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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the quarterly period ended June 28, 2008

OR

For the transition period from                      to

Commission file number 333-101117

GOLFSMITH INTERNATIONAL
HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s Telephone Number, Including Area Code: (512) 837-8810

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report: Not Applicable

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       o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    o     No    x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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GOLFSMITH INTERNATIONAL HOLDINGS, INC.

QUARTERLY REPORT

FOR THE QUARTER ENDED June 28, 2008

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

Golfsmith International Holdings, Inc.

Consolidated Balance Sheets

See accompanying notes to unaudited consolidated financial statements

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Golfsmith International Holdings, Inc.

Consolidated Statements of Operations

(Unaudited)

See accompanying notes to unaudited consolidated financial statements

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Golfsmith International Holdings, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to unaudited consolidated financial statements

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GOLFSMITH HOLDINGS INTERNATIONAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.              Nature of Business and Basis of Presentation

Description of Business

Golfsmith International Holdings, Inc. (the “Company”) is a multi-channel, specialty retailer of golf and tennis equipment and related apparel and accessories. The Company offers golf and tennis equipment from top national brands as well as its own proprietary brands. In addition, the Company provides clubmaking services, including the sale of individual club components for customers to build clubs, custom fitting and repair services. The Company markets its products through retail stores and through its direct-to-consumer channels, which include its Internet site and catalogs. The Company also operates a golf instruction school, the Harvey Penick Golf Academy.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Golfsmith International, Inc. (“Golfsmith”). The Company has no operations nor does it have any assets or liabilities other than its investment in Golfsmith. Accordingly, these consolidated financial statements represent the operations of Golfsmith and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. As information in this report relates to interim financial information, certain footnote disclosures have been condensed or omitted. In the Company’s opinion, the unaudited interim consolidated financial statements reflect all adjustments necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods presented. This includes all normal and recurring adjustments, but does not include all of the information and footnotes required by GAAP for complete financial statements. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 29, 2007, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 6, 2008. The results of operations for the three- and six-month periods ended June 28, 2008 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

The balance sheet at December 29, 2007 has been derived from the Company’s audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, refer to the audited consolidated financial statements and notes thereto for the fiscal year ended December 29, 2007 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 6, 2008.

Revenue Subject to Seasonal Variations

The Company’s business is seasonal and its sales leading up to and during the warm weather golf season and the December holiday gift-giving season have historically contributed a significantly higher percentage of the Company’s annual net revenues and annual net operating income than in other periods in its fiscal year. During the months encompassing these seasons the Company achieves the majority of its annual net revenue and substantially all of its annual operating income.

Fiscal Year

The Company’s fiscal year ends on the Saturday closest to December 31. The three-month periods ended June 28, 2008 and June 30, 2007, respectively, both consisted of 13 weeks. The six-month periods ended June 28, 2008 and June 30, 2007, respectively, both consisted of 26 weeks.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 157, Fair Value Measurement (“SFAS 157”) which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years and was adopted by the Company as of the beginning of the current fiscal year. The adoption of SFAS 157 did not have a material impact on the Company’s results of operations or financial position.

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GOLFSMITH HOLDINGS INTERNATIONAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). This statement expands the standards under SFAS 157, to provide entities the one-time election (Fair Value Option or FVO) to measure financial instruments and certain other items at fair value. SFAS 159 also amends SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, to require the presentation of investments in available-for-sale securities and trading securities:

(a) in the aggregate of those fair value and non-fair-value amounts in the same line item and parenthetically disclose the amount of fair value included in the aggregate amount or;

(b) in two separate line items to display the fair value and non-fair-value carrying amounts.

SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and was adopted by the Company as of the beginning of the current fiscal year. At the effective date, an entity may elect the fair value option for eligible items that exist at that date. The effect of the re-measurement is reported as a cumulative-effect adjustment to opening retained earnings. The adoption of SFAS 159 did not have a material impact on the Company’s results of operations or financial position.

2.              Earnings Per Share

The calculation for basic earnings per share is based on the weighted average number of common shares outstanding, including outstanding deferred common stock units (“DSU’s”). Diluted earnings per share is computed based on the weighted average number of common shares outstanding, including outstanding DSU’s, and the dilutive effect of outstanding stock options.

