<PAGE>

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

                                    FORM 10-K

     (Mark One)

          [ X ]  Annual Report Pursuant to Section 13 or 15(d) of
                    the Securities Exchange Act of 1934
                 For the fiscal year ended December 31, 1998

                                       OR

          [   ]  Transition Report Pursuant to Section 13 or 15(d)
                    of the Securities Exchange Act of 1934
                    Commission File Number 0-21872

                                  ALDILA, INC.
             (Exact name of registrant as specified in its charter)

           DELAWARE                                      13-3645590
(State or other jurisdiction of          (I.R.S. Employer Identification Number)
incorporation or organization)

                  12140 COMMUNITY ROAD, POWAY, CALIFORNIA 92064
                    (Address of principal executive offices)
                                 (619) 513-1801
                          (Registrant's Telephone No.)

     Securities Registered Pursuant to Section 12(b) of the Act:
   Title of each class                Names of each exchange on which registered
          None                                            None
          ----                                            ----
           Securities registered pursuant to section 12(g) of the Act:
                     Common Stock, par value $0.01 per share
                     ---------------------------------------
                                (Title of Class)

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. [ ]

As of March 22, 1999, the aggregate market value of the voting stock held by 
non-affiliates of the registrant, based on market quotations as of that date, 
was approximately $23.9 million.

As of March 22, 1999, there were 15,462,204 shares of the Registrant's common 
stock, par value $0.01 per share, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated into this report by
reference:
Part III  The Registrant's definitive Proxy Statement for the 1999 Annual 
Meeting of Stockholders to be filed with the Commission within 120 days after 
the close of the fiscal year.


                                      1

<PAGE>

                                  ALDILA, INC.

                               REPORT ON FORM 10-K
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                      INDEX

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Part I

         Item 1.  Business                                                     3
         Item 2.  Properties                                                  14
         Item 3.  Legal Proceedings                                           15
         Item 4.  Submission of Matters to a Vote of Security Holders         15

Part II

         Item 5.  Market for Registrant's Common Equity and Related
                     Stockholder Matters                                      15
         Item 6.  Selected Financial Data                                     16
         Item 7.  Management's Discussion and Analysis of Financial
                     Condition and Results of Operations                      17
         Item 7a. Quantitative and Qualitative Disclosures about Market
                     Risk                                                     22
         Item 8.  Financial Statements and Supplementary Data                 22
         Item 9.  Changes in and Disagreements with Accountants on
                     Accounting and Financial Disclosure                      22

Part III

         Item 10. Directors and Executive Officers of the Registrant          22
         Item 11. Executive Compensation                                      22
         Item 12. Security Ownership of Certain Beneficial Owners
                      and Management                                          22
         Item 13. Certain Relationships and Related Transactions              22
         Item 14. Exhibits, Financial Statement Schedules, and Reports
                      on Form 8-K                                             23

Signatures                                                                    38
Exhibit Index                                                                 39
</TABLE>

                                       2

<PAGE>

                                     PART I

     THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF 
THE FEDERAL SECURITIES LAWS. THESE FORWARD-LOOKING STATEMENTS ARE NECESSARILY 
BASED ON CERTAIN ASSUMPTIONS AND ARE SUBJECT TO SIGNIFICANT RISKS AND 
UNCERTAINTIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON MANAGEMENT'S 
EXPECTATIONS AS OF THE DATE HEREOF, AND THE COMPANY DOES NOT UNDERTAKE ANY 
RESPONSIBILITY TO UPDATE ANY OF THESE STATEMENTS IN THE FUTURE. ACTUAL FUTURE 
PERFORMANCE AND RESULTS COULD DIFFER FROM THAT CONTAINED IN OR SUGGESTED BY 
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF FACTORS SET FORTH IN THIS 
FORM 10-K (INCLUDING THOSE SECTIONS HEREOF INCORPORATED BY REFERENCE FROM 
OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION ), IN PARTICULAR AS 
SET FORTH IN "BUSINESS RISKS" UNDER ITEM 1 AND SET FORTH IN THE "MANAGEMENT'S 
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" 
UNDER ITEM 7.

ITEM 1.  BUSINESS

GENERAL

     Aldila, Inc. ("Aldila" or the "Company") is the leading designer and 
manufacturer of high-quality innovative graphite (carbon fiber-based 
composite) golf shafts in the United States today and has maintained this 
leading position for over a decade. Aldila enjoys strong relationships with 
most major domestic, and many foreign, golf club manufacturers including 
Callaway, Taylor Made, Ping and Titleist. Aldila believes that it is one of 
the few independent shaft manufacturers with the technical and production 
expertise required to produce high-quality graphite shafts in quantities 
sufficient to meet rapidly growing demand. The Company's current golf shaft 
product line consists of Aldila and G. Loomis branded products designed for 
custom club makers as well as hundreds of custom shafts developed in 
conjunction with its major customers, which are designed to improve the 
performance of any level of golfer, from novice to tour professional.

