

                                     FORM 10-K
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

             [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended October 31, 1996

           [  ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
            For the transition period from ________ to ___________

                     Commission file number: 0-18553

                          Ashworth, Inc.
      Delaware                                        84-1052000
(State or other jurisdiction of                     (I.R.S. Employer
incorporation or organization)                     Identification No.)

                    2791 LOKER  AVENUE  WEST,  CARLSBAD,  CA 92008  (Address  of
           Principal Executive Office, including Zip Code)
                               (619) 438-6610
                (Registrant's Telephone Number, including Area Code)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No ____

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

The  aggregate  market  value of the Common Stock held by  nonaffiliates  of the
Registrant as of January 8, 1997, was  $74,231,151  based upon the last reported
sale price of the  Company's  Common  Stock as reported  by the NASDAQ  National
Market System.

         Indicate the number of shares  outstanding of each of the  registrant's
classes of common stock, as of the latest practicable date.
               Title                                         Outstanding
Common Stock, $.001 Par Value                                12,179,626

                                    DOCUMENTS INCORPORATED BY REFERENCE:  None



<PAGE>



                                     PART I
Item 1.  BUSINESS
                       GENERAL DESCRIPTION OF THE COMPANY

                                                GENERAL DESCRIPTION

         Ashworth,  Inc.,  based in  Southern  California  was  incorporated  in
Delaware on March 19, 1987.  It changed its  corporate  name from Charter  Golf,
Inc. to  Ashworth,  Inc.  on April 6, 1994.  The  Company  designs,  markets and
distributes a full line of quality sports apparel, headwear, and shoes under the
Ashworth(R)  label. The Ashworth  products have been retailed in golf pro shops,
resorts and in the international  market, and at better department and specialty
retail stores.

         The Company  has wholly  owned  subsidiaries  which own and operate the
company  stores.  A wholly  owned  United  Kingdom  subsidiary  distributes  the
Company's  products  in Europe.  The Company  also  established  a wholly  owned
subsidiary  in the  Virgin  Islands  as a  foreign  sales  corporation  to  take
advantage of certain  federal  income tax benefits  with respect to profits from
foreign sales.  Ashworth,  Inc. and its wholly owned subsidiary,  Ashworth U.K.,
Ltd., are partners of a Luxembourg  partnership,  Ashworth, Inc. et Cie., formed
to qualify for trademark registration in Europe under the Madrid Convention.

                                         NARRATIVE DESCRIPTION OF BUSINESS

         At  its   inception,   the  Company   began   designing  and  marketing
classically-styled,  natural  fiber  golfwear  distributed  in the United States
under the  Ashworth(R)  brand  exclusively  to golf pro shops  and  resort.  The
Company has been credited with developing the new look in golfwear over the past
nine years, using natural fibers and a loose relaxed fit emphasizing  quality in
product and presentation,  which are now industry standards.  Its golf lifestyle
apparel is aimed at  predominately  the  younger  active  male  consumer  in the
middle/upper  middle  income  range and is priced in the middle to upper  middle
price range for golf  apparel.  For the past four years,  Ashworth  has been the
leading golf  apparel line sold at pro shops in the United  States with a market
share of approximately 10%.

                                                 ASHWORTH PRODUCTS

         All Ashworth  products are designed  in-house.  The Company designs two
Spring,  two Summer,  two Fall,  one Resort and one Holiday line per year.  Each
line consists of approximately 30 to 60 styles. Product design is largely one of
classic, timeless designs with an emphasis on quality and natural fibers.

         Through  the fall  lines of 1996,  the  Company  designed  two  labels,
Ashworth and Ashworth Harry  Logan(R).  The Ashworth label products were sold to
golf pro shops with the  Ashworth  Harry Logan line sold to the  department  and
speciality store trade. Going forward,  the Company will continue to design some
different  product for the department  store trade,  however,  the label will be
Ashworth.  This will provide management with better control over inventory,  
design and distribution costs.

         The  Company's  line  consists  of knit and  woven  shirts,  pullovers,
sweaters,  vests,  pants,  shorts,  hats,  shoes and  accessories.  In 1996, the
Company designed the new Weather Systems(TM) collection. These products are made
largely of micro fibers and are produced for a variety of


<PAGE>



weather conditions including cold and rainy as well as hot and humid.

         Going  forward,  the Company  intends to place less emphasis on growing
its golf shoe  business,  in an effort to  improve  inventory  turns and  reduce
costs.  The  product  focus on shoes will be in casual and golf  training  shoes
rather than spiked golf shoes.

         In 1996,  the Company  introduced  for the first time a new Basics line
which consists of shirts, pants and shorts. This line consists of popular styles
and  colors  which do not  change  significantly  from year to year in  customer
preference.  This line is projected to be the Company's  highest  volume line in
1997.

                                               DISTRIBUTION CHANNELS

         The Company  distributes  and sells its products  through the following
four channels of distribution.

Golf Pro Shops and Resorts

         The  Company's  core  business is selling to golf pro shops  located at
golf  courses.  According  to surveys by GOLF PRO  MAGAZINE,  the Company is the
leading  golf  apparel  company in golf pro shops in the United  States  with an
approximately 10% market share. The Company  presently  distributes to pro shops
in all 50 states.

Department Stores and Specialty Stores

         The Company presently sells its products to selected upscale department
and  specialty  stores which  include  Nordstrom,  Dillards,  Parisians,  Dayton
Hudson, and Saks Fifth Avenue.

International Market

         The Company  operates a wholly owned  subsidiary  in Essex England that
distributes  Ashworth  products  to  customers  in the United  Kingdom and other
European countries such as Germany, France, Spain, Sweden and Portugal.

         The Company also uses  distributors who resale the Ashworth products in
other countries such as Canada, Japan, Korea, Taiwan, Singapore, and Indonesia.

Ashworth Retail Stores

         The Company operates, through wholly owned subsidiaries,  eleven retail
stores in California,  Texas, Nebraska,  Colorado, Arizona, Utah and Nevada. The
main  purpose of these  stores is to help  control  inventory  by selling  prior
season and irregular merchandise.
<PAGE>
                                                SALES AND MARKETING

         The Company's products are sold in the United States and Europe largely
by  independent  sales  representatives.  The  Company  presently  has 44  sales
representatives in the United States and 12 sales representatives in Europe. The
Company uses 13 different distributors in other international locations.

         In an effort to add exposure and consumer  credibility  to its Ashworth
brand, the Company has five popular and well known golf celebrities who wear and
endorse the Company's products.  They are: (1) Fred Couples,  considered by many
as the most popular  golfer in the world;  (2) John Cook, who won two PGA events
in 1996; (3) Ernie Els, who won the 1995 U.S.  Open; (4) Dave Stockton,  who was
"Player of the Year" on the PGA senior tour two of the past four years;  and (5)
Jim Nantz the popular CBS golf announcer.

         As part of its  marketing  strategy,  the Company  plans to use more of
these players and  celebrities in  advertisements,  in store  displays,  and for
special appearances for trade shows and store appearances.

         In 1996, the Company developed a new in-store fixture program that will
be expanded in 1997.  This modular  fixture program is designed to help create a
dedicated in-store shop for Ashworth products coupled with pictures and displays
of our golf professionals.

         In an effort to introduce  new young  customers to the Ashworth  brand,
the Company is the national apparel sponsor of American Junior Golf Association.
Additionally,  Ashworth  supports  collegiate golf by providing team uniforms to
numerous college and university golf teams.

         The Company's  future  marketing and sales growth efforts will focus on
(1) increasing the annual sales amounts to existing customers;  (2) the addition
of new customers;  (3)  increasing the number of trained sales  representatives;
(4) emphasizing  Ashworth "in-store shop" concept stores utilizing the Company's
new fixture program.

         The  Company's  domestic  market  for the  Ashworth  apparel  has  been
seasonal,  with the highest  sales volume  traditionally  in the period  January
through  August  and the  lowest  volume  in the  months  of  September  through
December.  However,  the addition of the department  and specialty  retail store
market, which is a year-round business,  and additional fall and winter European
market has reduced the impact of the seasonality of the Company's business.

         After  adjusting  for the  discontinuation  of the  Women's  and  Kids'
divisions in fiscal 1995, sales increased 6.2% to $75,413,000 from  $71,018,000.
This increase was primarily due to an increase in the volume of sales.

         During the last three  fiscal  years,  the  Company  had the  following
domestic and international sales of Ashworth products:
<TABLE>
<CAPTION>
                                                                        Year ended October 31,
                                                              1996            1995           1994
                                                                         (In Thousands)
Consolidated Sales:
<S>                                                         <C>              <C>            <C>    
Ashworth Apparel                                            $50,615          $55,250        $51,771
Ashworth Headwear                                             3,614            4,016          3,672
Ashworth Footwear                                             1,645            3,486            N/A
                                                           --------         --------       --------
Ashworth Brand Sales                                         55,874           62,752         55,443
Ashworth Harry Logan Apparel                                  6,057            4,414          1,287
Company stores                                               10,104            5,572          3,469
Ashworth U.K., Ltd. Net of InterCo. Transfers                 3,378            1,786            640
                                                           --------         --------       --------
    Total Consolidated Sales                                $75,413          $74,524        $60,839
         Less Women's & Kids'                                     0            3,506          4,058
                                                       ------------         --------       --------
    Sales excluding Women's & Kids'                         $75,413          $71,018        $56,781
                                                             ======           ======         ======
Consolidated Sales Analysis - Domestic & Foreign:
Exports from the United States to:
  Japan                                                     $ 6,515          $ 7,860        $ 4,880
  England - Ashworth U.K., Ltd.                               3,103            2,994          2,432
  Other Foreign Jurisdictions                                 6,372            5,538          4,143
                                                           --------         --------       --------
     Total Exports                                           15,990           16,392         11,455
  Ashworth U.K., Ltd., Net of InterCo. Transfers              3,378            1,786            640
                                                           --------          -------       --------
     Total Foreign Sales                                     19,368           18,178         12,095
     Total Domestic Sales                                    56,045           56,346         48,744
                                                             ------         --------         ------
     Total Consolidated Sales                               $75,413          $74,524        $60,839
         Less Women's & Kids'                                     0            3,506          4,058
                                                       ------------         --------       --------
     Sales excluding Women's & Kids'                        $75,413          $71,018        $56,781
                                                             ======           ======         ======
</TABLE>
<PAGE>
         At December 31, 1996, the Company had backlog  orders of  approximately
$27,824,000  compared with  approximately  $31,007,000 at December 31, 1995. The
amount  of  backlog  orders  at a  particular  time is  affected  by a number of
factors,  including the  scheduling of  manufacture  and shipping of the product
which,  in some instances,  depends on the customers'  demands.  Accordingly,  a
comparison of backlog orders from period to period is not necessarily meaningful
and may not be  indicative  of eventual  actual  shipments  during the  quarter.
Orders may be changed  or  canceled  up to 45 days prior to the ship date of the
order. The Company's  experience has been that the cancellations,  rejections or
returns of orders do not materially reduce the amount of sales realized from its
backlog.

         The Company's  trading terms  generally  require payment from customers
within 30 days after shipment.  The Company extends discounts of 3%-5% for early
payment.

                                                    COMPETITION

         The golf apparel market is not dominated by any single company,  yet it
is highly  competitive  both in the  United  States  and  abroad.  However,  the
Ashworth brand is the market leader with  approximately 10% of the market share.
The Company  competes  not only with golf apparel  manufactures,  but also other
branded sports and sportswear apparel  manufactures who have entered the growing
golf apparel market in recent years.  Although many of the Company's competitors
have greater financial resources and greater experience,  the Ashworth brand has
been the market leader in the golf pro shop business for the past four years.

                                                 PRODUCT SOURCING

The Company sources its products in the following three ways:

1.  Contract Manufacturing: Most of the Company's knit shirts and pullovers are
           manufactured through arrangements with independent cutting and sewing
          contractors in the San Diego area.  Although the Company uses numerous
contractors, over 80% of its contract work is performed by two main contractors.
The Company has no written agreements with these firms but has used these
contractors since the Company's inception.  The Company considers its relations
with these contractors to be excellent. The Company purchases most of its fabric
from United States mills and then distributes the fabrics to its contractors
after quality inspection.

         2.       Finished  Goods  Sourcing:  The Company also sources  finished
                  garments   made  to  the   Company's   quality   and   styling
                  specifications  from  manufactures in Asia, Europe and Central
                  America.  Approximately 255 of the Company's  products are now
                  being made from  manufacturers  outside of the United  States.
                  Ashworth  is now  importing  products  from  Italy,  Scotland,
                  China,  India,  the  Phillippines and Costa Rica. In 1996, the
                  Company  entered  into an agreement  with an American  mill to
                  have a significant amount of its new basics line made in Costa
                  Rica.

         In the future years,  the Company plans to source more product  outside
the United  States in such areas as Central  America and Mexico to help increase
gross  profits.  The  Company  will,  at the same time,  continue  to  emphasize
quality.

