The following discussion and analysis should be read in conjunction with (i) the attached unaudited condensed consolidated financial statements and notes thereto for the three and nine months ended September 30, 2009, and with our consolidated financial statements and notes thereto for the year ended December 31, 2008 included in our Annual Report on Form 10-K filed with the SEC on March 11, 2009 and (ii) the discussion under the caption "Risk Factors" in our Annual Report on Form 10-K filed with the SEC on March 11, 2009 and any material changes from the risk factors as previously disclosed in the Annual Report on Form 10-K set forth in Item 1A of Part II below.

Forward Looking Statements

This Quarterly Report contains "forward looking statements" made under the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, including, without limitation, in the notes to the consolidated financial statements included in this Quarterly Report and under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report. Any and all statements contained in this Quarterly Report that are not statements of historical fact may be deemed forward-looking statements. The statements include, but are not limited to:
statements regarding the effect of unauthorized sales of our clubs and sales of counterfeit clubs, pending litigation, statements regarding liquidity and our ability to increase revenues or achieve satisfactory operational performance, statements regarding our ability to satisfy our cash requirements and our ability to satisfy our capital needs, including cash requirements during the next twelve months, statements regarding our ability to produce products commercially acceptable to consumers and statements using terminology such as "may," "might," "will," "would," "should," "could," "project," "pro forma," "predict," "potential," "strategy," "attempt," "develop," "continue," "future," "expect," "intend," "estimate," "anticipate," "plan," "seek" or "believe." Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties and assumptions related to certain factors including, without limitation, the following:

-The ability to maintain historical growth in revenue and profitability; -The impact of changing economic conditions; -The global economic uncertainty;
-Business conditions in the golf industry; -Product development difficulties;
-The uncertainty of the results of pending litigation; -The adequacy of the allowance for doubtful accounts, obsolete inventory and warranty reserves;
-Product approval and conformity to governing body regulations; -Assembly difficulties;
-Product introductions;
-Patent infringement risks;
-Uncertainty of the ability to protect intellectual property rights; -Market demand and acceptance of products; -The future market for our capital stock; -The uncertainty in the debt and equity markets; -The success of our marketing strategy; -The success of our tour strategy;
-Our dependence on one supplier for a majority of our inventory products; -Our dependence on suppliers who are concentrated in one geographic region; -Our dependence on a limited number of customers; -Solvency of, and reliance on third parties, including suppliers, and freight transporters;
-The actions of competitors, including pricing, advertising and product development risks concerning future technology; -Investor audience, interest or valuation; -The management of sales channels and re-distribution; -The risk associated with events that may prove unrecoverable under existing insurance policies; and
-The impact of operational restructuring on operating results and liquidity and one-time events and other factors detailed under Risk Factors, Item 1A.

Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein. Except as required by federal securities laws, we undertake no obligation to publicly update or revise any written or oral forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Quarterly Report. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements.

Overview

We design, assemble, market and distribute premium quality, technologically innovative golf clubs for all skill levels. Our net sales are primarily derived from sales to on- and off- course golf shops and sporting goods retailers and, to a lesser extent, international distributors and mass merchandisers. No assurances can be given that demand for our current products or the introduction of new products will allow us to achieve historical levels of sales in the future. Our net sales are typically driven by product lifecycles. Several factors affect a product's life, including but not limited to, customer acceptance, competition and technology. As a result, each product family's life cycles generally range from six months to three years.

Our business, financial condition, cash flows and results of operations are subject to seasonality resulting from factors such as weather and spending patterns. Due to the seasonality of our business, one quarter's financial results are not indicative of the full fiscal year's expected financial results. A majority of our revenue is earned in the first and second quarters of the year and revenues generally decline in the third and fourth quarters.

Costs of our clubs consist primarily of component parts, including the head, shaft and grip. To a lesser extent, our cost of goods sold includes labor, occupancy and shipping costs in connection with the inspection, testing, assembly and distribution of our products and certain promotional and advertising costs given in the form of additional merchandise as consideration to customers.