The following table sets forth the computation of basic and diluted net income per share:

3.     Stock-Based Compensation

The Company calculates the fair value of stock compensation transactions using the Black-Scholes fair-value pricing model. This model incorporates various subjective assumptions including expected volatility, expected term and interest rates. The resulting calculated fair values are reported as stock compensation expense and amortized over the vesting period of the options.

The fair value of stock option awards granted during the three-month period ended June 28, 2008 was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

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GOLFSMITH HOLDINGS INTERNATIONAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

On May 9, 2008, the Company made a grant of 751,000 options to employees to purchase common stock under the Company’s 2006 Incentive Compensation Plan. In determining the fair value of the options granted, the Company calculated the volatility factor in the Black-Scholes fair-value pricing model based on a combination of the Company’s historical volatility and the historical volatility for a comparable industry peer group over periods of time equivalent to the expected life of the awards granted. The Company believes the calculated basis for expected volatility provides a more reasonable measurement of its expected future volatility rate than solely using the two years of historic trading value of the Company’s own shares. The expected term is calculated based on the average of the expected life of the stock option awarded. The Company bases the estimate of risk-free rate on the U.S. Treasury yield curve in effect at the time of grant or modification. The Company has never paid cash dividends and does not currently intend to pay cash dividends, and thus has assumed a 0% dividend yield.

On June 13, 2008, the Company’s Compensation Committee approved a grant of 1,000,000 stock options to Martin E. Hanaka, the Company’s newly appointed chief executive officer, as part of his employment agreement. The grant provides Mr. Hanaka the right to purchase 1,000,000 shares of common stock of the Company at an exercise price equal to the closing price of the Company’s stock on the date of grant (which is the date of the employment agreement) vesting in five equal annual installments. However, 800,000 shares included in the grant are subject to approval by the Company’s shareholders of an increase in the number of shares available under the Company’s 2006 Incentive Compensation Plan by at least an equal number of shares. Although the additional shares included in the option grant have not yet been approved by the Company’s shareholders, the Company believes that First Atlantic Capital, Ltd., which owns a majority of the voting shares, will vote in favor of increasing the number of shares available to grant, and thus, that approval of the option grant is perfunctory. As such, for expense purposes related to the grant, the Company has treated the full 1,000,000 option grant as approved and has recorded the related stock compensation expense.

For the three-month periods ended June 28, 2008 and June 30, 2007, respectively, the Company recorded stock compensation expense of $0.4 million and $0.3 million in selling, general and administrative expenses. For the six-month periods ended June 28, 2008 and June 30, 2007, respectively, the Company recorded stock compensation expense of $0.8 million and $0.4 million in selling, general and administrative expenses.

As of June 28, 2008, there was $3.5 million of unamortized stock compensation expense which is expected to be amortized over a weighted-average period of approximately 2.5 years. No options were exercised during the three- or six-month periods ended June 28, 2008. During the six-month period ended June 30, 2007, 47,965 options were exercised with an intrinsic value of $0.1 million.

4.              Income Taxes

The Company’s provision for income taxes reflects an effective tax rate of approximately 12.0% for the three- and six-month periods ended June 28, 2008. The Company’s effective tax rate was lower than the U.S. federal statutory rate of 34.0% primarily as a result of changes to its valuation allowances.

In July 2006, the FASB issued FASB Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes — an interpretation of SFAS 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. The Company had $0.1 million of unrecognized tax benefits at June 30, 2007 and at June 28, 2008, respectively, which would impact the Company’s effective income tax rate if recognized. As of June 28, 2008, the Company does not expect to recognize any tax benefits in the next twelve months due to the closing of open tax years. The nature of the uncertainty relates to deductions taken on returns that have not been examined by the applicable tax authority. The Company recognized no material adjustment to the liability for unrecognized income tax benefits. The tax years 2004 through 2007 remain open to examination by the major taxing jurisdictions to which we are subject.

5.              Comprehensive Loss

The Company’s comprehensive loss is composed of net loss and translation adjustments. There were no material differences between net loss and comprehensive loss during the three- and six-month periods ended June 28, 2008 or June 30, 2007, respectively.

6.              Intangible Assets

The following is a summary of the Company’s intangible assets that are subject to amortization as of:

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GOLFSMITH HOLDINGS INTERNATIONAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Amortization expense related to finite-lived intangible assets was approximately $0.1 and $0.2 million for each of the three- and six-month periods ended June 28, 2008 and June 30, 2007, and is recorded in selling, general and administration expenses on the consolidated statements of operations.