In-House Manufacturing

         The Company  operates  its own  in-house  hat  manufacturing  facility.
Approximately  95% of the  Company's  hats  are made in this  facility  with the
balance  purchased  from  other  hat  manufacturing  companies.  Presently,  the
Company's hat factory is running at close to 100% capacity. The factory could be
easily expanded, however, as needed.

In-House Embroidery

         The embroidery of custom golf course logos and logos for tournaments is
done   in-house   by  the   Company.   The  Company   operates  39   multi-head,
computer-controlled embroidery machines. The machines consist of 2-head, 6-head,
12-head,  15-head  and  20-head  capacity,   totaling  399  heads.  The  Company
embroiders  either the Company's or  customer's  designs which total over 20,000
designs at the present time. Embroidery is applied on garments as well as custom
made caps.  The Company  averages  90,000 logos per week which amounts to 65,000
garments. One to three logos are applied to a single garment. The Company runs a
second  shift to  accommodate  seasonal  demand  during the period from  January
through July. The Company's


<PAGE>


embroidery  department has been ranked by two major trade publications as one of
the top 100 embroidery plants in the country.

                                                    OPERATIONS

         Approximately  97% of the  Company's  products  are  warehoused  in and
distributed from its distribution facilities in Carlsbad and Vista,  California.
The remaining 3% are products  drop-shipped from off-shore factories directly to
our international distributors.

         All products  delivered to the Company's  distribution  facilities must
pass a quality  inspection before  acceptance.  The Company uses a state-of-the-
art rail and trolley  garment  handling  system  designed  specifically  for the
garment  industry.  This system holds the majority of the  inventory at a second
and third  floor level that frees the ground  floor space for order  processing,
embroidery, packing and shipping functions.

         The Company's  computer  operations run on an IBM AS400  computer.  The
Company  has  completed a software  conversion  project  that has  significantly
enhanced the Company's  management  information  systems.  The new package is an
established,  fully integrated,  relational database for manufacturing companies
that has been adapted for the apparel industry.

                                        PATENTS, TRADEMARKS AND COPYRIGHTS

         The Company owns and utilizes several trademarks, principal among which
are the Ashworth word and design marks,  the Golfman word and design marks,  the
Ashworth Harry Logan word mark, and the Weather  Systems word mark. The Ashworth
word and design marks,  Ashworth Harry Logan word mark, and Golfman design marks
have been  registered on the Principal  Register of the United States Patent and
Trademark  Office.  The  Company  filed  an  application  in  January  1997  for
registration  of the Golfman and Weather Systems word marks in the United States
and intends to register these marks throughout its major international markets.

         The Company has obtained  registration  of the Ashworth word and design
marks  and  the  Golfman   design  marks  in  32  countries  and  is  processing
applications for  registration of these  trademarks in 20 additional  countries.
The application process takes from six months to two years to complete.

         The Company  regards its  trademarks  and other  proprietary  rights as
valuable assets and believes that they have  significant  value in the marketing
of its products.  Although the Company  believes that it has the exclusive right
to use the trademarks and intends to vigorously  protect its trademarks  against
infringement,  there  can be no  assurance  that the  Company  can  successfully
protect the trademarks from conflicting uses or claims of ownership.

         John L. Ashworth, an officer,  director and stockholder of the Company,
has  no  personal  rights  to  the  Ashworth   trademark  and  will  receive  no
compensation from the Company for its use of the trademark.

                                                        -9-

<PAGE>




                                                    EMPLOYEES

         At January 17, 1996, the Company had approximately 436 regular and 119
seasonal full-time employees.

Item 2.   PROPERTIES

         The  Company  owns  two  buildings  located  on  Loker  Avenue  West in
Carlsbad,  California, which were purchased on December 9, 1993, for $3,500,000.
The buildings total  approximately  77,000 square feet,  consisting of space for
administrative, embroidery, warehousing and distribution functions. The purchase
was  financed  with a down  payment of  $700,000  and a mortgage  of  $2,800,000
amortized over thirty years but due and payable in seven years.

         The  Company  and  its  subsidiaries  have  the  following  leases  for
manufacturing  and distribution  facilities,  as well as leases for retail space
for its stores:
<TABLE>
<CAPTION>

                                                        Lease           Min/Current           Maximum
                                     Square          Expiration          Base Rent           Base Rent
         Location                    Footage            Date             per Month           per Month
                                                                            ($)                 ($)
Manufacturing and Distribution Centers:
<S>                                  <C>               <C>                   <C>                <C>    
Carlsbad, CA.                        47,800            10/31/00               21,443             24,000
Vista, CA.                           42,000            10/31/97               16,800             16,800
Essex, England                        5,500            10/31/03                3,062              3,062 (a)
Essex, England                        5,500            10/31/03                3,445              3,445 (b)

Retail Stores
San Ysidro, CA                        2,450             4/30/98                4,451              4,629
San Marcos, TX                        3,000             8/31/00                4,263              4,514
Vacaville, CA                         2,500            11/30/00                4,428              5,060
Gretna, NE                            2,000             2/28/99                2,500              2,500
Carlsbad, CA                          1,600             6/30/97                  995                995
Barstow, CA                           2,300            12/31/00                4,420              4,420
Phoenix, AZ                           4,000             9/30/00                5,312              5,976
Park City, UT                         2,250             5/31/00                2,915              3,103
Hillsboro, TX                         2,700             5/31/00                4,163              4,613
Silverthorne, CO                      2,250             6/30/00                3,656              4,031
Las Vegas, NV                         2,450             9/30/01                4,088              4,088
Costa Mesa, CA                        6,020             1/31/08               25,088             32,613
</TABLE>
---------------------
(a)    The rate increase for years 6-10 is to be negotiated at the end of
year 5.
(b)    The rate increase for years 5-9 is to be negotiated at the end of year 4.

The  tenant  also pays  percentage  rent  based on sales  which  exceed  certain
breakpoints for all of the leases except the Carlsbad, California, lease. All of
the leases require the tenant to pay its pro rata share of taxes, insurance, and
maintenance  expenses.  The Company has entered into guaranties for some portion
or all of certain of the subsidiaries' leases.

       The Company's subsidiary,  Ashworth Store II, Inc., has also entered into
a lease for retail store space in the San Marcos,  Texas,  Sports Center,  which
was planned to be completed in 1996.  However,  the project has been put on hold
for at least a year.  The Sports Center lease will replace the  above-referenced
San Marcos lease if and when the Sports Center is completed.

                                                       -10-

<PAGE>



Item 3.   LEGAL PROCEEDINGS.

       There were no material  pending or  threatened  legal  proceedings  as to
which  the  Company  or any of its  subsidiaries  was a party or of which any of
their property was the subject during fiscal 1996.

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

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

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

       The Company's  Common Stock is traded in the  over-the-counter  market on
the NASDAQ National  Market System under the symbol "ASHW".  The following table
sets forth the high and low sale prices on the NASDAQ National Market System for
the quarters indicated.

                                            HIGH              LOW
         1995
         January 31                            11 1/2           7 1/8
         April 30                              10 7/8           7 1/2
         July 31                               10 5/8           7
         October 31                             8 7/8           5 7/8

         1996
         January 31                             7 3/4           5
         April 30                               7 3/8           6
         July 31                                7               4 1/2
         October 31                             7 5/8           4 7/8

Holders

         There is only one class of Common  Stock.  As of January 27, 1997 there
were 885 stockholders of record and approximately 10,000 beneficial owners of 
the Company's Common Stock.

Dividends

          No dividends have been declared  during the past two fiscal years with
respect to the Common Stock.



                                                       -11-

<PAGE>



Item 6.  SELECTED FINANCIAL DATA.

         The following  selected  consolidated  financial data should be read in
conjunction  with the  Consolidated  Financial  Statements and the Notes thereto
which are included  elsewhere in this report.  The  statement of income data set
forth below with respect to the fiscal years ended October 31, 1996,  1995,  and
1994 and the balance  sheet data at October 31, 1996 and 1995 are derived  from,
and  should  be read in  conjunction  with the  audited  Consolidated  Financial
Statements  included  elsewhere in this report. The statement of income data set
forth below with respect to the fiscal years ended October 31, 1993 and 1992 and
the balance  sheet data at October 31,  1994,  1993,  and 1992 are derived  from
audited financial statements not included in this report. No dividends have been
paid for any of the periods presented.
<TABLE>
<CAPTION>

                                                                         Years Ended October 31,
                                                        1996         1995         1994         1993         1992
                                                                       (In thousands, except per share amount)
Statement of Income Data:
<S>                                                    <C>          <C>          <C>          <C>           <C>    
Net Sales                                              $75,413      $74,524      $60,839      $45,823       $28,562
Gross Profit                                            27,395       25,025       23,898       17,816        10,605
Selling, general, and
     administrative expense                             24,086       21,521       15,525       11,161         7,120
Income from operations                                   3,309        3,504        8,373        6,655         3,485
Net Income                                               1,403        1,401        4,860        3,946         2,020
Net income per common
     and equivalent share                                 0.12         0.12         0.40         0.34          0.19
Weighted average common and
     equivalent shares outstanding                      12,098       12,112       12,224       11,766        10,910

                                                                               October 31
                                                        1996         1995         1994         1993         1992
                                                        ----         ----         ----         ----         ----
                                                                             (In thousands)
Balance Sheet Data:
Working capital                                        $31,583      $29,216      $26,368      $22,128       $17,461
Total assets                                            54,912       58,072       47,694       33,757        25,681
Long-term debt
     (less current portion)                              5,307        5,195        5,774        2,885         1,713
Stockholders' equity                                    38,867       36,390       32,926       26,050        20,203
</TABLE>

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

RESULTS OF OPERATIONS

1996 Compared to 1995

        Consolidated  net sales were $75,413,000 for fiscal 1996, an increase of
1.2% over net sales of  $74,524,000 in fiscal 1995.  Management's  focus in 1996
was not to increase  sales,  but was rather to reposition the Company for growth
in 1997 and in future  years.  The  Company  discontinued  its Women's and Kids'
lines in  fiscal  year  1995  which  accounted  for 4.7% of that  year's  sales.
Excluding  these  discontinued  lines,  sales  increased  6.2% in fiscal 1996 in
comparison to fiscal 1995.

         Cost of goods sold  decreased from 66.4% of net sales in fiscal 1995 to
63.7% in fiscal 1996.  This  resulted in improved  gross  margins of 2.7%.  This
improvement  was the result of improved and more  conservative  forecasting  and
fewer mark downs.

         Consolidated  selling,  general and administrative  expenses for fiscal
1996  increased  11.9%  to  $24,087,000  or  31.9%  of  net  sales  compared  to
$21,522,000 or 28.9% of net sales in fiscal 1995. This increase  resulted mainly
from the expense of sales and marketing  activities in the U.S. and Europe,  and
an increase in the cost of compensating the golf  professionals  who endorse the
Company's products.

         Additional  marketing  expenses  were  incurred  during  the year in an
effort to  position  the  Company  for  increased  sales  growth in 1997.  These
marketing expenses included increased  endorsement fees of our PGA professionals
and costs  associated  with the Company's new  integrated  marketing  plan which
includes in-store shop fixture and display programs, color catalogs and salaries
associated with new marketing personnel.

         Other expenses decreased to $948,000 for 1996 compared to $1,088,000 in
1995.  Increased  bank  borrowings  in fiscal 1996  resulted in higher  interest
payments of $86,000 for the year which was offset by a currency transaction gain
in fiscal 1996 of $131,000 by Ashworth  U.K.,  Ltd.  compared with a transaction
loss of $117,000 in fiscal 1995 (See Liquidity and Capital  Resources - Currency
Fluctuation.)

1995 compared to 1994

     Consolidated  net sales were  $74,524,000  for fiscal 1995,  an increase of
$13,685,000  over net sales of  $60,839,000  in fiscal  1994.  The  increase was
primarily  due to  increased  sales  volume in the main  areas of the  Company's
business,  price  increases in the outlet stores,  and the  introduction of golf
footwear.  Ashworth brand apparel sales to golf pro shops increased by only 2.3%
in the year due in large part to incomplete or late shipments resulting from the
slower than expected conversion of the Company's  Management  Information System
(MIS). Total sales increased by 22.5% over fiscal 1994. An analysis of
sales for the two years is shown under Business - Sales and Marketing.

     The increase in cost of sales was due  primarily to the  inventory  reserve
markdown  as a result of  discontinuing  the women's  and kid's  apparel  lines.
Additionally, the conversion to the new MIS software resulted in problems in the
area of  forecasting  and production  scheduling.  This resulted in an excess of
finished goods being produced for the spring and summer seasons.  The MIS 
conversion is now completed,  and the Company is better equipped
to  monitor   inventory   levels  through  better   forecasting  and  production
scheduling.

     Consolidated selling,  general and administrative  expenses for fiscal 1995
increased  38.6% to $21,522,000 or 28.9% of net sales compared to $15,525,000 or
25.5% of sales  in  fiscal  1994.  The  increase  was  primarily  attributed  to
increased sales volume.

