employee payroll practices and all applicable withholding requirements. Except
for such severance pay and other amounts specifically provided pursuant to this
Section 8, Mr. Callaway shall not be entitled to any further compensation,
bonus, damages, restitution, relocation benefits, or other severance benefits
upon termination of employment during the term of this Agreement. The amounts
payable to Mr. Callaway pursuant to this Section 8 shall not be treated as
damages, but as severance compensation to which Mr. Callaway is entitled by
reason of termination of employment under the applicable circumstances. The
Company shall not be entitled to set off against the amounts payable to Mr.
Callaway hereunder any amounts earned by Mr. Callaway in other employment after
termination of his employment with the Company pursuant to this Agreement, or
any amounts which might have been earned by Mr. Callaway in other employment had
Mr. Callaway sought such other employment. The provisions of this Section 8
shall not limit Mr. Callaway's rights under or pursuant to any other agreement
or understanding with the Company or with Mr. Callaway's participation in, or
terminating distributions and vested rights under, any pension, profit sharing,
insurance or other employee benefit plan of the Company to which Mr. Callaway is
entitled pursuant to the terms of such plan.

(h) Termination By Mutual Agreement of the Parties. Mr. Callaway's
----------------------------------------------
employment pursuant to this Agreement may be terminated at any time upon the
mutual agreement in writing of the parties. Any such termination of employment
shall have the consequences specified in such agreement.

(i) Pre-Termination Rights. The Company shall have the right, at its
----------------------
option, to require Mr. Callaway to vacate his office or otherwise remain off the
Company's premises prior to the effective date of termination as determined
above, and to cease any and all activities on the Company's behalf.

9. RIGHTS UPON A CHANGE IN CONTROL.
-------------------------------

(a) If a Change in Control (as defined in Exhibit A hereto) occurs
before the termination of Mr. Callaway's employment hereunder, then this
Agreement shall be extended (the "Extended Employment Agreement") in the same
form and substance as in effect immediately prior to the Change in Control,
except that the termination date shall be that date which would permit the
Extended Employment Agreement to continue in effect for an additional period of
time equal to the full term of this Agreement.

(b) Notwithstanding anything in this Agreement to the contrary, if
upon or at any time within one year following any Change in Control that occurs
during the term of this Agreement there is a Termination Event (as defined
below), Mr. Callaway shall be treated as if he had been terminated for the
convenience of the Company and Mr. Callaway shall be entitled to receive the
compensation and other benefits and entitlements set forth in Section 8(a).
Furthermore, except as specifically provided herein, the termination events and
consequences described in Section 8 shall continue to apply

7
<PAGE>

during the term of the Extended Employment Agreement except that, in the event
of a conflict between Section 8 and the rights of Mr. Callaway described in this
Section 9, the provisions of this Section 9 shall govern.

(c) A "Termination Event" shall mean the occurrence of any one or
more of the following, and in the absence of the Mr. Callaway's permanent
disability (defined in Sections 6 and 8(e)), Mr. Callaway's death, and any of
the factors enumerated in Section 8(c) as providing to the Company "substantial
cause" for terminating Mr. Callaway's employment:

(i) the termination or material breach of this Agreement by the
Company;

(ii) a failure by the Company to obtain the assumption of this
Agreement by any successor to the Company or any assignee of all or
substantially all of the Company's assets;

(iii) any material change in the title, position, duties,
responsibilities or status that Mr. Callaway had with the Company, as a publicly
traded entity, immediately prior to the Change in Control;

(iv) any reduction, limitation or failure to pay or provide any of
the compensation, reimbursable expenses, stock options, incentive programs, or
other benefits or perquisites provided to Mr. Callaway under the terms of this
Agreement or any other agreement or understanding between the Company and Mr.
Callaway, or pursuant to the Company's policies and past practices as of the
date immediately prior to the Change in Control; or

(v) any requirement that Mr. Callaway relocate or any assignment to
Mr. Callaway of duties that would make it unreasonably difficult for Mr.
Callaway to maintain the principal residence he had immediately prior to the
Change in Control.