Key Performance Indicators

Our management team has defined and tracks performance against several key sales, operational and balance sheet performance indicators. Key sales performance indicators include, but are not limited to, the following:

-Daily sales by product group
-Daily sales by geography
-Sales by customer channel
-Gross margin performance
-Market share by product at retail
-Inventory share by product at retail

Tracking these sales performance indicators on a regular basis allows us to understand whether we are on target to achieve our internal sales plans.

Key operational performance indicators include, but are not limited to, the following:

-Product returns (dollars and percentage of sales) -Product credits (dollars and percentage of sales) -Units shipped per man-hour worked
-Orders shipped on time
-Expenses by department
-Inbound and outbound freight cost by mode (dollars and dollars per unit) -Inbound freight utilization by mode (ocean vs air) -Vendor purchase order cycle time

Tracking these operational performance indicators on a regular basis allows us to understand whether we are on target to achieve our expense targets and efficiently satisfy customer demand.

Key balance sheet performance indicators include, but are not limited to, the following:

-Days of sales outstanding
-Days of inventory (at cost)
-Days of payables outstanding

Tracking these balance sheet performance indicators on a regular basis allows us to understand our working capital performance and forecast cash flow and liquidity.

Results of Operations

The following table sets forth operating results expressed as a percentage of
net sales for the periods indicated. All information is derived from the
accompanying unaudited condensed consolidated financial statements. Results for
any one or more periods are not necessarily indicative of annual results or
continuing trends.

                                                      Three Months Ended September 30,                Nine Months Ended September 30,
                                                       2009                      2008                 2009                      2008
                                                                 (unaudited)                                    (unaudited)
Net sales                                                   100.0 %                   100.0 %              100.0 %                   100.0 %
Cost of goods sold                                           63.6                      61.8                 71.7                      58.7

  Gross profit                                               36.4                      38.2                 28.3                      41.3

Operating expenses:
  Research and development expenses                           3.5                       5.0                  3.4                       3.5
  Sales and marketing expenses                               26.2                      27.9                 24.9                      27.5
  General and administrative expenses                         9.3                      11.8                  8.1                       8.7
  Settlement expense                                         28.7                         -                  7.8                         -
   Total operating expenses                                  67.7                      44.7                 44.2                      39.7

Interest income (expense), net                               (0.1 )                    (0.1 )               (0.1 )                     0.0

Other income, net                                             0.0                      (0.0 )                0.0                      (0.1 )
  Income (loss) before income taxes                         (31.4 )                    (6.6 )              (16.0 )                     1.5

Income tax expense                                            0.1                       0.0                  0.1                       0.0
Net income (loss)                                           (31.5 )%                   (6.6 )%             (16.1 )%                    1.5 %

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

Total net sales decreased to $17.4 million for the three months ended September 30, 2009 from $17.7 million for the comparable period of 2008. Our sales were primarily driven by the product sales of newly launched Idea a7 and a7 OS irons and hybrids along with Speedline drivers and hybrid-fairway woods and the Idea a3 and a3 OS irons. Several factors affect a product's life, including but not limited to, customer acceptance, competition and technology. As a result, each product family's life cycles generally range from six months to three years. Due to the seasonality of our business, one quarter's financial results are not indicative of the full fiscal year's expected financial results. The decline in net sales for the three months ended September 30, 2009 was primarily due to reduced demand by customers caused by a less than favorable economic environment in the United States and abroad.

Net sales of irons increased to $12.7 million, or 73.1% of total net sales, for the three months ended September 30, 2009 from $11.0 million, or 61.9% of total net sales, for the comparable period of 2008. Current period iron net sales primarily resulted from sales of the recently introduced Idea a7 and a7 OS irons coupled with the close out of the Idea a3 OS irons, and a smaller portion of sales resulting from Tech a4 and a4 OS Irons and integrated iron sets while the comparable period of 2008 net sales primarily resulted from sales of the Idea a3 and a3 OS irons coupled with a smaller portion of sales of Tech OS irons and integrated iron sets.