     Income  from  operations  decreased  to  $3,504,000  in  fiscal  1995  from
$8,373,000  in 1994.  The decrease was  primarily due to lower gross profits and
higher selling, general and administrative expenses.

     Other  expenses  increased to  $1,088,000  for 1995 compared to $313,000 in
1994.  This was  primarily  a result of  interest  payments  on  increased  bank
borrowings  in fiscal 1995 and a currency  exchange rate loss of $117,000 on the
transactions  between  Ashworth U.K., Ltd. and the Company compared to a gain of
$210,000 in 1994.



                                                       -13-

<PAGE>



LIQUIDITY AND CAPITAL RESOURCES

     The  Company's  need for  working  capital is  seasonal  with the  greatest
requirements from approximately  October through the end of April each year. The
inventory  buildup during this period is to provide product for shipment for the
primary  spring/summer  selling season.  However,  management believes that cash
from  operations  and the bank line of  credit  will be  sufficient  to meet the
Company's working capital requirements through fiscal 1997.

     Cash from  operations  in fiscal  1996  generated  a positive  cash flow of
$8,469,000,  compared to a negative cash flow of $9,727,000 in fiscal 1995.  The
primary reasons were a reduction in overall inventory  levels,  improved control
over  future  season  inventory  levels,  and  increased  sales of prior  season
merchandise at the Company's outlet stores.

      In December 1996,  the Company  entered into a new business loan agreement
with its bank. The agreement  provides a revolving line of credit of $20,000,000
compared to  $17,000,000  under the old  agreement.  The new agreement no longer
restricts  borrowings  to a  specified  asset  base.  Interest is charged at the
bank's reference (prime) rate and loans are  collateralized by substantially all
of the assets of the Company.  The loan  agreement  contains  certain  financial
covenants,  the most  restrictive  of which require the Company to maintain,  as
defined,  a minimum  tangible  net worth,  a  liabilities  to tangible net worth
ratio,  and  a  minimum  ratio  of  cash  and  accounts  receivable  to  current
liabilities.  The line of credit may also be used to finance up to $5,000,000 in
commercial letters of credit and standby letters of credit. At October 31, 1996,
no standby letters or commercial letters of credit were outstanding on this line
of credit.  Additionally,  the loan agreement may be used to enter into spot and
forward foreign exchange contracts.

     At October 31,  1996,  the Company  had no loan  outstanding  with the bank
compared to $6,670,000 outstanding at October 31, 1995. At January 15, 1997, the
loan balance outstanding was $435,000.

     During fiscal 1996, the Company  invested  approximately $2,500,000 in 
personal  property
and equipment, primarily for a new show booth, rack and rail equipment, computer
hardware,  embroidery  machines,  and outlet store  fixtures and  fittings.  For
fiscal 1997, the Company has a capital equipment budget of approximately 
$1,900,000  primarily
for the acquisition of computer  equipment,  leasehold  improvements for stores,
embroidery equipment and warehouse improvements. Management currently intends to
use leases or equipment financing  agreements to finance the purchase of much of
its capital equipment.

     If cash from  operations and debt financing are either  insufficient or not
available,  or if working capital  requirements are greater than estimated,  the
Company may be required to raise additional  capital.  There can be no assurance
that the Company will continue to successfully  raise sufficient working capital
to meet its  requirements.  Lack of  sufficient  working  capital  could  have a
material adverse effect upon the Company, its business, and its ability to grow.

Currency Fluctuations

     Ashworth U.K.,  Ltd., a wholly owned  subsidiary in England,  maintains its
books of account in British pounds. For consolidation  purposes,  the assets and
liabilities of Ashworth U.K.,  Ltd., are converted to U.S.  dollars at the month
end  exchange  rate.  A  translation  difference  arises for share  capital  and
retained  earnings,  which are converted at rates other than the month end rate,
and this amount is reported in the  shareholders'  equity section of the balance
sheet.


                                                       -14-

<PAGE>



     Ashworth  U.K.,  Ltd.  sells  Ashworth  product to other  countries  in the
European Union,  largely with sales denominated in the currencies of those other
countries.  Fluctuations  in the currency  rates between the United  Kingdom and
those other countries give rise to a loss or gain which is reported in earnings.
The amount in fiscal year 1996 was not material.

     All export  sales by  Ashworth,  Inc.,  are U.S.  Dollar  denominated,  and
ordinarily there is no currency exchange rate problem for the Company.  However,
with respect to export sales to Ashworth U.K.,  Ltd.,  that subsidiary may be at
risk.  The  subsidiary  maintains  its account with  Ashworth,  Inc., in British
pounds, but owes Ashworth, Inc., in U.S. Dollars. At the end of every accounting
period,  the debt is adjusted to pounds by multiplying  the  indebtedness by the
closing  dollar/pound  exchange  rate to ensure that the account has  sufficient
pounds to meet its dollar obligation.  This remeasurement is either income or an
expense in the subsidiary's financial statement.

     The Company purchases some garments and shoes from off-shore  manufacturers
which are U.S. Dollar denominated;  consequently,  there is no currency exchange
rate problem for the Company in connection with these purchases.

     The Company has not used  derivative  instruments or other  arrangements to
hedge  against  currency  fluctuations.  However,  management  may  use  hedging
arrangements  in the  future  to  reduce  the  Company's  exposure  to risk with
Ashworth U.K., Ltd.

Inflation.

     Management  believes that  inflation  has not had a material  effect on the
Company's results of operations.

Item 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The  following  financial  statements  with  respect  to  the  Company  are
submitted herewith:

     1.  Report of Independent Public Accountants, page F1.
     2.  Consolidated Balance Sheets-October 31, 1996 and 1995, pages F2 and F3.
     3.  Consolidated Statements of Income for the years ended October 31, 1996,
         1995, and 1994,  Page F4.
     4.  Consolidated  Statements  of  Stockholders'  Equity for the years ended
         October 31, 1996, 1995, and 1994, page F5.
     5.  Consolidated  Statements  of Cash Flows for the years ended October 31,
         1996, 1995, and 1994, and pages F6 and F7.
     6.  Notes to Consolidated Financial Statements, pages F8 through F18.
     7.  Report of Independent Public Accountants on Supplementary Schedule,page
         F19.
     8.  Supplementary Schedule, page F20.

Item 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
              FINANCIAL DISCLOSURE.

     There  have  been  no  changes  in or  disagreements  with  accountants  on
accounting and financial disclosure during the past three fiscal years.





                                                       -15-

<PAGE>



Item 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The Company's directors and executive officers are:
<TABLE>
<CAPTION>

       Name                        Age                             Position

<S>                                <C>               <C>                                  
Gerald W. Montiel                  50                Chairman of the Board of Directors
Randall L. Herrel, Sr.             46                President and Chief Executive Officer
                                                     and Director
John L. Ashworth                   37                Senior Executive Vice President -
                                                     Creative Director and Director
John Newman                        60                Vice President - Finance, Treasurer,
                                                     Chief Financial Officer, and
                                                     Chief Accounting Officer
Mary Montiel                       44                Vice President - Manufacturing & Design
Monica M. McKenzie                 63                General Counsel and Secretary
Andre P. Gambucci                  68                Director
John M. Hanson, Jr.                56                Director
</TABLE>

     Richard H. Werschkul,  formerly the Company's president and chief executive
officer,  resigned  effective  January 15, 1996, to pursue personal and business
interests.  Mr.  Montiel  was  appointed  to  these  positions  by the  board of
directors,  which  positions he held until December 8, 1996.  Randall L. Herrel,
Sr., joined the Company as president and chief executive  officer on December 9,
1996.

     The directors are divided into three classes, each class as nearly equal in
number as  possible,  with an annual  election of each class for a term of three
years.  The terms of  Messrs.  Herrel and  Hanson  expire in 1997,  the terms of
Messrs.  Ashworth and Gambucci expire in 1998, and Mr. Montiel's term expires in
1999.  The directors  serve until their terms expire and until their  successors
are duly elected and qualified or until their death, resignation or removal. The
executive officers of the Company are elected at the annual meeting of the board
of directors and serve at its discretion.

Business Experience

     Gerald W.  Montiel is a founder of the Company and has been its chairman of
the board of  directors  since the  inception  of the Company in March 1987.  He
served as chief executive officer from 1988 to April 1995 and president from the
Company's inception to October 1993 and again from January 15, 1996, to December
8, 1996. Mr. Montiel also served as treasurer from October 1989 to December 1991
and chief financial officer from January 1990 to December 1991.

     Randall L. Herrel, Sr. has been a director, president, and chief executive
officer since December 9, 1996.  Mr. Herrel served as president and chief
operating officer of Quiksilver, Inc., a sports apparel company in Newport
Beach, California for the past two years.  Mr. Herrel joined Quiksilver in
June 1989 and also served at various times as chief financial officer,
treasurer and secretary.  Mr. Herrel holds a B.S. degree in Engineering from
Purdue University, an M.S. degree in Engineering from Northrop University and
an M.B.A. from Stanford University.

     John L. Ashworth is a founder of the Company and has been a director  since
its inception.  Mr.  Ashworth has served as a vice president  since October 1989
and currently serves as senior executive vice president - creative director.
He served as secretary from March 1987 to January 1990.

     Andre P. Gambucci  has been a director of the Company since June 1991.  Mr.
Gambucci was a senior vice president and director of marketing of Acordia of

                                                       -16-

<PAGE>



Colorado,  a general  insurance agency and insurance  brokerage firm in Colorado
Springs, Colorado, from 1982 until December 31, 1995, when he retired. He is now
a  consultant  for Acordia  National and special  assistant to the  president of
American Specialty Services, an insurance company.

     John M. Hanson, Jr.  has been a director of the Company since April 1994.
Mr. Hanson has been a shareholder and officer of John M. Hanson & Company, a
professional corporation practicing accounting, from 1968 to the present.  The
firm has been retained to prepare the Company's tax returns for fiscal 1996.

     John Newman has served as chief  accounting  officer since January 1990 and
vice  president-finance,  treasurer,  and chief financial officer since December
1991. He also served as the company's  controller  from 1988 to January 1990 and
secretary from January 1990 until May 1993.

     Mary  Montiel was elected  vice  president  -  manufacturing  and design in
December 1994.  She served as production  manager from April 1991 until December
1994. She was president and chief financial  officer of Mondav  Corporation,  an
auto  parts  supplier,  from 1988 to April  1991.  Ms.  Montiel is the sister of
Gerald Montiel, the Company's chairman of the board.

     Monica M.  McKenzie has served as general  counsel since April 1993 and was
elected to the position of secretary in May 1993.  She was formerly a partner of
the Denver,  Colorado,  law firm of Gorsuch Kirgis L.L.C., the Company's outside
legal counsel.

Section 16(a) Beneficial Ownership
Reporting Compliance

     Section 16(a) of the  Securities  Exchange Act of 1934  requires  executive
officers,  directors,  and  persons who  beneficially  own more than ten percent
(10%) of the  Company's  Common Stock to file initial  reports of ownership  and
reports of changes in ownership of the Company's  securities with the Securities
and Exchange Commission. To the best of the Company's information and belief, no
person beneficially owns more than ten percent of the Company's securities.  The
executive  officers  and  directors  are  required to furnish  the Company  with
information concerning their ownership of the securities and with copies of such
filings.

     Based solely on a review of such  information and the copies of the filings
furnished by  executive  officers  and  directors  to the  Company,  the Company
believes that all Section 16(a) filing requirements  applicable to its executive
officers and directors were complied with during fiscal 1996.

Item 11.       EXECUTIVE COMPENSATION.

       The following  information  sets forth the executive  compensation of the
Company's chief executive  officer and each of the four most highly  compensated
executive  officers other than the CEO who were serving as executive officers at
the end of the last fiscal year.



                                                       -17-

<PAGE>



<TABLE>
<CAPTION>
                                            SUMMARY COMPENSATION TABLE

                                                                 Long-Term                  All Other
                                                               Compensation               Compensation
                                                Annual            Awards            Split           401(k)
            Name and                         Compensation          Stock            Dollar          Savings
       Principal Position          Year         Salary            Options           Policy            Plan
                                                  ($)               (#)               ($)             ($)

<S>                                <C>          <C>                <C>                   <C>           <C>  
Gerald W. Montiel                  1996         314,483            450,000               996           4,726
Chief Executive                    1995         315,065            300,000             1,062           4,011
Officer (from                      1994         312,693                  0             1,283           3,538
January 16, 1996)

Richard H.
  Werschkul (a)                    1996          63,705                  0                 0             810
Chief Executive                    1995         242,740            200,000                 0           3,088
Office (until                      1994         220,462            150,000                 0           2,740
January 15, 1996)

John L. Ashworth, Sr.              1996         264,668            125,000                 0           2,795
Exec. Vice President-              1995         264,741            260,000                 0           3,385
Creative Director                  1994         263,514             40,000                 0           3,367

A. John Newman                     1996         161,230             45,000                 0           2,551
Vice President -                   1995         160,385                  0                 0           2,430
Finance                            1994         145,173             20,000                 0           1,976

Mary Montiel                       1996         146,904             60,000                 0           1,043
Vice President -                   1995         112,693              5,000                 0               0
Mfg. & Design                      1994          65,077             12,500                 0               0

Monica M. McKenzie                 1996         127,324             25,000                 0           2,010
General Counsel &                  1995         125,480                  0                 0           1,832
Secretary                          1994         112,001             12,500                 0           1,185
</TABLE>

(a) Upon termination on January 15, 1996, Mr. Werschkul  entered into a two-year
non-compete  and  consulting  agreement for which the Company  agreed to pay him
$240,000 during the first year.