7.              Accrued Expenses and Other Current Liabilities

The Company’s accrued expenses and other current liabilities are comprised of the following as of:

8.              Debt

Credit Facility

On June 20, 2006, the Company entered into an amended and restated credit agreement by and among Golfsmith International, L.P., Golfsmith NU, L.L.C., and Golfsmith USA, L.L.C., as borrowers (the “Borrowers”), the Company and the other subsidiaries of the Company identified therein as credit parties (the “Credit Parties”), General Electric Capital Corporation, as “Administrative Agent”, Swing Line Lender and L/C Issuer, GE Capital Markets, Inc., as Sole Lead Arranger and Bookrunner, and the financial institutions from time to time parties thereto, which was amended in September, 2007 (the “Credit Facility”). The Credit Facility consists of a $90.0 million asset-based revolving credit facility (the “Revolver”), including a $5.0 million letter of credit subfacility and a $10.0 million swing line subfacility.

Loans incurred under the Credit Facility bear interest per annum at (1) LIBOR plus two percent (2.0%), or (2) the “Base Rate,” which is equal to the higher of (i) the Federal Funds Rate plus 0.50 basis points and (ii) the publicly quoted rate as published by The Wall Street Journal on corporate loans posted by at least 75% of the nation’s largest 30 banks. Presently, the Loans bear interest in accordance with a graduated pricing matrix based on the average excess availability under the Revolver for the previous quarter. Borrowings under the Credit Facility are jointly and severally guaranteed by the Credit Parties, and are secured by a security interest granted in favor of the Administrative Agent, for itself and for the benefit of the lenders, in all of the personal and owned real property of the Credit Parties, including a lien on all of the equity securities of the Borrowers and each of Borrower’s subsidiaries. The Credit Facility has a term of five years.

The Credit Facility contains customary affirmative covenants regarding, among other things, the delivery of financial and other information to the lenders, maintenance of records, compliance with law, maintenance of property and insurance and conduct of business. The Credit Facility also contains certain customary negative covenants that limit the ability of the Credit Parties to, among other things, create liens, make investments, enter into transactions with affiliates, incur debt, acquire or dispose of assets, including merging with another entity, enter into sale-leaseback transactions, and make certain restricted payments. The foregoing restrictions are subject to certain customary exceptions for facilities of this type. The Credit Facility includes events of default (and related remedies, including acceleration of the loans made thereunder) usual for a facility of this type, including payment default, covenant default (including breaches of the covenants described above), cross-default to other indebtedness, material inaccuracy of representations and warranties, bankruptcy and involuntary proceedings, change of control, and judgment default. Many of the defaults are subject to certain materiality thresholds and grace periods usual for a facility of this type.

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GOLFSMITH HOLDINGS INTERNATIONAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Available amounts under the Credit Facility are based on a borrowing base. The borrowing base is limited to (i) 85% of the net amount of eligible receivables, as defined in the Credit Facility, plus (ii) the lesser of (x) 70% of the value of eligible inventory or (y) up to 90% of the net orderly liquidation value of eligible inventory, plus (iii) the lesser of (x) $17,500,000 or (y) 70% of the fair market value of eligible real estate, and minus (iv) $3.5 million, which is an availability block used to calculate the borrowing base. At June 28, 2008, the Company had $34.6 million of outstanding borrowings under the Credit Facility and $33.0 million of borrowing availability after giving effect to all reserves. At December 29, 2007, the Company had $50.7 million of outstanding borrowings under the Credit Facility and $12.7 million of borrowing availability after giving effect to all required reserves.

9.              Guarantees

The Company and its subsidiaries fully and unconditionally guarantee, and all of its future domestic subsidiaries will guarantee, the Credit Facility. At June 28, 2008 and December 29, 2007, there were $34.6 million and $50.7 million, respectively, in borrowings outstanding under the Credit Facility.

The Company has no operations nor any assets or liabilities other than its investment in its wholly-owned subsidiary Golfsmith. Domestic subsidiaries of Golfsmith comprise all of Golfsmith’s assets, liabilities and operations. There are no restrictions on the transfer of funds between the Company, Golfsmith and any of Golfsmith’s domestic subsidiaries.