Net sales of fairway woods decreased to $3.3 million, or 19.2% of total net sales, for the three months ended September 30, 2009, from $4.0 million, or 22.7% of total net sales, for the comparable period of 2008. Net sales for the three months ended September 30, 2009 primarily were generated from sales of Idea a7 and a7 OS hybrids, Speedline hybrid-fairway woods, Tech a4 and a4 OS hybrids and hybrid-fairway woods, Idea a3 and a3 OS and Idea Pro Gold I-woods. Net sales for the three months ended September 30, 2008 primarily were generated from sales of Insight XTD fairway woods and Idea a3 and a3 OS, Idea Pro and Tech OS I-woods.

Net sales of drivers increased to $1.2 million, or 7.0% of total net sales, for the three months ended September 30, 2009 from $1.1 million, or 6.5% of total net sales, for the comparable period of 2008. A large portion of the driver net sales for the three months ended September 30, 2009 was generated by the sales of the Speedline driver, which was launched in the first quarter of 2009 along with the Speedline 9032 driver launched in the second quarter of 2009, while in the comparable period of 2008, net sales were primarily driven by the sales of the Insight XTD driver, which was launched in the first quarter of 2008.

We were dependent on two customers, which collectively comprised approximately 24% of net sales for the three months ended September 30, 2009. Of these, one customer individually represented greater than 10% but less than 20% of net sales and no customer represented greater than 20% of net sales for this period. Should these customers or our other customers fail to meet their obligations to us, our results of operations and cash flows would be adversely impacted.

Net sales of our products outside the United States decreased to $2.9 million, or 16.9% of total net sales, from $3.5 million, or 20.0% of total net sales, for the three months ended September 30, 2009 and 2008, respectively. Net sales resulting from countries outside the United States and Canada decreased to 3.7% of total net sales for the three months ended September 30, 2009 from 6.5% for the comparable period of 2008.

Cost of goods sold increased to $11.1 million, or 63.6% of total net sales, for the three months ended September 30, 2009 from $10.9 million, or 61.8% of total net sales, for the comparable period of 2008. The increase as a percentage of total net sales is primarily due to changes in the product mix and promotional programs during the quarter.

Selling and marketing expenses decreased to $4.5 million for the three months ended September 30, 2009 from $4.9 million for the comparable period in 2008. The decrease is primarily the result of a decrease in compensation expense and cost saving initiatives in various areas.

General and administrative expenses decreased to $1.6 million for the three months ended September 30, 2009 from $2.1 million for the comparable period in 2008. The decrease is primarily the result of a decrease in compensation expense and cost saving initiatives in various areas.

Research and development expenses, primarily consisting of costs associated with development of new products, decreased to $0.6 million for the three months ended September 30, 2009 from $0.9 million for the comparable period in 2008. The decrease is primarily the result of a decrease in compensation expense and cost saving initiatives in various areas.

Due to the recession currently affecting the global economy and the golf industry specifically, we continue to assess our cost structure, including but not limited to work force reductions, gross margin savings and overall cost savings in order to sustain our financial position as well as to position ourselves for future growth.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

Total net sales decreased to $64.1 million for the nine months ended September 30, 2009 from $79.0 million for the comparable period of 2008. Our sales were primarily driven by the product sales of Idea a7 and a7 OS irons and hybrids, Speedline drivers and hybrid-fairway woods, the Idea a3 and a3 OS Irons, the Tech a4 and a4 OS irons, hybrids, drivers and hybrid-fairway woods and integrated iron sets. Several factors affect a product's life, including but not limited to, customer acceptance, competition and technology. As a result, each product family's life cycles generally range from six months to three years. Due to the seasonality of our business, one quarter's financial results are not indicative of the full fiscal year's expected financial results. The decline in net sales for the nine months ended September 30, 2009 was primarily due to reduced demand by customers caused by a less than favorable economic environment in the United States and abroad.

Net sales of irons decreased to $42.9 million, or 66.9% of total net sales for the nine months ended September 30, 2009 from $49.9 million, or 63.2% of total net sales, for the comparable period of 2008. Current period iron net sales primarily resulted from sales of the Idea a7 and a7 OS irons, Tech a4 and a4 OS Irons, Idea a3 and a3 OS irons coupled with a smaller portion of sales of the integrated iron sets while the comparable period of 2008 net sales primarily resulted from sales of the Idea a3 and a3 OS irons coupled with a smaller portion of sales of the Tech OS irons and integrated iron sets.