                                                         -18-

<PAGE>




<TABLE>
<CAPTION>
                     Option/SAR Grants in Last Fiscal Year
                                                                                                 Potential
                                                                                             Realizable Value
                                                                                                    at
                                                                                              Assumed Annual
                                                                                               Rate of Stock
                                                                                                   Price
                                                                                               Appreciation
                Individual Grants                             For Option Term
                             Number of        % of
                            Securities        Total
                            Underlying      Options/
                             Options/         SARS
                               SARS        Granted to      Exercise
                              Granted       Employees       or Base
                                (#)         in Fiscal        Price          Expiration
Name                                          Year          ($/sh)              Date             (5%)         (10%)
----                          ------       ----------       ------         -------------       -------       ------

<S>                            <C>                            <C>              <C>              <C>          <C>                
Gerald W. Montiel              150,000                        5.50             01/21/04         335,858        782,692
                               150,000                        6.00             12/31/04         429,710      1,029,230
                               150,000          35.6          6.50             12/31/95(a)      537,545      1,323,999

John L. Ashworth               125,000           9.9          6.50             12/31/00         175,099        377,081

John Newman                     10,000                        6.00             12/31/98(b)        6,150         12,600
                                10,000                        6.50             12/31/00          14,008         30,167
                                10,000                        6.50             12/31/01          17,958         39,683
                                15,000           3.6          6.50             09/17/01          26,937         59,525

Mary Montiel                    10,000                        6.50             12/31/00          14,008         30,167
                                25,000                        6.50             09/17/01          44,896         99,208
                                25,000           4.7          6.50               12/31/02(a)     55,266        125,379

Monica M. McKenzie              10,000                        6.50             12/31/00          14,008         30,167
                                15,000           2.0          6.50             09/17/01          26,937         59,525
-------------------
(a) These options are not exercisable until January 1, 1998.
(b) This option replaced an option to purchase 10,000 shares at $6.00 which expired on 12/31/95.
</TABLE>


                                                         -19-

<PAGE>



<TABLE>
<CAPTION>
                   Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values

                                                                         Number of
                                                                        Securities               Value of
                                                                        Underlying              Unexercised
                                                                        Unexercised            In-the-Money
                                                                         Options at             Options at
                                   Shares                                  FY-End                 FY-End
                                  Acquired          Value              Exercisable/            Exercisable/
       Name                     on Exercise        Realized            Unexercisable           Unexercisable
                                     (#)              ($)                   (#)                     ($)

<S>                                <C>              <C>                <C>                     <C>         
Gerald W. Montiel                  50,000           159,500            700,000/400,000         250,000/125,000
Richard H. Werschkul                    0                 0            275,000/0                87,500/0
John L. Ashworth                   75,000           267,375            520,000/200,000          47,500/100,000
John Newman                             0                 0             85,000/0                10,000/0
Mary Montiel                            0                 0             55,500/25,000            1,500/0
Monica McKenzie                         0                 0             50,500/0                 4,000/0

</TABLE>

Compensation of Directors

     Directors  who  are  not  employees  of the  Company  each  receive  annual
compensation  of $10,000 plus $1,000 and expenses for  attendance  at each board
meeting.  Such directors also receive quarterly stock options to purchase shares
of the Company's $.001 par value Common Stock for each quarter during which they
serve as  directors  and for each  committee  on which  they serve  during  each
quarter.  All directors  receive an annual $1,000  apparel  allowance.  No other
arrangement exists pursuant to which any director of the Company was compensated
during the Company's last fiscal year for any service provided as a director.

Employment Contracts and
Termination of Employment and
Change of Control Arrangements

     The Company has  executive  employment  agreements  with Gerald W. Montiel,
Randall L. Herrel, Sr., and John L. Ashworth.  Under the terms of the agreements
with Messrs.  Montiel and Ashworth,  the Company may  terminate the  executive's
employment  upon 30 days notice,  and the executive may terminate his employment
upon 90 days notice to the Company.  The agreement with Mr. Herrel  provides for
employment  for an initial term of three years through  November 30, 1999,  with
automatic  renewal each year unless  either  party gives to the other  six-month
written notice of non-renewal.  The agreements provide that base salary is to be
determined periodically at the discretion of the board of directors on the basis
of merit and the Company's financial success and progress. A bonus is to be paid
to Mr. Herrel on January 15, 1998, based on the Company's earnings per share and
Mr. Herrel's then base salary.  If the earnings per share are from $.46 to $.54,
the bonus will be from 15% to 85% of his then base salary. The Company agreed to
pay the  executives  an annual bonus equal to the premium due on life  insurance
policies  with a face value of  $1,000,000  for  Messrs.  Montiel and Herrel and
$2,000,000 for Mr. Ashworth. The Company also pays the premium on a split dollar
insurance policy with a face value of $1,000,000 on the life of Mr. Montiel. The
agreements  with Messrs.  Montiel and  Ashworth  include  noncompete  provisions
following termination of employment for which the Company has agreed to pay each
executive  compensation  based upon a percentage  of his then current  salary as
consideration for the noncompete  agreement.  The noncompete period is ten years
with  the  noncompete  consideration  to be an  amount  equal  to  100%  of  the
executive's then current salary for the first year and 40% of such salary for

                                                       -20-

<PAGE>



the next nine years.  In the event of the  executive's  death during  employment
with the Company,  his beneficiary or estate will receive an amount equal to the
noncompete  consideration.  The Company has  purchased  term life  insurance  to
provide  the  funds  in such  event.  The  agreement  with Mr.  Herrel  includes
severance payments upon termination of employment under specific  circumstances,
such payments ranging from one-half to two times his then annual base salary.

     The  Company has key person  life  insurance  payable to the Company on the
lives of Messrs.  Montiel and Ashworth in the amount of $1,000,000 and $300,000,
respectively.

                                                STOCK OPTION PLANS

Amended and Restated Nonqualified Stock Option Plan

     In August 1987 the Company  adopted a nonqualified  stock option plan which
was subsequently  amended (as amended to date, the "Plan").  The Company's board
of directors or any committee as the board of directors may designate  from time
to time (reference hereafter to the "Committee" includes either the board or its
designated  committee)  administers  the Plan and  selects  the  persons to whom
options are granted.

     The Company has reserved 5,700,000 shares of Common Stock for issuance upon
exercise  of  options  granted  under the Plan,  all of which  shares  have been
registered  pursuant to the Securities  Act and, upon  issuance,  will be freely
tradable  without  restriction,  except for shares held by an "affiliate" of the
Company.  Under the Plan, as of December 31, 1996, options to purchase 1,439,145
shares  were  outstanding,   options  to  purchase  1,695,500  shares  had  been
exercised,  and 2,565,355  shares were  available for options to be granted at a
future date.  Of the  outstanding  options  under the Plan,  options to purchase
additional  shares were  exercisable  or will become  exercisable  in the fiscal
years and at the weighted average exercise prices indicated below:
<TABLE>
<CAPTION>

                   No. Of          Exercisable as of                    Weighted Average
                   Options             December 31                       Exercise Price

<S>                <C>                     <C>                                <C>   
                   1,237,145               1996                               $ 7.59
                      74,500               1997                               $ 8.75
                      62,500               1998                               $ 9.18
                      65,000               1999                               $ 7.67
                   ---------
                   1,439,145
</TABLE>


Founders' Nonqualified Stock Option Plan

         In November  1992 the Company  adopted a Founders'  nonqualified  stock
option  plan (the  "Founders'  Plan") to  provide  a means for  recognizing  and
rewarding officers, directors,  consultants and advisors of the Company who have
played a substantial  role in the founding or early  development of the Company.
The Founders' Plan is administered by a committee of directors  appointed by the
board of directors (the "Compensation  Committee") which is presently  comprised
of the Company's two outside directors.  The Compensation Committee has the sole
and absolute  authority and  discretion  to interpret the Founders'  Plan and to
prescribe,  amend and rescind  rules and  regulations  relating to the Founders'
Plan.  The Committee may grant options at less than the fair market value of the
stock on the date of grant.



                                                       -21-

<PAGE>



         The Company has reserved  1,000,000 shares of Common Stock for issuance
upon exercise of options  granted under the Plan,  all of which shares have been
registered  pursuant to the Securities  Act and, upon  issuance,  will be freely
tradable  without  restriction,  except for shares held by an "affiliate" of the
Company.

         Under the Plan,  as of December 31, 1996,  options to purchase  535,000
shares were outstanding,  options to purchase 464,000 shares had been exercised,
and 1,000 shares were  available for options to be granted at a future date. All
of the  outstanding  options are  currently  exercisable  at a weighted  average
exercise price of $8.41

Incentive Stock Option Plan

         The  Company  adopted  the  Incentive  Stock  Option  Plan in May  1993
following  stockholder  approval,  and the Plan  was  subsequently  amended  (as
amended,  the ISOP).  The  Company's  board of directors or any committee as the
board of directors may designate from time to time  (reference  hereafter to the
"Committee" includes either the board or its designated  committee)  administers
the ISOP. The Committee selects the persons to whom the options are granted from
among the Company's full-time employees who are regular salaried officers or key
employees of the Company and certain other persons in connection  with offers of
employment.  Any options granted under the ISOP to an employee during a calendar
year in excess of $100,000 of  aggregate  fair market value  (determined  at the
time the option is granted)  will not qualify as incentive  stock  options under
the ISOP.

         The grant or exercise of an incentive stock option (ISO) under the ISOP
is not taxable to the employee. The employee generally will be taxed when and if
the stock received on exercise of the ISO is sold at a gain. In order to receive
this tax treatment under the Internal  Revenue Code,  certain  provisions of the
Plan were  required  to be  approved by the  stockholders,  the options  must be
granted  within 10 years of the date of the Plan, an option by its terms must be
exercisable only within 10 years of the date it is granted (an option granted to
an employee who owns more than 10% of the voting power or value of the Company's
stock must be exercisable within five years of the date it is granted),  and the
exercise  price  must  equal or exceed the fair  market  value of the  Company's
Common Stock on the date of the grant (the exercise price of options  granted to
employees  who own more than 10% of the voting  power or value of the  Company's
stock must be at least 110% of the fair  market  value on the grant  date).  Any
gain on the sale of shares  received  upon exercise of an option will be treated
as capital gain if the optionee  does not dispose of the shares within two years
from the date the  option was  granted  and one year from the date the option is
exercised.  If the optionee does not meet the holding requirements,  any gain on
the sale will be treated as ordinary income.

         The Company has reserved  3,000,000 shares of Common Stock for issuance
upon exercise of options  granted under the Plan,  all of which shares have been
registered  pursuant to the Securities  Act and, upon  issuance,  will be freely
tradable  without  restriction,  except for shares held by an "affiliate" of the
Company.

         Under the ISOP, as of December 31, 1996,  options to purchase 2,318,792
shares were  outstanding,  7,000 options to purchase  shares had been exercised,
and 674,208 shares were available for options to be granted at a future date. Of
the outstanding  options under the Plan,  options to purchase  additional shares
were  exercisable  or will  become  exercisable  in the fiscal  years and at the
weighted average exercise prices indicated below:


                                                       -22-

<PAGE>


<TABLE>
<CAPTION>

                   No. Of               Exercisable as of               Weighted Average
                   Options                 December 31,                  Exercise Price

<S>                <C>                         <C>                            <C>   
                   1,365,792                   1996                           $ 6.89
                     456,750                   1997                           $ 6.07
                     296,250                   1998                           $ 6.42
                     100,000                   1999                           $ 6.00
                     100,000                   2000                           $ 6.00
                   ---------
                   2,318,792
                   =========
</TABLE>

         Options granted under the above described stock option plans may not be
transferred  by the  optionee  other  than by will or the  laws of  descent  and
distribution, pursuant to a qualified domestic relations order as defined by the
Internal  Revenue Code,  or, at the  discretion of the  Committee,  to immediate
family members or trusts,  provided,  however,  incentive  stock options are not
transferable  other than by will or the laws of descent and distribution.  EaTch
option is exercisable  during the lifetime of the optionee only by such optionee
or by his or her guardian or legal representative. An optionee must exercise the
options  within  thirty  days  after  the  date  of  termination  of  employment
disability,  unless the option is extended by the  Committee  for an  additional
period. Options exercised more than three months after termination of employment
(12 months in the case of a disabled employee) do not qualify as incentive stock
options.  This  requirement  is waived in the case of the death of the optionee.
The Committee may in its discretion  permit options to be exercised for a period
not to exceed the option's  stated  expiration  date.  If an optionee dies while
still  employed or engaged by the Company or at any time prior to the expiration
or termination of his or her option, the option may be exercised within one year
after death or at such later date as the Committee may specify.  Options held by
persons whose  employment is terminated  because of retirement or disability are
fully  exercisable  for a  period  of  twelve  months  after  the  date  of such
termination,  unless  either  the  option  or  the  ISOP  provides  for  earlier
termination.  In no event may an option be exercisable  after  expiration of the
term of the option.