The Company offers warranties to its customers depending on the specific product and terms of the goods purchased. A typical warranty program requires that the Company replace defective products within a specified time period from the date of sale. The Company records warranty costs as they are incurred, historically such costs have not been material. During the three- and six-month periods ended June 28, 2008 and June 30, 2007, respectively, no material amounts have been accrued or paid relating to product warranties.

10.       Related Party Transactions

The Company had previously recorded a related party receivable and offsetting liability of approximately $1.5 million that was an estimated amount related to state taxes owed and related interest on those past due amounts (the “State Taxes and Interest Owed”). The State Taxes and Interest Owed are for periods prior to the acquisition by Golfsmith International Holdings, Inc. of Golfsmith International, Inc. in 2002. The individuals that were shareholders of Golfsmith International, Inc. (the “Selling Shareholders”), have agreed to reimburse the Company for all State Taxes and Interest Owed.  In May, 2008, the Company received $1.2 million from the Selling Shareholders for the State Taxes and Interest Owed.  In turn, the Company filed the amended tax returns and paid the related State Taxes and Interest Owed amounts of $1.2 million as well as associated penalties of $0.2 million. The Company does not expect to incur any additional liabilities or expense related to this matter.

11.  Commitments and Contingencies

Lease Commitments

The Company leases certain store locations under operating leases that provide for annual payments that, in some cases, increase over the life of the lease. The aggregate of the minimum annual payments is expensed on a straight-line basis over the term of the related lease without consideration of renewal option periods. The lease agreements contain provisions that require the Company to pay for normal repairs and maintenance, property taxes and insurance. In addition, the Company has entered into certain sublease agreements with third parties to sublease retail space previously occupied by Golfsmith. Future minimum sublease payments to be received by Golfsmith over the terms of the leases are noted in the table below.

At June 28, 2008, future minimum payments due under non-cancelable operating leases, not including repairs and maintenance, property taxes or insurance, with initial terms of one year or more are as follows for each of the 12-month periods ending at the end of our second fiscal quarter for each year presented below:

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GOLFSMITH HOLDINGS INTERNATIONAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Employment Agreements

The Company has employment agreements with Martin E. Hanaka, the Company’s chairman and chief executive officer as well as with Virginia Bunte, the Company’s senior vice president, chief financial officer and treasurer.

Legal Proceedings

The Company is also involved in various other legal proceedings arising in the ordinary course of conducting business.  The Company believes that the ultimate outcome of such matters, in the aggregate, will not have a material adverse impact on its financial position, liquidity or results of operations.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend,” and similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, the amount and timing of future store openings, store retrofits and capital expenditures, the likelihood of our success in expanding our business, financing plans, working capital needs and sources of liquidity.

Forward-looking statements are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based in part on currently available information and in part on management’s estimates and projections of future events and conditions. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the introduction of new product offerings, store opening costs, our ability to lease new sites on a timely basis, expected pricing levels, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve risks and uncertainties, which could cause actual results that differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to the Risk Factors set forth in Item 1A. Risk Factors in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 6, 2008.

We believe our forward-looking statements are based on reasonable assumptions; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.

Overview

We are one of the nation’s largest specialty retailers of golf and tennis equipment, apparel and accessories. We were founded in 1967 as a golf club-making company offering custom-made clubs, club-making components and club repair services. In 1973 we opened our first retail store, and in 1975 we mailed our first general golf products catalog. Over the past three decades, in our efforts to grow our business and increase our market share, we have continued to expand our product offerings, open retail stores and add to our catalog titles. In addition, we have an internet site, www.golfsmith.com, which is a significant part of our direct-to-consumer channel.

We operate as an integrated multi-channel retailer, offering our customers the convenience of shopping in our retail locations across the nation and through our direct channel which includes both our website, www.golfsmith.com, and our direct mail catalogs.  As of August 5, 2008, we operate 72 retail stores in 19 states and 25 markets, which include 13 of the top 15 golf markets. We continue to explore opportunities to open additional stores in existing and new geographic markets, but we do not provide any assurances about the rate at which we will open new stores in the future, and our historical record in this regard is no indication of our current or future strategy. In fiscal 2008, we have substantially reduced the growth of our square footage retail base. We have closed three stores in one of our larger markets and have opened one store in that market. We have also signed a lease on a space in Palm Desert, a new market for us, and we intend to open a retail store there in the next six to nine months. A major part of our strategy continues to be the non-clubmaking and internet portions of our direct-to-consumer channel. In addition, we have acquired and developed a number of proprietary brands, and we plan to continue our efforts to grow our proprietary brand revenue.