Net sales of fairway woods decreased to $12.1 million, or 18.8% of total net sales, for the nine months ended September 30, 2009, from $18.8 million, or 23.7% of total net sales, for the comparable period of 2008. Net sales for the nine months ended September 30, 2009 primarily were generated from sales of Idea a7 and a7 OS hybrids, Speedline hybrid-fairway woods, Tech a4 and a4 OS hybrids and hybrid-fairway woods, Idea a3 and a3 OS and Idea Pro Gold I-woods. Net sales for the nine months ended September 30, 2008 primarily were generated from sales of Insight XTD fairway woods and Idea a3 and a3 OS, Idea Pro and Tech OS I-woods.

Net sales of drivers decreased to $8.9 million, or 14.0% of total net sales, for the nine months ended September 30, 2009 from $9.4 million, or 11.9% of total net sales, for the comparable period of 2008. A large portion of the driver net sales for the nine months ended September 30, 2009 was generated by sales of the Speedline driver, which was launched in the first quarter of 2009 along with the Speedline 9032 driver launched in the second quarter of 2009, coupled with the Tech a4 and a4 OS drivers, which were introduced in the third quarter of 2008, while in the comparable period of 2008, net sales were primarily driven by sales of the Insight XTD driver, which was launched in the first quarter of 2008.

We were dependent on two customers, which collectively comprised approximately 28% of net sales for the nine months ended September 30, 2009. Of these, one customer individually represented greater than 5% but less than 10% of net sales and one customer represented greater than 10% but less than 25% of net sales for this period. Should these customers or our other customers fail to meet their obligations to us, our results of operations and cash flows would be adversely impacted.

Net sales of our products outside the United States decreased to $11.6 million, or 18.1% of total net sales, from $16.4 million, or 20.7% of total net sales, for the nine months ended September 30, 2009 and 2008, respectively. Net sales resulting from countries outside the United States and Canada decreased to 4.4% of total net sales for the nine months ended September 30, 2009 from 6.1% for the comparable period of 2008.

Cost of goods sold decreased to $46.0 million, or 71.1% of total net sales, for the nine months ended September 30, 2009 from $46.4 million, or 58.7% of total net sales, for the comparable period of 2008. The increase as a percentage of total net sales is primarily due to the inventory write down to lower of cost or market totaling $3.6 million taken during the second quarter coupled with changes in the product mix and promotional programs during the period.

Selling and marketing expenses decreased to $15.9 million for the nine months ended September 30, 2009 from $21.7 million for the comparable period in 2008. The decrease is primarily the result of a decrease in marketing and tour expense of $3.4 million and commission expense of $1.6 million and other cost saving initiatives in various areas.

General and administrative expenses decreased to $5.2 million for the nine months ended September 30, 2009 from $6.8 million for the comparable period in 2008. The decrease is primarily the result of a decrease in compensation expense of $1.0 million along with other cost saving initiatives in various areas.

Research and development expenses, primarily consisting of costs associated with development of new products, decreased to $2.2 million for the nine months ended September 30, 2009 from $2.8 million for the comparable period in 2008. The decrease is primarily the result of a decrease in compensation expense.

Our net accounts receivable balances were approximately $16.3 million and $14.7 million at September 30, 2009 and December 31, 2008, respectively. The increase is consistent with the seasonality of our business; historically, sales in the golf industry are stronger in the first half of the year as compared to the second half of the year.

Our inventory balances were approximately $20.6 million and $33.6 million at September 30, 2009 and December 31, 2008, respectively. The decrease in inventory levels is primarily due to the seasonality of our business where purchases are stronger in the fourth and first quarters of the year, while sales begin to deplete inventory levels in the first and second quarters of the year, coupled with an inventory write down to lower of cost or market totaling $3.6 million during the second quarter of 2009.