                                                    401(k) PLAN

         The Company  adopted a defined  contribution  savings plan (the "401(k)
plan") to  provide  retirement  income to  employees  of the  Company  effective
January 1, 1990.  The 401(k)  Plan is  intended to be  qualified  under  Section
401(a) of the Internal Revenue Code of 1986, as amended.  The 401(k) Plan covers
all  employees  who are at least 21 and have been employed by the Company for at
least six months. It is funded by voluntary pre-tax contributions from employees
up to a maximum amount equal to 15% of annual  compensation  and by 50% matching
contributions by the Company up to 3% of an employee's annual compensation.

Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The following  table sets forth the number and percentage of 12,179,626
issued and  outstanding  shares of the  Company's  $.001 par value  Common Stock
owned beneficially,  as of January 8, 1997 by (1) any person who is known to the
Company to be, or to claim to be, the  beneficial  owner of more than 5% of such
Common Stock, (2) by each of the directors,  (3) each of the executive officers,
and (4) all directors and officers as a group. Each person has sole voting power
and sole  investment  powers  with  respect  to the  shares.  Information  as to
beneficial  ownership is based upon statements  furnished to the Company by such
persons.



                                                       -23-

<PAGE>



<TABLE>
<CAPTION>
                                                         Shares Beneficially Owned                     Percent
              Name                        Shares               Options(1)(2)               Total       Owned(3)
                                            (#)                 (#)                         (#)          (%)

<S>                                          <C>               <C>                        <C>              <C>
Gerald W. Montiel                            50,840            850,000                    900,840          6.9
Randall L. Herrel                                 0                  0                          0            0
John L. Ashworth                             98,109            520,000                    618,109          4.9
A. John Newman                               -0-                85,000                     85,000            *
Mary Montiel                                 -0-                55,500                     55,500            *
Monica M. McKenzie                           -0-                50,500                     50,500            *
Andre P. Gambucci                            67,500             37,500                    105,000            *
John M. Hanson, Jr.                          -0-                27,500                     27,500            *
All executive officers
   and directors as a
   group (8 persons)                        216,449          1,626,000                  1,842,449         13.4
Fred Couples                                543,000            700,000                  1,243,000          9.7
</TABLE>
* Less than one percent.
(1)     Represents  shares of Common  Stock  which may be  acquired  pursuant to
        presently exercisable stock options, including stock options exercisable
        within 60 days of January 15, 1997.
(2)    Only the below indicated options have exercise prices which are less than
       the  market  price of the  Company's  Common  Stock on  January  8,  1997
       ($6.50):

                             Mr. Montiel                   500,000
                             Mr. Herrel                          0
                             Mr. Ashworth                   95,000
                             Mr. Newman                     20,000
                             Ms. Montiel                     3,000
                             Ms. McKenzie                    8,000
                             Mr. Gambucci                    2,500
                             Mr. Hanson                      2,500
                             Mr. Couples                   150,000

(3)  For the purpose of computing the percentage of outstanding shares owned by
     each of the above persons, the shares issuable pursuant to presently
     exercisable stock options held by such person are deemed to be outstanding
     nd have been added to the shares actually issued and outstanding, at
     January 8, 1997, pursuant to Rule 13d-3(d)(1) of the Securities Exchange
     Act of 1934.  Such options are not deemed to be outstanding for the purpose
     of computing the percentage owned by any other person, except for all
     officers and directors as a group.

Item 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

       John L. Ashworth, the Company's senior executive vice  president-creative
director,  was extended a loan by the Company on May 1, 1995 in connection  with
the exercise of an option  expiring May 1, 1995.  The full  recourse loan was in
the  principal  amount of $306,000 and bore  interest at a variable  annual rate
based upon the Bank of America prime rate on the 1st day of each month. Interest
was payable in quarterly  installments.  The principal was paid in full on April
12, 1996.

       Mary Montiel, sister of Mr. Montiel, is an executive officer and employee
of  the  Company.   Her   compensation   is  set  forth  above  under  Executive
Compensation.  She is  currently  receiving an annual  salary of  $160,000.  Ms.
Montiel has been an employee of the Company  serving in various  positions since
April 16, 1992. She served as production  manager from April 1992 until December
1994 and vice president of manufacturing and design since that date.


                                                       -24-

<PAGE>



       Carol Kettela,  sister of Jerry Montiel and Mary Montiel,  is an employee
of the Company,  presently serving as human resources manager. In the year ended
October 31, 1996, she had earned a salary of $61,143 and is currently  receiving
an annual  salary of  $63,000.  Ms.  Kettela has been an employee of the Company
since April 7, 1992,  initially in the position of  administrative  assistant to
the chief  executive  officer and investor  relations.  She was appointed to the
position of human resources manager in January 1996.

       David  Kettela,  brother-in-law  of Mr.  Montiel  and  husband  of  Carol
Kettela, is an employee of the Company,  presently serving as operations manager
of the Outlet Stores Division. In the year ended October 31, 1996, he had earned
a salary of $68,106 and is currently receiving an annual salary of $72,500.  Mr.
Kettela has been an employee of the Company  serving in various  positions since
January 25, 1993. He was appointed the  operations  manager of the Outlet Stores
Division in March 28, 1994.

       Michelle  Zafiropoulos,  daughter of Gerald W. Montiel, is an employee in
the Company's Design and Product Development  Department as a design manager. In
the year ended  October  31,  1996,  she had  earned a salary of $61,067  and is
currently  receiving an annual salary of $72,500.  Ms.  Zafiropoulos has been an
employee of the Company  since March 18,  1991,  except for a brief  period from
April 28, 1995 to January 1, 1996

       Hank Ashworth,  brother of Mr. Ashworth, is a sales representative of the
Company.  During  the fiscal  year ended  October  31,  1996,  he was paid sales
commissions in the amount of $69,764.  Mr. Ashworth also received  severance pay
of $32,533 for  September  18, 1995 through  January 31,  1996.  He was national
sales manager for the Ashworth  core  business  from April 1994 through  October
1996.

       Laura Gambucci, daughter of Mr. Gambucci, is an employee in the Company's
Design and Product Development Department as a design manager. In the year ended
October 31, 1996,  she earned a salary of $84,646 and is currently  receiving an
annual salary of $84,000. Ms. Gambucci has been an employee of the Company since
November 6, 1989.

       Eric Montiel,  son of Gerald W.  Montiel,  is an employee of the Company,
presently  serving  as excess  resource  materials  manager.  In the year  ended
October 31, 1996,  he had earned a salary of $44,183 and is currently  receiving
an  annual  salary  of  $62,500.  Eric  Montiel  has been an  employee  or sales
representative  of the Company from time to time since May 1991, his most recent
employment period commencing January 1996.

       The  Company  has also  entered  into a  promotion  agreement  with  Fred
Couples, who owns of record or beneficially more than 5% of the Company's Common
Stock. The agreement requires Mr. Couples'  exclusive  endorsement and promotion
of Ashworth  products during his lifetime.  The Company has agreed to compensate
Mr.  Couples for such  services,  the  present  value of which  compensation  is
approximately  $5,600,000.  In addition,  the Company has granted to Mr. Couples
the right to receive  options to purchase  the  Company's  Common Stock upon his
performance of specified  services,  including his  participation  in PGA tourna
ments.  The  exercise  price of the options will be the fair market value of the
Company's Common Stock at the time the options are granted, and the options will
be  exercisable  for a period of seven years.  The Company has also made certain
price guaranties with respect to the options.





                                                       -25-

<PAGE>



Item 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)    The following documents are filed as part of this report:

       1.     Financial Statements

       Report of independent  public accountants  
       Consolidated  Balance Sheets - October 31, 1996 and 1995 
       Consolidated Statements of Income for the years ended October  31,  1996,
          1995, and 1994
       Consolidated Statements of Stockholders' Equity for the years ended 
          October 31, 1996, 1995, and 1994
       Consolidated  Statements  of Cash Flows for the years  ended  October 31,
          1996, 1995, and 1994
       Notes to Consolidated Financial Statements - October 31, 1996, 1995, and
          1994

       2.     Financial Statement Schedules

       Report of  independent  public  accountants  on  supplementary  schedules
       Schedule II - Valuation and Qualifying Accounts

       3.     Exhibits.

       See Item (c)  below.

(b)    Report on Form 8-K

       No Forms 8-K were filed  during the last quarter of the fiscal year ended
October 31, 1996.

(c)    Exhibits

3(a)   Certificate of Incorporation as filed March 19, 1987 with the Secretary
       of State of Delaware, Amendment to Certificate of Incorporation as filed
       August 3, 1987 and Amendment to Certificate of Incorporation as filed
       April 26, 1991 (filed as Exhibit 3(a) to Registrant's Registration
       Statement dated February 21, 1992 (File No.33-45078)) and incorporated
       herein by reference) and Amendment to Certificate of Incorporation as
       filed April 6, 1995 (filed as Exhibit 3(a) to the Registrant's Form 10-K
       for fiscal year ended October 31, 1994 (File No. 0-18553), and
       incorporated herein by reference)

3(b)     Bylaws of the  Registrant as adopted by its board of directors on March
         19, 1987, and amended February 13, 1991, October 15, 1993, and November
         30,  1993  (filed as  Exhibit  3(b) to  Registrant's  Form 10-K for the
         fiscal year ended October 31, 1993 (File No. 0-18553) and
         incorporated herein by reference).

4(a)     Specimen  certificate  for  Common  Stock,  par  value  $.001,  of  the
         Registrant   (filed  as  Exhibit  4(a)  to  Registrant's   Registration
         Statement dated November 4, 1987 (File No.33-16714-D)) and incorporated
         herein by reference.

4(b)(1)  Specimen certificate for Options granted under the Amended and Restated
         Nonqualified  Stock  Option Plan dated March 12, 1992 (filed as Exhibit
         4(b) to  Registrant's  Form 10-K for the fiscal year ended  October 31,
         1993 (File No. 0-18553) and incorporated herein by reference).

                                                       -26-

<PAGE>



4(b)(2)  Specimen  certificate  for Options  granted  under the  Founders  Stock
         Option  Plan  dated  November  6, 1992  (filed as  Exhibit  4(b)(2)  to
         Registrant's Form 10-K for the fiscal year ended October 31, 1993 (File
         No. 0-18553) and incorporated
         herein by reference)..

4(c)     Specimen  certificate  for Options  granted under the  Incentive  Stock
         Option Plan dated June 15, 1993 (filed as Exhibit 4(c) to  Registrant's
         Form 10-K for the fiscal year ended October 31, 1993 (File No. 0-18553)
         and incorporated herein by reference).

10(r)(2) Business Loan Agreement dated December 9, 1996,  between the Registrant
         and Bank of America,  expiring March 1, 1999. Under the agreement,  the
         Bank  provides  the Company  with a  revolving  line of credit of up to
         $20,000,000 collateralized by most of the Company's assets.

10(r)(3) Foreign  Exchange   Agreement  dated  December  9,  1996,  between  the
         Registrant  and Bank of  America,  expiring  March 1,  1999.  Under the
         agreement,  the Bank  provides  the  Company  with a spot  and  forward
         foreign exchange contract up to a maximum of $2,500,000.

11       Schedule computing net income per common share.

21       Subsidiaries of the Registrant

23       Consent of Arthur Andersen LLP

27       Financial Data Schedule

                                                       -27-

<PAGE>












                                     REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To the Stockholders of
  Ashworth, Inc. and subsidiaries:

We have audited the accompanying  consolidated balance sheets of ASHWORTH, INC.,
(a Delaware  corporation)  and subsidiaries as of October 31, 1996 and 1995, and
the related  consolidated  statements of income,  stockholders'  equity and cash
flows for each of the three years in the period ended  October 31,  1996.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Ashworth, Inc. and subsidiaries
as of October 31, 1996 and 1995,  and the results of their  operations and their
cash flows for each of the three years in the period  ended  October 31, 1996 in
conformity with generally accepted accounting principles.