Fiscal Year

Our fiscal year ends on the Saturday closest to December 31 and consists of either 52 weeks or, as is the case in fiscal 2008, 53 weeks. Each quarter of each fiscal year generally consists of 13 weeks, although the fourth quarter of fiscal 2008 will have 14 weeks. The three-month periods ended June 28, 2008 and June 30, 2007, respectively, each consisted of 13 weeks. The six-month periods ended June 28, 2008 and June 30, 2007, respectively, each consisted of 26 weeks. In addition, the timing on the calendar of relatively high sales volume holiday periods could affect our revenue. In the fourth quarter of

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fiscal 2008, due to the timing of the Thanksgiving holiday, the high sales volume holiday season will be shorter in comparison to the same period in fiscal 2007.

Industry Trends

The golf retail industry is highly fragmented among mass merchants, off-course specialty retailers such as ourselves, internet merchants, warehouse-type merchants and on-course pro shops. The off-course specialty golf retail industry has become extremely competitive as sporting or other golf specialty retailers expanded their markets. We also face new competition as new competitors enter the marketplace in our existing channels. In addition, the club component business has been in decline for the last several years and may continue to decline going forward. We believe this decline is due to the increase of brand name closeouts from the top manufacturers resulting from shorter product life cycles, the rise of the now more accessible pre-owned club market and declining interest by consumers in building their own clubs.

Sales of golf products are generally affected by increases and decreases in the number of golf participants and the number of rounds played annually in the United States. According to the National Golf Foundation (“NGF”), the number of rounds played has had minimal increases over the past four years and the number of golf participants has stayed fairly flat. The NGF estimates that in 2007 there were approximately 30 million golf participants and the number of rounds played was approximately 500 million. The NGF predicts that, over the next 20 years, the number of golf participants in the United States will grow by three to four million and that the number of rounds played will increase by 100-150 million. Because of this slow growth rate, we expect that any possible growth over time for us, or any competitor that is heavily reliant on the golf industry, will result primarily from market share gains.

Revenues

Revenue channels. We generate revenues from the sale of golf and tennis products in our retail stores, through our direct-to-consumer distribution channels and from other sources including international distributors.

Store revenues. Changes in revenues generated from our stores are driven primarily by the number of stores in operation and changes in comparable store sales. We consider sales by a new store to be comparable commencing in the fourteenth month after the store was opened or acquired. We consider sales by a relocated store to be comparable if the relocated store is expected to serve a comparable customer base and there is not more than a 30-day period during which neither the original store nor the relocated store is closed for business. We consider sales by retail stores with modified layouts to be comparable. We consider sales by stores that are closed to be comparable in the period leading up to closure if they meet the qualifications of a comparable store and do not meet the qualifications to be classified as discontinued operations under Statement of Financial Accounting Standards (“SFAS”) No. 146, Accounting For Costs Associated With Exit or Disposal Activities (“SFAS 146”).

Branded compared to proprietary products. Most of our sales are generated from premier-branded golf and tennis equipment, apparel and accessories sold through all of our channels. In addition, we sell proprietary-branded golf equipment, components, apparel and accessories under a variety of trademarked brand names.

Seasonality. Our business is seasonal, and our sales leading up to and during the warm weather golf season and the December holiday gift-giving season have historically contributed a significantly higher percentage of our annual net revenues and annual net operating income than other periods in our fiscal year. During the months encompassing these seasons we achieve the majority of our annual net revenues and substantially all of our annual operating income.

Revenue Recognition. We recognize revenue from retail sales at the time the customer takes possession of the merchandise and purchases are paid for, primarily with either cash or by credit card. We recognize revenues from catalog and Internet sales upon shipment of merchandise. We recognize revenues from the Harvey Penick Golf Academy at the time the services are performed.