Our accrued liabilities balances were approximately $11.4 million and $7.3 million at September 30, 2009 and December 31, 2008, respectively. The increase in accrued liabilities is primarily due to the accrual for the settlement of the stockholder class action lawsuit pursuant to which we currently estimate that we will contribute $5 million in conjunction with the settlement to cover the layer of exposure on our directors' and officers' corporate liability insurance that our former insurance carrier will not cover at this time. See the Legal Proceedings section of this Form 10-Q for further details.

Liquidity and Capital Resources

Our principal sources of liquidity are cash reserves, cash flows provided by operations and our credit facilities in effect from time to time. Cash inflows from operations are generally driven by collections of accounts receivables from customers, which generally increase in our second quarter and continue into the third quarter and then begin to decrease during the fourth quarter. As necessary we could use our credit facility to supplement our cash inflows from operations as well as effect other investing activities such as potential future acquisitions. Cash outflows are primarily tied to procurement of inventory which typically begins to build during the fourth quarter and continues heavily into the first and second quarters in order to meet demands during the height of the golf season.

Cash and cash equivalents increased to $11.4 million at September 30, 2009 compared to $6.0 million at December 31, 2008. During the period, inventory decreased $11.2 million and an increase in the inventory reserve of $1.8 million and a net increase in accrued expense and accounts payable of $1.8 million. These were offset by an increase in accounts receivable of $2.5 million.

In November 2007, we signed a revolving credit agreement, which expires November 2012 with Wachovia Bank, NA to provide up to $15.0 million in short term debt. The agreement is collateralized by all of our assets and requires us, among other things, to maintain certain financial performance levels relative to the fixed charge coverage ratio. This agreement was amended in June 2009 so that the ratio is only calculated when we have less than $5.0 million in availability on the facility. Interest on outstanding balances accrues at a rate of LIBOR plus 2.50% and is payable monthly. As of September 30, 2009 and November 10, 2009, we had no outstanding borrowings on our credit facility and we were in compliance with the terms of our agreement. In 2008, Wells Fargo Bank, NA acquired Wachovia Bank, NA. Wells Fargo Bank, NA, as successor to Wachovia Bank, NA, has become our lender under our existing line of credit and is subject to all of the terms and conditions thereof.

Working capital decreased at September 30, 2009 to $30.4 million compared to $38.5 million at December 31, 2008. Approximately 33% of our current assets were comprised of accounts receivable at September 30, 2009. Due to industry sensitivity to consumer buying trends and available disposable income, we have in the past extended payment terms for specific purchase transactions. Issuance of these terms (e.g. greater than 30 days or specific dating) is dependent on our relationship with the customer and the customer's payment history. Payment terms are extended to selected customers typically during off-peak times in the year in order to promote our brand name and to assure adequate product availability and to coincide with planned promotions or advertising campaigns. Although a significant amount of our sales are not affected by these terms, the extended terms do have a negative impact on our financial position and liquidity. Given the current global economic recession and credit crisis, we believe that more customers may request payment terms and we expect to continue to selectively offer extended payment terms in the future, depending upon known industry trends and our financial condition. We generate cash flow from operations primarily by collecting outstanding trade receivables. Because we have limited cash reserves, if collections of a significant portion of trade receivables are unexpectedly delayed, we would have a limited amount of funds available to further expand production until such time as we could collect a significant portion of the trade receivables. If our cash needs in the near term exceed the available cash and cash equivalents on hand and the available borrowing under our credit facility, we would be required to obtain additional financing, which may not be available at all or in the full amounts necessary, or limit expenditures to the extent of available cash on hand, all of which could adversely effect our current growth plans and result in a material adverse effect on our results of operations, financial condition and/or liquidity.

Our anticipated sources of liquidity over the next twelve months are expected to be cash reserves, projected cash flows from operations, and available borrowings under our credit facility. We anticipate that operating cash flows, current cash reserves, and available borrowings also will fund capital expenditure programs. These capital expenditure programs can be suspended or delayed at any time with minimal disruption to our operations if cash is needed in other areas of our operations. In addition, cash flows from operations and cash reserves . . .