                                                          ARTHUR ANDERSEN LLP


Orange County, California
December 13, 1996



                                                       F-1

<PAGE>









                                   ASHWORTH, INC. AND SUBSIDIARIES


                        CONSOLIDATED BALANCE SHEETS-OCTOBER 31, 1996 AND 1995



                                            ASSETS


<TABLE>
<CAPTION>
                                                            1996                       1995
CURRENT ASSETS:
<S>                                                         <C>                        <C>        
  Cash and cash equivalents                                 $ 1,953,918                $ 1,613,029
  Accounts receivable-
    Trade, net of allowance for
      doubtful accounts
      of $480,000 and $767,000 in
      1996 and 1995, respectively                             8,835,663                 10,040,200
    Other                                                       877,471                  1,133,771
  Inventories                                                24,729,179                 27,845,721
  Income tax refund receivable                                1,769,119                  1,239,648
  Other current assets                                        1,815,128                  1,650,792
  Deferred income tax benefit                                 1,755,216                  1,684,776
                                                            -----------                -----------
           Total current assets                              41,735,694                 45,207,937
                                                            -----------                -----------

PROPERTY, PLANT AND EQUIPMENT, at cost:
  Land                                                        1,200,000                  1,200,000
  Buildings and improvements                                  2,726,534                  2,714,357
  Production equipment                                        8,408,622                  7,272,234
  Furniture and equipment                                     6,836,164                  5,473,237
  Leasehold improvements                                        680,338                    680,426
                                                            -----------                -----------
                                                             19,851,658                 17,340,254
  Less--Accumulated depreciation and
    amortization                                              7,657,905                  5,571,001
                                                            -----------                -----------
                                                             12,193,753                 11,769,253
                                                            -----------                -----------

OTHER ASSETS                                                    982,714                  1,094,834
                                                            -----------                -----------
                                                            $54,912,161                $58,072,024
                                                            ===========                ===========
</TABLE>

The  accompanying  notes  are an  integral  part of these  consolidated  balance
sheets.


                                       F-2

<PAGE>



                         ASHWORTH, INC. AND SUBSIDIARIES


              CONSOLIDATED BALANCE SHEETS-OCTOBER 31, 1996 AND 1995



                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                             1996                     1995
                                                                          -----------              -------
CURRENT LIABILITIES:
<S>                                                                          <C>                  <C>        
  Line of credit                                                             $    -               $ 6,670,000
  Current portion of long-term debt                                           1,512,051             1,557,006
  Accounts payable                                                            5,969,495             5,865,878
  Accrued liabilities-
    Salaries and commissions                                                    965,465               972,094
    Endorsement fees                                                            731,608               318,996
    Other                                                                       973,872               607,861
                                                                            -----------           -----------
           Total current liabilities                                         10,152,491            15,991,835
                                                                            -----------           -----------
LONG-TERM DEBT, net of current portion                                        5,307,284             5,195,434
                                                                            -----------           -----------

DEFERRED INCOME TAX LIABILITY                                                   585,815               494,747
                                                                            -----------           -----------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Common stock, authorized--50,000,000
    shares of $.001 par value; issued
    and outstanding-- 12,162,626 shares
    and 11,901,626 shares at October 31,
    1996 and 1995, respectively                                                  12,163                11,902
  Capital in excess of par value                                             24,217,654            23,242,390
  Retained earnings                                                          14,699,461            13,296,418
  Deferred compensation                                                        (109,954)             (160,702)
  Cumulative translation adjustment                                              47,247                  -
                                                                            -----------           -----------
                                                                             38,866,571            36,390,008
                                                                            -----------           -----------
                                                                            $54,912,161           $58,072,024
                                                                            ===========           ===========
</TABLE>



The  accompanying  notes  are an  integral  part of these  consolidated  balance
sheets.


                                                        F-3

<PAGE>















                                ASHWORTH, INC. AND SUBSIDIARIES


                               CONSOLIDATED STATEMENTS OF INCOME

                      FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994



<TABLE>
<CAPTION>
                                                               1996                    1995                      1994
                                                            -----------             -----------               -------

<S>                                                           <C>                      <C>                    <C>        
NET SALES                                                     $75,412,847              $74,524,311            $60,839,179


COST OF GOODS SOLD                                             48,017,486               49,498,975             36,941,376

                                                              -----------              -----------            -----------
     Gross profit                                              27,395,361               25,025,336             23,897,803


SELLING, GENERAL AND
  ADMINISTRATIVE EXPENSES                                      24,086,780               21,521,662             15,525,021

                                                              -----------              -----------            -----------
     Income from operations                                     3,308,581                3,503,674              8,372,782

                                                              -----------              -----------            -----------
OTHER INCOME (EXPENSE):
  Interest income                                                  35,013                   62,538                 85,841

  Interest expense                                             (1,151,693)              (1,050,838)              (614,494)

  Other income (expense)                                          168,526                  (99,678)               215,567
                                                              -----------              -----------            -----------
                                                                 (948,154)              (1,087,978)              (313,086)

                                                              -----------              -----------            -----------
     Income before provision for
       income taxes                                             2,360,427                2,415,696              8,059,696


PROVISION FOR INCOME TAXES                                        957,384                1,015,114              3,199,340
                                                              -----------              -----------            -----------
     Net income                                               $ 1,403,043              $ 1,400,582            $ 4,860,356

                                                              ===========              ===========            ===========

NET INCOME PER COMMON AND
     EQUIVALENT SHARE                                         $       .12              $       .12            $       .40
                                                              ===========              ===========            ===========
WEIGHTED AVERAGE COMMON AND
     EQUIVALENT SHARES OUTSTANDING                             12,098,273               12,111,633             12,223,721

                                                              ===========              ===========            ===========
</TABLE>

The accompanying notes are an integral part of these consolidated statements.


                                       F-4

<PAGE>



                         ASHWORTH, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
               FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994


<TABLE>
<CAPTION>
                                                                                                          Cumulative
                                                                                                          Trans-
                    Common Stock                  Capital in                            Deferred          lations
                    ------------                  Excess of            Retained         Compen-           Adjust-
                   Shares           Amount        Par Value            Earnings         sation            ment        Total
                  -------           ------        ---------            --------         --------          ----     --------
BALANCE,
October 31,
<C>               <C>               <C>           <C>                  <C>              <C>               <C>   <C>        
1993              11,296,229        $11,296       $19,152,416          $7,179,635       $ (293,275)       $  -  $26,050,072
 Options
 exercised,
 including
 stock option
 tax benefit         277,739            278         1,928,005              -                -                -    1,928,283
Stock for
 services                500              1            5,437               -                 (5,438)          -        -
Amortization
 of deferred
 compensation            -                -             -                  -                 87,263           -      87,263
Net income               -                -             -                4,860,356            -               -   4,860,356
                  ----------        -------       ----------           ----------       ----------        -----  ----------
BALANCE,
October 31,
1994              11,574,468         11,575        21,085,858          12,039,991       $ (211,450)          -  $32,925,974
 Options
 exercised,
 including
 stock option
 tax benefit         374,761            375         2,434,941              -                -                -    2,435,316
Treasury Stock
 acquired and
 retired            (47,603)            (48)        (278,409)            (144,155)          -                 -     (422,612)
Amortization
 of deferred
 compensation         -                  -             -                    -               50,748           -        50,748
Net income            -                -             -                  1,400,582          -                 -     1,400,582
                  ----------        -------       ----------           ----------       ----------        -----   ----------
BALANCE,
October 31,
1995              11,901,626         11,902       $23,242,390          13,296,418         (160,702)          -   $36,390,008
 Options
 exercised,
 including
 stock option
 tax benefit         261,000            261           975,264              -                -                 -      975,525
Amortization
 of deferred
 compensation           -              -             -                    -                 50,748           -        50,748
Net income            -                -             -                  1,403,043          -                 -     1,403,043
Translation
 adjustment           -                -             -                    -                -              47,247     47,247
                  ----------        -------       ----------           ----------       ----------         -----     ------
BALANCE,
October 31,
1996              12,162,626         $12,163      $24,217,654          $14,699,461      $(109,954)       $47,247 $38,866,571

                                                                   F-5

<PAGE>


</TABLE>

The accompanying notes are an integral part of these consolidated statements.



                                                                   F-6

<PAGE>



                                 ASHWORTH, INC. AND SUBSIDIARIES


                              CONSOLIDATED STATEMENTS OF CASH FLOWS

                       FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994



<TABLE>
<CAPTION>
                                                                1996                    1995                    1994
                                                             ------------           ------------            --------

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                             <C>                   <C>                     <C>         
  Cash received from customers                                  $ 76,619,682          $ 72,215,663            $ 57,191,522
  Cash paid to suppliers and employees                           (66,013,018)          (78,166,721)            (53,323,129)
  Interest received                                                   49,479                 50,931                 88,804
  Interest paid                                                   (1,151,694)           (1,050,838)               (620,883)
  Income taxes paid                                               (1,037,924)           (2,775,861)             (3,835,966)
                                                                ------------           ------------           ------------
     Net cash provided by (used in)
     operating activities                                          8,466,525            (9,726,826)               (499,652)
                                                                ------------           ------------           ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Net purchases of property, plant and
     equipment                                                    (2,547,304)           (2,129,072)             (6,767,392)
  Proceeds from sale of property, plant
     and equipment                                                     2,001                 2,850                    -
  Translation gain                                                    47,247                  -                       -
                                                                ------------          ------------            ------------
     Net cash used in investing
     activities                                                   (2,498,056)           (2,126,222)             (6,767,392)
                                                                ------------           ------------           ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments on capital lease
     obligations                                                    (667,395)             (718,783)               (648,185)
  Borrowings on line of credit                                    21,755,000            34,670,000               8,445,000
  Payments on line of credit                                     (28,425,000)          (28,000,000)             (8,445,000)
  Borrowings on notes payable and
     long-term debt                                                1,930,013               944,586               4,170,190
  Principal payments on notes payable
     and long-term debt                                           (1,195,723)             (786,674)               (539,777)
  Proceeds from issuance of common stock                             975,525             2,435,316               1,928,283
  Treasury stock acquired                                               -                 (422,612)                   -
                                                                ------------          ------------            ------------
     Net cash (used in) provided
     by financing activities                                      (5,627,580)            8,121,833               4,910,511
                                                                ------------          ------------            ------------
NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS                                                   340,889            (3,731,215)             (2,356,533)

CASH AND CASH EQUIVALENTS, beginning
  of year                                                          1,613,029             5,344,244               7,700,777
                                                                ------------          ------------            ------------
CASH AND CASH EQUIVALENTS, end of year                          $  1,953,918          $  1,613,029            $  5,344,244
                                                                ============          ============            ============
</TABLE>



                                                                   F-7

<PAGE>



<TABLE>
<CAPTION>
                                                                 1996                   1995                    1994
                                                             ------------           ------------            --------

RECONCILIATION OF NET INCOME TO NET CASH
    PROVIDED BY (USED IN) OPERATING
    ACTIVITIES:
<S>                                                               <C>                  <C>                     <C>        
    Net income                                                    $1,403,043           $ 1,400,582             $ 4,860,356
    Adjustments to reconcile net income
    to net cash provided by (used in)
    operating activities-
       Amortization of deferred
         compensation                                                 50,748                50,748                  87,263
       Depreciation and amortization                               2,303,459             2,513,760               1,868,103
       Loss on disposal of
         property, plant and equipment                                17,237                33,181                  41,780
       Provision for doubtful accounts
      and sales returns                                               64,000               557,756                 101,272
       Decrease (increase) in accounts
      receivable                                                   1,396,836            (2,327,613)             (3,670,229)
       Decrease (increase) in inventories                          3,116,542            (8,954,658)             (6,559,074)
       Increase in other current assets                             (164,335)             (746,295)               (331,743)
       Increase in deferred income
      tax benefit                                                    (70,440)           (1,240,804)               (153,939)
       Increase in other assets                                      (87,773)             (484,493)               (545,235)
       Increase in income tax
      refund receivable                                             (529,471)           (1,239,648)                   -
       Increase (decrease) in accounts
      payable                                                        103,617              (171,651)              3,442,435
       Decrease in accrued
      income taxes                                                      -                  (24,364)               (103,386)
       Increase in accrued liabilities                               771,994               786,676                 306,577
       Increase in deferred income
         tax liability                                                91,068               119,997                 156,168
                                                                  ----------           -----------             -----------
      Total adjustments                                            7,063,482           (11,127,408)             (5,360,008)
                                                                  ----------           -----------             -----------
       Net cash provided by (used in)
       operating activities                                       $8,466,525           $(9,726,826)            $  (499,652)
                                                                  ==========           ===========             ===========
</TABLE>



The accompanying notes are an integral part of these consolidated statements.


                                                                   F-8

<PAGE>



                         ASHWORTH, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                         OCTOBER 31, 1996, 1995 AND 1994


1.       The Company and Summary of Significant Accounting Policies

         a.   Business

Ashworth, Inc. and subsidiaries (collectively referred to as the
"Company") designs, markets, and distributes golf apparel, headwear, and
footwear.  The Company's operations are located primarily in the western
part of the United States and the United Kingdom.

The Company  sells its  products  primarily  on credit to golf course pro shops,
country clubs,  resorts,  department stores, and retail outlet stores worldwide.
The  Company had  aggregate  foreign  sales in Europe,  Canada,  Mexico,  Japan,
Singapore,  United Arab Emirates,  Australia,  Hong Kong,  Puerto Rico,  Taiwan,
South Africa, Guam and South Korea of approximately $19,400,000, $18,178,000 and
$12,095,000 in the years ended October 31, 1996, 1995 and 1994, respectively.

         b.   Use of Estimates in the Preparation of Financial Statements

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

         c.   Inventories

Inventories  are valued at the lower of cost  (first-in,  first-out)  or market.
Cost includes materials, labor and manufacturing overhead.

