Callaway Golf Company net sales for the third quarter were $235.5 million, an increase of 22% compared to $193.8 million for the same period in 2006. These strong sales are primarily the result of sales of Fusion drivers and X-series irons, as well as increases in sales of accessories and golf balls.

Fully diluted earnings per share were two cents on 67.6 million shares outstanding compared to a loss per share of 18 cents on 67.0 million shares outstanding in 2006. The third quarter 2007 results include a gain of approximately three cents per diluted share related to the sale of a building.

Fully diluted earnings per share include four cents of after-tax charges for gross margin improvement initiatives. The third quarter of 2006 includes after-tax charges of one penny for the integration of Top-Flite and one penny for the restructuring initiatives announced in September 2005. Excluding these charges, the Company’s pro forma fully diluted earnings per share for the third quarter of 2007 would have been six cents compared to a loss per share of 16 cents for the third quarter of 2006.

Gross profit for the third quarter of 2007 increased 39% to $94.0 million (or 40% of net sales) compared to $67.7 million (or 35% of net sales) for the third quarter of 2006. The increase in gross profit as a percent of sales is primarily the result of the Company’s gross margin improvement initiatives announced in November, 2006 and secondarily a more favorable mix of higher margin Fusion woods and X-series irons products.

Operating expenses for the third quarter of 2007 were $93.1 million (or 40% of net sales) compared to $84.6 million (or 44% of net sales) in 2006. The dollar increase is primarily due to higher marketing expenses, increased annual incentive compensation associated with the improved financial results compared to 2006, higher legal expenses to enforce the Company’s intellectual property rights, and higher selling expenses associated with increased sales, partially offset by the gain recognized on the sale of a building.

Highlights for the first nine months include:

Net sales increased 13% to $950.2 million, a new record for the Company. Net Sales were $838.0 million for the same period in 2006.

Fully diluted earnings per share increased 110% to $1.03 on 68.4 million shares outstanding, as compared to $0.49 on 68.8 million shares outstanding in 2006.

Fully diluted earnings per share include after-tax charges of $0.07 associated with the Company’s gross margin improvement initiatives. Results for the first nine months of 2006 include after-tax charges of $0.04 for the integration of Top-Flite and $0.01 for restructuring. Excluding these charges, the Company’s pro forma fully diluted earnings per share for 2007 and 2006 would have been $1.10 and $0.54 respectively, an increase of 104%.

Gross profit for 2007 was $429.9 million (or 45% of net sales) compared to $339.3 million (or 40% of net sales) for 2006. The increase in gross profit is due to the positive results of the Company’s gross margin initiatives and a more favorable mix of higher margin products.

Operating expenses for 2007 were $311.0 million (or 33% of net sales), compared to $281.1 million (or 34% of net sales) for 2006. The dollar increase is primarily due to increased annual incentive compensation associated with the improved financial results, higher marketing expenses, increased legal expenses to enforce the Company’s intellectual property rights, and higher selling expenses associated with the increase in sales.

“We are very pleased with the results for the quarter and for the first nine months of 2007,” commented George Fellows, President and CEO. “Year to date sales have increased 13% for a new record as a result of strong consumer demand for our 2007 products, driven by our Fusion drivers and X-series irons along with the successful launch of the Top-Flite D2 golf ball. This growth has been across all of our regions, a majority of which was driven by our international business which is up 19% for the year.”

“Our gross margins as a percent of sales also continue to improve,” continued Mr. Fellows, “as we successfully execute the gross margin improvement initiatives announced last November, with a majority of the third quarter improvement resulting from these efforts. We also reduced our third quarter inventory by $28 million compared to last year, in line with our expectations, due to these initiatives while maintaining and in many cases improving customer service levels. “

Business Outlook

The Company estimates that its full year 2007 net sales will be in the range of $1.095 to $1.105 billion compared to the previous estimate of $1.070 to $1.080 billion. It is also estimated that the 2007 full year pro forma fully diluted earnings per share will be in the range of $0.85 to $0.89 (on 68.0 million shares) compared to the estimate provided last quarter of $0.78 to $0.84 (on 70.0 million shares). Pro forma earnings exclude charges related to the Company’s gross margin improvement initiatives, currently estimated at $0.08 per share for 2007, but include charges related to employee equity-based compensation under FAS 123R.

“We are raising our forecast to reflect the higher than expected third quarter results,” commented Brad Holiday, Chief Financial Officer. “Our full year forecast continues to take into consideration that the fourth quarter, due to seasonality, is typically our smallest revenue quarter and also that unlike last year, there are very limited new product introductions planned in the quarter. Overall we are very pleased with our results to date and feel we are well on track in achieving our three year targets we set earlier this year.”

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Callaway Golf Company
Statements of Operations
(In thousands, except per share data)
(Unaudited)

Quarter Ended

September 30,

2007

2006

Net sales $ 235,549 100 % $ 193,763 100 %
Cost of sales

141,543

60 %

126,058

65 %
Gross profit 94,006 40 % 67,705 35 %
Operating expenses:
Selling 65,808 28 % 56,949 29 %
General and administrative 19,394 8 % 20,901 11 %
Research and development

7,928

3 %

6,788

4 %
Total operating expenses 93,130 40 % 84,638 44 %
Income (loss) from operations 876 (16,933 ) -9 %
Other income (expense), net

1,223

1 %

(1,058 )
Income (loss) before income taxes 2,099 1 % (17,991 ) -9 %
Income tax provision (benefit)

830

(6,075 )
Net income (loss) $ 1,269

1 % $ (11,916 ) -6 %

Earnings (loss) per common share:
Basic $ 0.02 ($0.18 )
Diluted $ 0.02 ($0.18 )
Weighted-average shares outstanding:
Basic