10. SURRENDER OF BOOKS AND RECORDS. Mr. Callaway agrees that upon
------------------------------
termination of employment in any manner, Mr. Callaway will immediately surrender
to the Company all lists, books and records of or connected with the business of
the Company, and all other properties belonging to the Company, it being
distinctly understood that all such lists, books, records and other documents
are the property of the Company. However, notwithstanding the foregoing, Mr.
Callaway may keep, subject to the provisions of Section 12 of this Agreement and
any and all other confidentiality agreements between Mr. Callaway and the
Company, copies of those records maintained by Mr. Callaway as Founder of the
Company or otherwise relating to Mr. Callaway's association with the Company
("Retained Copies"). The Company shall have the right to inspect and review all
Retained Copies during normal business hours upon reasonable request.

8
<PAGE>

11. GENERAL RELATIONSHIP. Mr. Callaway shall be considered an
--------------------
employee of the Company within the meaning of all federal, state and local laws
and regulations, including, but not limited to, laws and regulations governing
unemployment insurance, workers' compensation, industrial accident, labor and
taxes.

12. PROPRIETARY INFORMATION.
-----------------------

(a) Mr. Callaway agrees that any trade secret or proprietary
information of the Company to which Mr. Callaway has become privy or may become
privy to as a result of his employment with the Company shall not be divulged or
disclosed to any other party (including, without limit, any person or entity
with whom or in whom Mr. Callaway has a business interest) without the express
written consent of the Company, except as otherwise required by law. In
addition, Mr. Callaway agrees to use such information only during the term of
this Agreement and only in a manner which is consistent with the purposes of
this Agreement. In the event Mr. Callaway believes that he is legally required
to disclose any trade secret or proprietary information of the Company, Mr.
Callaway shall give reasonable notice to the Company prior to disclosing such
information and shall take such legally permissible steps as are reasonably
necessary to protect such Company trade secrets or proprietary information,
including but not limited to, seeking orders from a court of competent
jurisdiction preventing disclosure or limiting disclosure of such information
beyond that which is legally required. The Company shall reimburse Mr. Callaway
for reasonable legal expenses incurred in seeking said orders.

(b) Except as otherwise required by law, Mr. Callaway shall hold in
confidence all trade secret and proprietary information received from the
Company until such information is available to the public generally or to the
Company's competitors through no unauthorized act or fault of Mr. Callaway.
Upon termination of this Agreement, Mr. Callaway shall promptly return any
written proprietary information in his possession to the Company.

(c) As used in this Agreement, "trade secret and proprietary
information" means information, whether written or oral, not generally available
to the public; it includes the concepts and ideas involved in the Company's
products whether patentable or not; and includes, but is not limited to, the
processes, formulae, and techniques disclosed by the Company to Mr. Callaway or
observed by Mr. Callaway. It does not include:

(i) Information, which at the time of disclosure, had been
previously published;

(ii) Information which is published after disclosure, unless such
publication is a breach of this Agreement or is otherwise a violation of the
contractual, legal or fiduciary duties owed to the Company, which violation is
known to Mr. Callaway; or

9
<PAGE>

(iii) Information which, subsequent to disclosure, is obtained by
Mr. Callaway from a third person who is lawfully in possession of such
information (which information is not acquired in violation of any contractual,
legal, or fiduciary obligation owed to the Company with respect to such
information, and is known by Mr. Callaway) and does not require Mr. Callaway to
refrain from disclosing such information to others.

(d) The provisions of this Section 12 shall survive the termination or
expiration of this Agreement, and shall be binding upon Mr. Callaway in
perpetuity.

13. INVENTIONS AND INNOVATIONS.
--------------------------

(a) As used in this Agreement, inventions and innovations mean new
ideas and improvements, whether or not patentable, relating to the design,
manufacture, use or marketing of golf equipment or other products of the
Company. This includes, but is not limited to, products, processes, methods of
manufacture, distribution and management, sources of and uses for materials,
apparatus, plans, systems and computer programs.