Below is a summary of the components of inventory at October 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                        1996                        1995
                                                     -----------                --------

<S>                                                   <C>                       <C>        
Raw materials                                         $ 3,258,555               $ 4,317,017
Work in process                                         1,937,069                 2,839,828
Finished products                                      19,533,555                20,688,876
                                                      -----------               -----------
                                                      $24,729,179               $27,845,721
                                                      ===========               ===========
</TABLE>



                                                   F-9

<PAGE>



d.   Depreciation and Amortization

Depreciation  and  amortization  have  been  provided  using  straight-line  and
accelerated methods over the following estimated useful lives:

         Buildings and improvements                           20 to 30 years
         Production equipment                                  5 to 12 years
         Furniture and equipment                               5 to 7  years
         Leasehold improvements                                Life of lease

All  maintenance  and repair costs are charged to operations  as incurred.  When
assets are sold or otherwise disposed of, the costs and accumulated depreciation
or amortization  are removed from the accounts and any resulting gain or loss is
reflected in operations.

e.   Organization Costs

Organization  and  trademark  costs,  which are  included  in other  non-current
assets,  are  capitalized  and amortized  over periods  ranging from two to five
years.

f.   Advertising Expenses

Advertising  costs,  which consist primarily of product  advertising  costs, are
expensed  in the period the costs are  incurred.  Advertising  expenses  for the
years  ended  October  31,  1996,  1995 and 1994  were  $434,952,  $532,559  and
$379,564, respectively.

g.   Income Per Common and Equivalent Share

Income per common  share  amounts are  computed  based on the  weighted  average
number of common  shares  outstanding  during the year,  including  common stock
equivalents resulting from dilutive stock options.

h.   Cash and Cash Equivalents

The Company  considers  all highly  liquid  debt  instruments  purchased  with a
maturity of three months or less to be cash equivalents.

i.   Income Taxes

The Company  accounts  for income  taxes in  accordance  with the  Statement  of
Financial  Accounting  Standards  No. 109  "Accounting  for Income  Taxes." This
statement  requires  that  income  taxes be  accounted  for using the  liability
method.

j.   Foreign Currency

The  Company's  primary  functional  currency  is the U.S.  dollar.  Assets  and
liabilities of the Company  denominated in foreign  currencies are translated at
the rate of exchange at the balance sheet date,  while revenues and expenses are
translated using the average exchange rate. Gains and losses on foreign currency
transactions  are recognized as incurred.  Gains and losses on  remeasurement of
transactions  denominated  in  currency  other than the  reporting  currency  of
individual  subsidiaries  are recognized at each balance sheet date.  Cumulative
translation   adjustments  resulting  from  the  translation  of  the  financial
statements  of foreign  subsidiaries  are  included as a separate  component  of
stockholers' equity and have not been material prior to October 31,

                                                   F-10

<PAGE>



1996.

k.   Principles of Consolidation

The consolidated  financial  statements  include the accounts of the Company and
all of its subsidiaries.  All significant intercompany accounts and transactions
have been eliminated in consolidation.

l.   Postretirement and Postemployment Benefits

The Company does not provide postretirement or postemployment benefits
to employees.  Accordingly, SFAS No. 106, "Employers' Accounting for
Postretirement Benefits other than Pensions" and SFAS No. 112
"Employers' Accounting for Postemployment Benefits" do not impact the
Company's consolidated financial statements.

m.   Fair Value of Financial Instruments

Based on borrowing rates currently  available to the Company for bank loans with
similar terms and  maturities,  the fair value of the Company's  long-term  debt
approximates  the carrying value.  Furthermore,  the carrying value of all other
financial  instruments   potentially  subject  to  valuation  risk  (principally
consisting  of cash and  cash  equivalents,  accounts  receivable  and  accounts
payable) also approximate fair value.

n.   Impact of New Accounting Pronouncements

In March  1995,  the  Financial  Accounting  Standards  Board  issued  SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be  Disposed  Of."  SFAS  121  requires  that  long-lived   assets  and  certain
identifiable  intangibles  to be held and  used to be  reviewed  for  impairment
whenever events or changes in circumstances indicate that the carrying amount of
an  asset  may not be  recoverable  based on the  estimated  future  cash  flows
(undiscounted  and  without  interest  charges).  SFAS  121 also  requires  that
long-lived  assets and  certain  identifiable  intangibles  to be disposed of be
reported at the lower of carrying  amount or fair value less costs to sell.  The
Company  adopted  SFAS 121 in the current  year.  The impact of adoption was not
material to the financial statements.

In  October  1995,  the  Financial  Accounting  Standards  Board  issue SFAS 123
"Accounting for Stock-Based  Compensation."  Under SFAS 123,  companies have the
option to implement a fair value-based  accounting method or continue to account
for  employee  stock  options  and stock  purchase  plans  using  the  intrinsic
value-based  method of accounting as prescribed by Accounting  Principles  Board
(APB)  Opinion  No. 25  "Accounting  for Stock  Issued to  Employees."  Entities
electing to remain under APB Opinion No. 25 must make  pro-forma  disclosures of
net income or loss and earnings per share as if the fair  value-based  method of
accounting  defined  in SFAS 123 had been  applied.  SFAS 123 is  effective  for
financial  statements  for fiscal years  beginning  after December 15, 1995. The
Company has tentatively determined it will continue to account for stock options
under APB Opinion No. 25 and will adopt this new standard  effective October 31,
1997.


                                                   F-11

<PAGE>



o.   Reclassifications

Certain reclassifications have been made to certain prior year balances in order
to conform with current year presentation.

2.       Equipment Under Capital Lease

During the years ended October 31, 1995 and 1994, the Company acquired $94,307
and $277,720, respectively, of various equipment under capital leases.  Future
minimum lease payments are as follows:

          Year Ended
          October 31:

           1997                                                       $480,414
           1998                                                         89,494
           1999                                                         17,094
                                                                      --------
       Total future minimum payments                                   587,002
       Less--Amount representing interest                               28,035
                                                                      --------
       Present value of future minimum
         capital lease payments (Note 4)                              $558,967
                                                                      ========

At October 31,  1996 and 1995,  the  accompanying  consolidated  balance  sheets
include the following equipment under capital leases:

<TABLE>
<CAPTION>
                                                               1996                    1995
                                                            ----------              ----------

<S>                                                         <C>                     <C>       
         Production equipment                               $1,619,772              $3,129,872
         Furniture and equipment                               351,449                 431,640
                                                            ----------              ----------
                                                             1,971,221               3,561,512
         Less--Accumulated amortization                        963,556               1,401,653
                                                            ----------              ----------
                                                            $1,007,665              $2,159,859
                                                            ==========              ==========
</TABLE>

3.       Line of Credit Agreement

The Company has a $20 million  working  capital line of credit  agreement with a
bank which expires on March 1, 1999 and is  collateralized  by substantially all
assets  of the  Company.  The  interest  rate  on  borrowings  is at the  bank's
reference  rate which was 8.25 percent at October 31,  1996.  The line of credit
agreement  contains certain financial  covenants,  the most restrictive of which
require the Company to maintain,  as defined,  a minimum  tangible net worth,  a
maximum debt-to-equity ratio and a maximum ratio of cash and accounts receivable
to current liabilities. The line of credit agreement also limits the purchase of
capital equipment and requires that the Company have no loss for two consecutive
quarters.  The line of credit  may also be used to  finance  up to $5 million in
commercial letters of credit and standby letters of credit. At October 31, 1996,
no borrowings or commercial  letters of credit were  outstanding on this line of
credit.






                                                       F-12

<PAGE>



                                          ASHWORTH, INC. AND SUBSIDIARIES

Additional  information  for years ended October 31, 1996,  1995 and 1994, is as
follows:

<TABLE>
<CAPTION>
                                                              1996                 1995                1994
                                                            --------             --------            ------

<S>                                                           <C>                  <C>                 <C>  
       Interest rate at year-end                              8.25%                8.75%               8.25%
       Weighted average interest rate
           during the year                                    8.40%                8.90%               6.80%
       Maximum amount outstanding                          $12,195,000          $10,775,000          $4,195,000
       Average amount outstanding                          $ 6,430,000          $ 5,130,000          $  610,000
</TABLE>

4.       Long-Term Debt

Amounts  outstanding  under  long-term  debt  agreements at October 31, 1996 and
1995, consist of the following:

<TABLE>
<CAPTION>
                                                                                  1996                   1995
                                                                              -----------             -------
       Installment notes bearing interest ranging from 7.3 to 8.7 percent,  with
           due dates through February 2001
<S>                                                                            <C>                    <C>       
           collateralized by various equipment                                 $3,529,413             $2,771,720

       Notepayable  to a bank,  bearing  interest  at 8.0  percent,  payable  in
           monthly  principal and interest  payments of $20,245 through November
           2000 with a balloon payment of approximately  $2.6 million payable on
           November 30, 2000 collateralized by land and
           buildings                                                            2,730,955              2,754,357
       Capital lease obligations (Note 2)                                         558,967              1,226,363
                                                                               ----------             ----------
                                                                                6,819,335              6,752,440
       Less--Current portion                                                    1,512,051              1,557,006
                                                                               ----------             ----------
       Long-term debt                                                          $5,307,284             $5,195,434
                                                                               ==========             ==========
</TABLE>

Future maturities of long-term debt at October 31, 1996, are as follows:

<TABLE>
<CAPTION>
                                Year Ended
                                October 31:

<S>                              <C>                                          <C>       
                                 1997                                         $1,512,051
                                 1998                                          1,023,542
                                 1999                                            904,330
                                 2000                                            649,409
                                 2001                                          2,730,003
                                                                              ----------
                                                                              $6,819,335
                                                                              ==========
</TABLE>




                                                       F-13

<PAGE>



5.       Employees' 401(k) Plan

The Company  maintains a retirement plan covering  substantially  all employees.
Company  contributions,  which  are  voluntary  and  at  the  discretion  of the
Company's  board of  directors,  are  currently  being made at 50 percent of the
amount  the  employee  contributes,  up to three  percent of  compensation.  The
Company's  expense for the years  ended  October 31,  1996,  1995 and 1994,  was
$107,004, $113,709 and $79,020, respectively.

6.       Stockholders' Equity

a.   Common Stock Options

The Company maintains several nonqualified and incentive stock option plans. The
plans  (as  amended)  provide  for the  Compensation  Committee  or  such  other
committee  that the Company's  board of directors may appoint to administer  the
plans.  The plans provide for an aggregate  reservation  of 9,700,000  shares of
common stock for issuance  upon the exercise of granted  options.  As of October
31, 1996, the Company had 4,334,437 options outstanding under the above plans to
purchase  common stock at prices  ranging  from $4.50 to $11.63 with  expiration
dates  between  November  1996 and December  2006. A total of 3,215,063  options
remained available for grant, and 1,139,500 options with exercise prices ranging
from $6.00 to $11.00 were not exercisable at October 31, 1996.

The following is a summary of common stock option activity:

<TABLE>
<CAPTION>
                                                    1996                1995                1994
                                                  ----------         ----------           -------
     Outstanding, beginning
<S>                                                <C>                 <C>               <C>      
       of year                                     3,347,437           2,680,761         1,935,500
     Granted                                       2,306,986           1,076,937         1,025,000
     Exercised                                      (261,000)           (374,761)         (277,739)
     Expired                                      (1,058,986)            (35,500)           (2,000)
                                                  ----------          ----------        ----------
     Outstanding, end of year                      4,334,437           3,347,437         2,680,761
                                                  ==========          ==========        ==========
</TABLE>

b.   Common Stock for Services

In January 1993, the Company  entered into an agreement with a PGA  professional
to endorse the Company's product from January 1, 1993 through December 31, 1998.
Upon meeting certain annual  obligations,  the PGA  professional  will be issued
7,000  shares of the  Company's  common  stock at the end of each year under the
agreement.  If the  market  value of the 7,000  shares of common  stock does not
reach and  maintain at least $14.29 per share for at least five days during each
agreement year, the PGA professional  will be entitled to receive cash per share
equal to the difference  between $14.29 and the highest  closing market price of
the Company's common stock for any five days for that year. The Company incurred
approximately $48,000,  $22,000 and $10,000 in charges related to the difference
in stock prices in 1996, 1995 and 1994, respectively.



                                                   F-14

<PAGE>



c.   Deferred Compensation

During fiscal 1993,  common stock was issued to a golf  professional  for future
services to the Company for a total value of $304,500.  The service arrangements
cover a six year period and the value of the stock is being  amortized over this
period.  The  unamortized  portion of the stock is reported  as a  reduction  in
stockholders'  equity and the remainder will be amortized to operating  expenses
through fiscal 1998. Additionally,  during fiscal 1993, the Company issued stock
options to a golf professional and an outside  consultant for current and future
services to the Company for a total value of  $125,725.  This  compensation  was
amortized over the period of the service  agreement of twelve months during 1993
and 1994.