We recognize revenue from the sale of gift cards and issuance of returns credits when (1) the cards or credits are redeemed by the customer, or (2) the likelihood of the cards or credits being redeemed by the customer is remote (breakage) and we determine that there is no legal obligation to remit the value of the unredeemed cards or credits to the relevant jurisdiction. Estimated breakage is calculated and recognized as revenue over a 48-month period following the card or credit issuance, in amounts based on the historical redemption patterns of the used cards or credits. Amounts in excess of the total estimated breakage, if any, are recognized as revenue at the end of the 48 months following the issuance of the card or credit, at which time we deem the likelihood of any further redemptions to be remote, and provided that such amounts are not

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required to be remitted to the relevant jurisdictions. Breakage income is included in net revenue in the consolidated statements of operations.

For all merchandise sales, we reserve for sales returns in the period of sale using estimates based on our historical experience.

Cost of Products Sold

We capitalize inbound freight and vendor discounts into inventory upon receipt of inventory. These costs and discounts increase and decrease, respectively, the value of inventory recorded on our consolidated balance sheets.  These costs and discounts are then subsequently reflected in cost of products sold upon the sale of that inventory. Because some retailers exclude these costs from cost of products sold and instead include them in a line item such as selling, general and administrative expenses, our gross profit may not be comparable to those of other retailers. Salary and facility expenses, such as depreciation and amortization, associated with our distribution and fulfillment center in Austin, Texas are included in cost of products sold. Income received from our vendors through our co-operative advertising program that does not pertain to incremental direct advertising costs is recorded as a reduction to cost of products sold when the related merchandise is sold.

Operating Expenses

Selling, general and administrative

Selling, general and administrative expenses consist of all expenses associated with general operations for our stores and general operations for corporate and international expenses. This includes salary expenses, occupancy expenses, including rent and common area maintenance, advertising expenses and direct expenses, including supplies for all retail and corporate facilities. A portion of our occupancy expenses is offset through our subleases to GolfTEC Learning Centers. Additionally, a portion of income received through our co-operative advertising program for reimbursement of incremental direct advertising costs is treated as a reduction to our selling, general and administrative expenses.

Store pre-opening/ closing expenses

Store pre-opening expenses consist of costs related to the opening of new stores that are incurred prior to the opening. These could include costs of hiring and training personnel, supplies and certain occupancy and miscellaneous costs. These costs, except for rent as noted below, are recorded as an expense upon the opening of each store. Rent expense recorded after possession of the leased property but prior to the opening of a new retail store is recorded as store pre-opening expenses. Our store closing expenses could include charges related to future net lease obligations and lease cancellations, personnel expenses, miscellaneous occupancy charges and non-recoverable investments in fixed assets.

Interest expense

Interest expense consists of costs related to our line-of-credit.

Interest income

Interest income consists of amounts earned from our cash balances held in short-term money market accounts.

Other income

Other income consists primarily of exchange rate variances.

Other expense

Other expense consists primarily of exchange rate variances.

Income taxes

Income taxes consist of federal, state and foreign taxes, based on the estimated effective rate for the fiscal year.

Results of Operations

The following table sets forth selected consolidated statements of operations data for each of the periods indicated:

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nm = not meaningful

Net Revenues

Three Month Comparison

Net revenues increased by 4.0% for the three-month period ended June 28, 2008 compared with the same period in the prior year. The increase was primarily due to a $7.3 million increase in our store revenues and was partially offset by a decrease of $2.4 million from our direct-to-consumer channel. Our revenue growth continues to be driven by the significant expansion of our store base in fiscal 2006 and fiscal 2007 while our direct-to-consumer revenue channel continues to decline both as a percentage of total revenue as our retail base grows, and in total dollar amount. In addition, the three-month period ended June 28, 2008 included one more shopping day than the same period in fiscal 2007 due to the timing of the Easter weekend holiday which occurred in the first quarter of our fiscal 2008.

The increase in our store revenue was primarily due to an increase in our non-comparable store revenues in the second quarter of fiscal 2008. We increased our store base due to the opening of 13 stores in fiscal 2007 partially offset by the closing of one store in fiscal 2007 and two stores in the first quarter of fiscal 2008. Seven stores entered our comparable store base in the second quarter of fiscal 2008. Our comparable store revenues increased by 0.5% during the three-month period ended June 28, 2008 compared with the same period in fiscal 2007.