(b) Mr. Callaway agrees to disclose to the General Counsel and the
Board of Directors of the Company any invention or innovation which he develops,
either alone or with anyone else, during the term of Mr. Callaway's employment
with the Company, as well as any invention or innovation based on proprietary
information of the Company which Mr. Callaway develops, whether alone or with
anyone else, within twelve (12) months after the termination of Mr. Callaway's
employment with the Company.

(i) which is developed totally or partially while Mr. Callaway is
employed by the Company;

(ii) for which Mr. Callaway used any of the Company's equipment,
supplies, facilities or proprietary information, even if any or all of such
items are relatively minor, and have little or no monetary value; or

(iii) which results in any way from Mr. Callaway's work for the
Company or relates in any way to the Company's business or the Company's current
or anticipated research and development.

(d) Mr. Callaway understands and agrees that the existence of any
condition set forth in either (c)(i), (ii) or (iii) above is sufficient to
require Mr. Callaway to assign his inventions or innovations to the Company.

10
<PAGE>

(e) All provisions of this Agreement relating to the assignment by Mr.
Callaway of any invention or innovation are subject to the provisions of
California Labor Code Sections 2870, 2871 and 2872.

(f) Mr. Callaway agrees that any invention or innovation which is
required under the provisions of this Agreement to be assigned to the Company
shall be the sole and exclusive property of the Company. Upon the Company's
request, at no expense to Mr. Callaway, Mr. Callaway shall execute any and all
proper applications for patents, assignments to the Company, and all other
applicable documents, and will give testimony when and where requested to
perfect the title and/or patents (both within and without the United States) in
all inventions or innovations belonging to the Company.

(g) Mr. Callaway shall disclose all inventions and innovations to the
Company, even if Mr. Callaway does not believe that he is required under this
Agreement, or pursuant to California Labor Code Section 2870, to assign his
interest in such invention or innovation to the Company. If the Company and Mr.
Callaway disagree as to whether or not an invention or innovation is included
within the terms of this Agreement, it will be the responsibility of Mr.
Callaway to prove that it is not included.

14. ASSIGNMENT. This Agreement shall be binding upon and shall inure
----------
to the benefit of the parties hereto and the successors and assigns of the
Company. Except as otherwise specifically provided in writing, Mr. Callaway
shall have no right to assign his rights, benefits, duties, obligations or other
interests in this Agreement, it being understood that this Agreement is personal
to Mr. Callaway.

15. ATTORNEYS' FEES AND COSTS. If any arbitration or other
-------------------------
proceeding is brought for the enforcement of this Agreement, or because of an
alleged dispute or default in connection with any of its provisions, the
successful or prevailing party shall be entitled to recover reasonable
attorneys' fees and costs incurred in such action or proceeding, in addition to
any relief to which such party may be deemed entitled.

16. ENTIRE UNDERSTANDING. This Agreement sets forth the entire
--------------------
understanding of the parties hereto with respect to the subject matter hereof,
and no other representations, warranties or agreements whatsoever as to that
subject matter have been made by Mr. Callaway or the Company not herein
contained. This Agreement shall not be modified, amended or terminated except
by another instrument in writing executed by the parties hereto. This Agreement
replaces and supersedes any and all prior understandings or agreements between
Mr. Callaway and the Company regarding employment.

17. NOTICES. Any notice, request, demand, or other communication
-------
required or permitted hereunder, shall be deemed properly given when actually
received

11
<PAGE>

or within five (5) days of mailing by certified or registered mail, postage
prepaid, to:

Mr. Callaway: Ely Callaway
c/o Callaway Golf Company
2285 Rutherford Road
Carlsbad, California 92008-8815

Company: Callaway Golf Company
2285 Rutherford Road
Carlsbad, California 92008-8815
Attn: Donald H. Dye

or to such other address as Mr. Callaway or the Company may from time to time
furnish, in writing, to the other.