7.       Operating Leases

The Company leases  certain  production,  warehouse and outlet store  facilities
under  operating  leases.  These leases  expire in various  fiscal years through
January 2008.  Rent expense for the years ended October 31, 1996, 1995 and 1994,
was  $1,288,560,  $757,438  and $554,795  respectively.  Future  minimum  rental
payments are as follows:

         Year Ended
         October 31:

           1997                                                    $1,124,272
           1998                                                     1,105,587
           1999                                                     1,065,309
           2000                                                     1,029,200
           2001                                                       502,302
         Thereafter                                                 2,534,427
                                                                   ----------
                                                                   $7,361,097
                                                                   ==========

8.       Commitments and Contingencies

a.   Promotion Agreements with PGA Professionals and a Television Personality

The Company has  promotional  agreements  with several PGA  professionals  and a
Television  Personality.  Under the terms of these  agreements,  the  Company is
obligated to pay cash  compensation  and to issue options (at fair market value)
to  purchase  shares  of  the  Company's  common  stock.  The  aggregate  annual
compensation  under these agreements  totals $782,000 payable in 1997,  $744,500
payable in 1998,  $665,333  payable in 1999,  $657,000 payable in the years 2000
through  2010 and  $547,500  payable in 2011.  The number of options  granted to
purchase shares of the Company's  common stock will vest as follows:  209,500 in
1997,  217,500  in 1998,  185,000 in 1999 and  150,000  per year from years 2000
through  2011.  The  majority  of  these  stock  options  were  granted  on  the
understanding  that the market value of the Company's common stock will increase
to certain  predetermined minimum levels during certain time periods, as defined
under the various agreements.  If the market value of the Company's common stock
does  not  increase  to these  predetermined  minimum  levels,  the  Company  is
obligated  to  pay  additional  cash   compensation  to  these  option  holders.
Obligations under this provision,  if any, are accrued and charged to operations
during  the period in which  they  arise.  The  Company  incurred  approximately
$546,000,  $253,000 and $57,000 in charges  related to the  difference  in stock
prices in 1996, 1995 and 1994, respectively.


                                                   F-15

<PAGE>



b.   Executive Employment Agreements

The  Company  entered  into  employment  agreements  with  its  key  executives,
effective  January  1,  1995.  The  agreements  specify  the  amount  of  annual
compensation  each  executive  is to  receive  and  also  contain  a  noncompete
arrangement.  These noncompete  arrangements (which if based upon current salary
levels would aggregate approximately  $2,587,500) are based upon a percentage of
the executives' then current salary, as defined,  and are in effect for the term
of the agreements and for a period of ten years after termination of employment.
The present  value of the  estimated  future cash payments to be made is accrued
and charged to operations over the periods benefited.  In 1996 and 1995, $40,504
and $37,503, respectively, was accrued and charged to operations for existing
executives and is reflected in other accrued liabilities in the balance sheet.

c.   Legal Proceedings

The Company is party to claims and litigation  proceedings arising in the normal
course of business.  Although the legal responsibility and financial impact with
respect to such claims and  litigation  cannot  presently  be  ascertained,  the
Company  does not believe  that these  matters will result in the payment by the
Company of monetary damages, net of any applicable insurance proceeds,  that, in
the  aggregate,  would be material in  relation  to the  consolidated  financial
position of the Company. It is reasonably possible that the reserves provided by
the Company with respect to such claims and litigation  could change in the near
term.

9.       Related-Party Transactions

At October  31,  1995,  the Company  had a note  receivable  from an officer for
$320,238. During 1996, the entire balance of the note was collected.

At October 31, 1996, the Company has a note receivable from a former officer for
$50,000  which is  included  in other  assets on the  balance  sheet.  Principal
payments begin December 1997 and continue until maturity at May 1999.

10.      Income Taxes

The provision  for income taxes for the years ended  October 31, 1996,  1995 and
1994, is as follows:

<TABLE>
<CAPTION>
                                                          1996               1995                 1994
                                                        --------          ----------           ---------

       Current provision:
<S>                                                     <C>                <C>                <C>       
              Federal                                   $697,134           $1,625,392         $2,475,245
              State                                      239,622              510,529            721,866
                                                        --------           ----------         ----------
                    Total                                936,756            2,135,921          3,197,111
                                                        --------           ----------         ----------
       Deferred provision (benefit):
              Federal                                     17,337             (856,889)             1,863
              State                                        3,291             (263,918)               366
                                                        --------           ----------         ----------
                    Total                                 20,628           (1,120,807)             2,229
                                                        --------           ----------         ----------
                                                        $957,384           $1,015,114         $3,199,340
                                                        ========           ==========         ==========
</TABLE>


                                                       F-16

<PAGE>



The components of the Company's deferred income tax provision  (benefit) for the
years ended October 31, 1996, 1995 and 1994, are as follows:

<TABLE>
<CAPTION>
                                                                   1996                1995              1994
                                                                ----------         ------------        ---------

<S>                                                             <C>                <C>                  <C>     
     Depreciation                                               $  91,068          $   119,997          $156,168
     Allowance for doubtful accounts                              127,163             (197,607)           (7,261)
     Inventory reserves                                          (120,443)            (818,252)          (58,203)
     Other non-deductible accruals                                (66,205)            (232,463)          (51,890)
     Other deductible capitalized costs                           (10,955)               7,518           (36,585)
                                                                ---------          -----------          --------
                                                                $  20,628          $(1,120,807)         $  2,229
                                                                =========          ===========          ========
</TABLE>

The components of the Company's  deferred income tax benefit and liability as of
October 31, 1996 and 1995 are as follows:


                                                      1996               1995  
   Current deferred income tax benefit:
       Allowance for doubtful accounts            $  125,653        $  252,816
       Inventory reserves                          1,229,710         1,109,267
       Other non-deductible accruals                 428,641           362,436
       Other deductible capitalized costs            (28,788)          (39,743)
                                                  ----------        ----------
                                                  $1,755,216        $1,684,776
                                                  ==========        ==========
     Long-term deferred income tax liability:
       Depreciation                               $ (585,815)       $ (494,747)
                                                  ==========        ==========



The  Company  has  recorded  a net  consolidated  deferred  income  tax asset of
approximately  $1.2 million.  The realization of this net asset may be dependent
upon the  Company's  ability to  generate  sufficient  taxable  income in future
years.  Although  realization  is not  assured,  management  believes it is more
likely than not that the net  deferred  income tax asset will be  realized.  The
amount of the net  deferred  income tax asset  considered  realizable,  however,
could be  reduced in the near term if  estimates  of future  taxable  income are
reduced or if tax rates are lowered.



                                                       F-17

<PAGE>



A reconciliation  of the provision for income taxes at the statutory rate to the
Company's effective rate is as follows:


<TABLE>
<CAPTION>
                                          1996                         1995                       1994
                                    ----------------              ---------------          ------------------
                                     Amount  Percent              Amount  Percent            Amount   Percent
     Computed tax at
       the expected
     <S>                            <C>           <C>            <C>           <C>           <C>           <C>  
       statutory rate               $802,545      34.0%          $821,337      34.0%         $2,740,296    34.0%
     State income tax,
       net of federal
       tax benefits                  143,986       6.1            147,357       6.1             491,641     6.1
     Non-deductible
       expenses                       46,034       2.0             42,190       1.7              15,601     0.2
     Foreign sales
       corporation
       tax benefit                   (53,981)     (2.3)           (60,087)     (2.5)            (48,198)   (0.6)
     Other                            18,800       0.8             64,317       2.7                -        -
                                    --------      -----          --------      -----          ---------    ----
     Income tax
       provision                    $957,384       40.6%       $1,015,114       42.0%        $3,199,340    39.7%
                                    ========     ======        ==========      ======        ==========  ======
</TABLE>

11.      Statement of Cash Flows, Noncash Transactions

The Company completed the following noncash transactions which are not reflected
in the statement of cash flows:

<TABLE>
<CAPTION>
                                                            1996                  1995                  1994
                                                         ----------            ----------            -------
     Capital lease equipment
         acquired and related
<S>                                                         <C>                  <C>                <C>      
         capital lease obligations                          $  -                 $ 94,307           $ 277,720
     Common stock issued in payment for
       services, including deferred
       compensation                                            -                      -                 5,438
</TABLE>

12.      Results by Quarter (Unaudited)

The  unaudited  results by quarter for the years ended October 31, 1996 and 1995
are shown below:

<TABLE>
<CAPTION>
             Year Ended                       First             Second              Third             Fourth
          October 31, 1996                   Quarter            Quarter            Quarter            Quarter
          ----------------                 -----------        -----------        -----------        ---------

<S>                                         <C>                 <C>                <C>                <C>        
   Net sales                                $17,069,864         $26,355,684        $17,883,768        $14,103,531
   Gross profit                               6,600,711          10,955,138          6,692,647          3,146,865
   Net income                                   834,063           2,517,185            198,200         (2,146,405)
   Net income per common
      and equivalent
      share                                         .07                 .21                .02               (.18)
   Weighted average common
      and equivalent
      shares outstanding                     11,958,206          12,232,755         12,154,206         12,063,050
</TABLE>



                                                       F-18

<PAGE>



<TABLE>
<CAPTION>
             Year Ended                       First             Second              Third             Fourth
          October 31, 1996                   Quarter            Quarter            Quarter            Quarter
          ----------------                 -----------        -----------        -----------        ---------


<S>                                         <C>                 <C>                <C>                <C>        
   Net sales                                $14,590,696         $26,438,854        $20,385,985        $13,108,776
   Gross profit                               5,497,664           9,035,266          7,621,185          2,871,221
   Net income                                   805,931           1,810,137            808,217         (2,023,703)
   Net income per common
      and equivalent share                          .07                 .15                .07               (.17)
   Weighted average common
      and equivalent
      shares outstanding                     12,020,191          12,187,819         12,235,566          11,882,143
</TABLE>


                                                       F-19

<PAGE>






                  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To the Stockholders of
  Ashworth, Inc. and subsidiaries:

We have audited in accordance with generally  accepted auditing  standards,  the
consolidated  financial statements included in Ashworth,  Inc. and subsidiaries'
annual report to  shareholders  included in this Form 10-K,  and have issued our
report  thereon dated  December 13, 1996.  Our audit was made for the purpose of
forming an opinion on those  statements taken as a whole. The schedule listed in
the index of  consolidated  financial  statements  is presented  for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures  applied in the audit of the basic  financial  statements and, in our
opinion,  fairly states in all material  respects the financial data required to
be set forth therein in relation to the basic consolidated  financial statements
taken as a whole.




                                                          ARTHUR ANDERSEN LLP


Orange County, California
December 13, 1996





























                                                       F-20

<PAGE>



                              ASHWORTH, INC. AND SUBSIDIARIES


                      SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                    Additions
                                                   ---------------------
                              Balance at        Charged to     Charged to                            Balance
                               Beginning         Costs and        Other                              at End
Description                     of Year          Expenses       Accounts          Deductions         of Year

FOR THE YEAR ENDED
     OCTOBER 31, 1994:

     Allowance for
         doubtful
<S>                               <C>               <C>            <C>              <C>              <C>     
         accounts                 $215,000          $101,000       $  -             $ 61,000         $255,000
                                  ========          ========       ========         ========         ========

FOR THE YEAR ENDED
     OCTOBER 31, 1995:

     Allowance for
         doubtful
         accounts                 $255,000          $558,000       $  -             $ 46,000         $767,000
                                  ========          ========       ========         ========         ========

FOR THE YEAR ENDED
     OCTOBER 31, 1996:

     Allowance for
         doubtful
         accounts                 $767,000           $64,000       $  -             $351,000         $480,000
                                  ========          ========       ========         ========         ========
</TABLE>



                                      F-21

<PAGE>



                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) 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.

                             ASHWORTH, INC.
                             (Registrant)


Date: January 27, 1997       BY: /s/ Randall L. Herrel, Sr.
                             --------------------------
                             Randall L. Herrel, Sr.
                             Chief Executive Officer

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
         Signature                          Title                                         Date


<S>                                      <C>                                          <C> 
/s/ Gerald W. Montiel                    Chairman of the Board                        January 27, 1997
--------------------------                                                                            
Gerald W. Montiel

/s/ Randall L. Herrel, Sr.               President and                                January 27, 1997
--------------------------                                                                            
Randall L. Herrel, Sr.                   Chief Executive Officer
                                         (Principal Executive Officer)

/s/ John L. Ashworth                     Sr. Executive Vice President                 January 27, 1997
--------------------------                                                                            
John L. Ashworth                         and Director


/s/ A. John Newman                       Vice President - Finance,                    January 27, 1997
--------------------------                                                                            
A. John Newman                           Treasurer, Chief Financial
                                         Officer (Principal Financial
                                         and Accounting Officer)

/s/ Andre P. Gambucci                    Director                                     January 27, 1997
--------------------------                                                                            
Andre P. Gambucci


/s/ John M. Hanson, Jr.                  Director                                     January 27, 1997
--------------------------                                                                            
John M. Hanson, Jr.
</TABLE>












<PAGE>