Despite facing increased competition in select geographic markets and the adverse macroeconomic climate, we were successful in slightly increasing comparable store sales by being selectively promotional in our sales efforts. We also believe that the macroeconomic climate adversely affected our direct-to-consumer channel business particularly in clubmaking as consumers seem to be favoring pre-owned clubs over our clubmaking offerings. Furthermore, due to our increasing retail base across the country, we believe that a growing portion of our direct consumers are sometimes choosing to transact in our stores rather than through our direct-to-consumer channel.

Non-comparable store net revenues in the second quarter of fiscal 2008 are primarily comprised of revenue from stores that were opened during fiscal 2007. Seven stores became comparable in the second quarter of fiscal 2008, five will become comparable in the second half of fiscal 2008 and one will become comparable in the first quarter of fiscal 2009.

Six Month Comparison

Net revenues increased by 3.2% for the six-month period ended June 28, 2008 compared with the same period in the prior year. The increase was primarily due to a $10.7 million increase in our store revenues and was partially offset by a decrease of $4.5 million from our direct-to-consumer channel. Our revenue growth continues to be driven by the expansion of our store base while our direct-to-consumer revenue channel continues to decline both as a percentage of total revenue as our

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retail base grows, and in total dollar amount.

The increase in our store revenue was due to an increase in our non-comparable store revenues in the first two quarters of fiscal 2008. Nine stores entered our comparable store base in the first two quarters of fiscal 2008. Our comparable store revenues declined by 2.9% during the six-month period ended June 28, 2008 in comparison with the same period in fiscal 2007.

We believe that both the macroeconomic climate and increased competition in select geographic markets contributed to the decline in our comparable store revenues during the first quarter of fiscal 2008. However, by being selectively promotional in our sales efforts in the second quarter of fiscal 2008, we were able to drive foot traffic in our stores and increase revenues. We also believe that the macroeconomic climate adversely affected our direct-to-consumer channel business particularly in clubmaking as consumers seem to be favoring second hand products over our clubmaking offerings. Furthermore, due to our increasing retail base across the country, we believe that a growing portion of our direct consumers are sometimes choosing to transact in our stores versus through our direct-to-consumer channel.

In addition to these macroeconomic and competitive factors, golf rounds played in the United States, a leading indicator of golf participation tracked by Golf Datatech L.L.C., decreased 2.1% in the first two quarters of fiscal 2008 compared to the same period in fiscal 2007. We believe that, taken together, the factors listed above all contributed to reduced consumer demand in the first two quarters of fiscal 2008.

Non-comparable store net revenues in the first two fiscal quarters of fiscal 2008 are primarily comprised of revenue from 13 stores that were opened in fiscal 2007.

Gross Profit

Three Month Comparison

Increased revenues led to higher gross profit for the three-month period ended June 28, 2008 compared to the three-month period ended June 30, 2007. The decrease in gross margin for the three-month period ended June 28, 2008 in comparison to the three-month period ended June 30, 2007 was primarily due to our using some of our savings from cuts in marketing expenses to increase our promotional efforts which resulted in lower margins as well as the sales mix of products driving our revenue. By increasing our sales promotions, we believe that we were able to improve our competitive position in specific markets and drive revenue, albeit with a negative impact on margins. Our mix of products sold also negatively impacted margins as we saw an increase in the percentage of sales from lower margin items such as used clubs, certain brand name clubs and electronic accessories. In addition, revenue from our higher margin direct channel, specifically clubmaking products, continued to decline.

Six Month Comparison

Increased revenues led to higher gross profit for the six-month period ended June 28, 2008 compared to the six-month period ended June 30, 2007. The decrease in gross margin for the six-month period ended June 28, 2008 in comparison to the six-month period ended June 30, 2007 was primarily due to our using some of our savings from cuts in marketing expenses to increase our promotional efforts which resulted in lower margins as well as the sales mix of products driving our revenue. By increasing our sales promotions, we believe that we were able to improve our competitive position in specific markets and drive revenue, albeit with a negative impact on margins. Our mix of products sold also negatively impacted margins as we saw an increase in the percentage of sales from lower margin items such as used clubs, certain brand name clubs and electronic accessories as well as declines in revenue from our higher margin direct-to-consumer channel, specifically clubmaking products. These declines in margin due to product mix were slightly offset by increased revenues from our higher margin proprietary brands. In addition, the decrease in gross margin was also partially offset by a reduction in our estimated percent of shrink expense for the six-month period ended June 28, 2008 in comparison to the

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six-month period ended June 30, 2007.

Selling General and Administrative