18. ARBITRATION. Any dispute, controversy or claim arising hereunder
-----------
or in any way related to this Agreement, its interpretation, enforceability, or
applicability, or relating to Mr. Callaway's employment, or the termination
thereof, that cannot be resolved by mutual agreement of the parties shall be
submitted to arbitration. The arbitration shall be conducted by a retired judge
from the Judicial Arbitration and Mediation Service/Endispute ("JAMS") office
located in Orange County, California, who shall have the powers to hear motions,
control discovery, conduct hearings and otherwise do all that is necessary to
resolve the matter. The arbitration award shall be final and binding, and
judgment on the award may be entered in any court having jurisdiction thereof.
It is expressly understood that the parties have chosen arbitration to avoid the
burdens, costs and publicity of a court proceeding, and the arbitrator is
expected to handle all aspects of the matter, including discovery and any
hearings, in such a way as to minimize the expense, time, burden and publicity
of the process, while assuring a fair and just result. In particular, the
parties expect that the arbitrator will limit discovery by controlling the
amount of discovery that may be taken (e.g., the number of depositions or
interrogatories) and by restricting the scope of discovery to only those matters
clearly relevant to the dispute.

19. MISCELLANEOUS.
-------------

(a) Headings. The headings of the several sections and paragraphs of
--------
this Agreement are inserted solely for the convenience of reference and are not
a part of and are not intended to govern, limit or aid in the construction of
any term or provision hereof.

(b) Waiver. Failure of either party at any time to require
------
performance by the other of any provision of this Agreement shall in no way
affect that party's rights thereafter to enforce the same, nor shall the waiver
by either party of any breach of any provision hereof be held to be a waiver of
any succeeding breach of any provision or a waiver of the provision itself.

12
<PAGE>

(c) Applicable Law. This Agreement shall constitute a contract under
--------------
the internal laws of the State of California and shall be governed and construed
in accordance with the laws of said state as to both interpretation and
performance.

(d) Severability. In the event any provision or provisions of this
------------
Agreement is or are held invalid, the remaining provisions of this Agreement
shall not be affected thereby.

20. SUPERSEDES OLD OFFICER EMPLOYMENT CONTRACT. Mr. Callaway and the
-------------------------------------------
Company recognize that prior to the effective date of this Agreement they were
parties to a certain Officer Employment Agreement effective January 1, 1995 (the
"Old Officer Employment Agreement"). It is the intent of the parties that as of
the effective date of this Agreement, this Agreement shall replace and supersede
the Old Officer Employment Agreement entirely, that the Old Officer Employment
Agreement shall no longer be of any force or effect except as to Sections 7, 12,
13, 15, 18, 20 and 22 thereof, and that to the extent there is any conflict
between the Old Officer Employment Agreement and this Agreement, this Agreement
shall control and both agreements shall be construed so as to give the maximum
force and effect to the provisions of this Agreement.

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

MR. CALLAWAY: COMPANY:
CALLAWAY GOLF COMPANY
a California corporation

/s/ ELY CALLAWAY By: /s/ DONALD H. DYE
- - ----------------------- -----------------------------------
Ely Callaway Donald H. Dye, President and C.E.O.

13
<PAGE>

EXHIBIT A

A "Change in Control" means the following and shall be deemed to occur
if any of the following events occurs:

(a) Any person, entity or group, within the meaning of Section 13(d)
or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") but
excluding the Company and its subsidiaries and any employee benefit or stock
ownership plan of the Company or its subsidiaries and also excluding an
underwriter or underwriting syndicate that has acquired the Company's securities
solely in connection with a public offering thereof (such person, entity or
group being referred to herein as a "Person") becomes the beneficial owner
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or
more of either the then outstanding shares of Common Stock or the combined
voting power of the Company's then outstanding securities entitled to vote
generally in the election of directors; or

(b) Individuals who, as of the effective date hereof, constitute the
Board of Directors of the Company (the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board of Directors of the Company,
provided that any individual who becomes a director after the effective date
hereof whose election, or nomination for election by the Company's shareholders,
is approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered to be a member of the Incumbent Board
unless that individual was nominated or elected by any Person having the power
to exercise, through beneficial ownership, voting agreement and/or proxy, 20% or
more of either the outstanding shares of Common Stock or the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally in the election of directors, in which case that individual shall not
be considered to be a member of the Incumbent Board unless such individual's
election or nomination for election by the Company's shareholders is approved by
a vote of at least two-thirds of the directors then comprising the Incumbent
Board; or

(c) Consummation by the Company of the sale or other disposition by
the Company of all or substantially all of the Company's assets or a
reorganization or merger or consolidation of the Company with any other person,
entity or corporation, other than

(i) a reorganization or merger or consolidation that would result
in the voting securities of the Company outstanding immediately prior thereto
(or, in the case of a reorganization or merger or consolidation that is preceded
or accomplished by an acquisition or series of related acquisitions by any
Person, by tender or exchange offer or otherwise, of voting securities
representing 5% or more of the combined voting power of all securities of the
Company, immediately prior to such acquisition or the first acquisition in such
series of acquisitions) continuing to represent, either by remaining outstanding
or by being converted into voting securities of another entity, more than 50% of
the combined voting power of the voting securities of the Company or such other

14
<PAGE>

entity outstanding immediately after such reorganization or merger or
consolidation (or series of related transactions involving such a reorganization
or merger or consolidation), or

(ii) a reorganization or merger or consolidation effected to implement
a recapitalization or reincorporation of the Company (or similar transaction)
that does not result in a material change in beneficial ownership of the voting
securities of the Company or its successor; or

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

<PAGE>

EXHIBIT 11.1

CALLAWAY GOLF COMPANY
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)

<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Primary earnings per share computation:
- - --------------------------------------
Net income $46,821 $38,937 $71,288 $58,392
======= ======= ======= =======

Weighted average shares outstanding 67,528 66,657 67,771 66,369
Dilutive options 3,200 3,847 3,473 3,680
------- ------- ------- -------

Common equivalent shares 70,728 70,504 71,244 70,049
======= ======= ======= =======

Primary earnings per share:
Net income $ .66 $ .55 $ 1.00 $ .83
======= ======= ====== =======

Fully diluted earnings per share
- - --------------------------------
computation:
-----------
Net income $46,821 $38,937 $71,288 $58,392
======= ======= ======= =======

Weighted average shares outstanding 67,528 66,657 67,771 66,369
Dilutive options 3,458 4,146 3,601 4,050
------- ------- ------- -------

Common equivalent shares 70,986 70,803 71,372 70,419
======= ======= ======= =======

Fully diluted earnings per share:
Net income $ .66 $ .55 $ 1.00 $ .83
======= ======= ======= =======
</TABLE>

<PAGE>

<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the Callaway
Golf Company Consolidated Condensed Balance Sheet (unaudited) and Consolidated
Condensed Statement of Income (unaudited) at June 30, 1997 and for the six
months then ended and is qualified in its entirety by reference to such
financial statements.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 150,849
<SECURITIES> 0
<RECEIVABLES> 133,757
<ALLOWANCES> 6,382
<INVENTORY> 74,405
<CURRENT-ASSETS> 386,656
<PP&E> 155,567
<DEPRECIATION> 41,000
<TOTAL-ASSETS> 522,782
<CURRENT-LIABILITIES> 99,073
<BONDS> 0
0
0
<COMMON> 732
<OTHER-SE> 417,156
<TOTAL-LIABILITY-AND-EQUITY> 522,782
<SALES> 422,105
<TOTAL-REVENUES> 422,105
<CGS> 200,360
<TOTAL-COSTS> 200,360
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 104
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> 115,194
<INCOME-TAX> 43,906
<INCOME-CONTINUING> 71,288
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71,288
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00

</TABLE>