     In an effort to maintain its leadership position in the graphite shaft 
market over the last several years the Company has taken steps to vertically 
integrate into the manufacture of its own raw materials in order to control 
its raw material costs and ensure its sources of supply. In 1994, the Company 
started production of its principal raw material for shafts, graphite 
prepreg, which consists of sheets of carbon fibers combined with epoxy resin. 
See "Manufacturing--Raw Materials." The Company now produces substantially 
all of its graphite prepreg requirements internally. In 1997, the Company 
constructed a 50,000 square foot carbon fiber manufacturing facility in 
Evanston, Wyoming. The Company now produces carbon fiber at this facility to 
satisfy a significant portion of its internal demand for carbon fiber in the 
manufacturing of graphite prepreg for the production of graphite golf club 
shafts. The Company also has the capability to produce carbon fiber at this 
new facility in excess of what it will be able to use in the manufacture of 
golf club shafts. The Company intends to sell such excess carbon fiber, in 
the form of graphite prepreg manufactured using its existing facility in 
Poway, California, as well as chopped carbon fiber to manufacturers of other 
carbon fiber - based products. Management of the Company believes that the 
ability to manufacture carbon fiber will ultimately enable the Company to 
diversify its sales and reduce its dependence on the overall golf club 
market, while continuing to leverage the Company's existing composite 
materials expertise. During 1998, however, the new facility did not operate 
at full capacity and management does not expect to operate the plant at full 
capacity in 1999 due to the weak demand for carbon fiber. The full benefit of 
this facility to the Company is not expected to be realized until the demand 
for the Company's carbon fiber increases which will allow the Company to 
produce at increased volume levels resulting in lower production costs.

                                       3
<PAGE>

Graphite Golf Shafts and Other Composite Products:

     The Company was founded in San Diego, California in 1972 and was an 
early leader in the design and production of graphite golf shafts. Since 
then, the Company has continually improved upon its shaft designs and the 
materials used in its shafts to meet the demands of a growing market. The 
Company believes it is well positioned to remain a leader in the market for 
graphite shafts due to its innovative and high quality products, strong 
customer relationships, design and composite expertise and significant 
manufacturing capabilities.

     Most golf clubs being sold today have shafts constructed from steel or 
graphite, although limited numbers are also manufactured from other 
materials. Graphite shafts were introduced in the early 1970's as the first 
major improvement in golf shaft technology since steel replaced wood in the 
1930's. The first graphite shafts had significant torque (twisting force) and 
appealed primarily to weaker-swinging players desiring greater distance. 
Graphite shaft technology has subsequently improved so that shafts can now be 
designed for golfers at all skill levels. Unlike steel shafts, graphite 
shafts can be altered with respect to weight, flex, flex location and torque 
to produce greater distance, increased accuracy and reduced club vibration 
resulting in improved "feel" to the golfer. The improvements in the design 
and manufacture of graphite shafts and the growing recognition of their 
superior performance characteristics compared to steel have resulted in 
increased demand for graphite shafts by golfers of all skill levels. The 
initial acceptance of graphite shafts was primarily for use in woods. 
Subsequently, after achieving dominant acceptance and penetration in both the 
professional and consumer woods markets (with over 78% of new woods purchased 
including graphite shafts in 1998), graphite shafts have started to achieve 
similar success in the irons market including increasing acceptance among 
tour professionals. Since many golfers consider professionals to be "opinion 
leaders," their acceptance and growing use of graphite shafts in irons has 
helped broaden the overall graphite market. As a result, in 1998, 
approximately 39% of new irons purchased were graphite shafted.

     Originally, graphite shafts were primarily sold for use in premium 
clubs, while the value priced segment of the golf club market continued to be 
supplied with steel shafts. In the last several years, however, an increasing 
percentage of value priced clubs are being sold with graphite shafts, which 
is a trend that the Company expects will continue. As a result, the Company 
has taken steps to enable it to meet the needs of this segment of the shaft 
market, including the design of shafts that can be manufactured at prices 
acceptable to this market and continued efforts to reduce its overall 
manufacturing costs.

Carbon Fiber and Graphite Prepreg:

     Carbon fiber is produced by processing acrylic fiber through a series of 
stretching, stabilizing and carbonizing sequences converting it into 
essentially a pure carbon chain fiber exhibiting stiffness and strength 
characteristics similar to steel at significantly less weight. These carbon 
fibers combined with various resins (prepregs) are then converted to 
composite structures which have replaced metals in a number of weight 
critical aerospace, sporting and industrial applications. Typically, the 
composite structure will weigh 25 to 50 percent less than the metal structure 
it has replaced. Carbon fiber composite structures also provide toughness, 
resistance to corrosion, resistance to fatigue, capacity to dissipate heat 
and electrical conductivity. Carbon fiber has grown from its inception in the 
late 1950's into an industry producing approximately 27 million pounds of 
carbon fiber per year.

     Carbon fiber usage has grown primarily for consumption by the aerospace 
industry and for sporting goods applications. Aerospace grade carbon fibers 
continue to be utilized for production of commercial and military 
aerostructures. The higher-cost, aerospace grade carbon fibers were first 
used in sporting goods and industrial applications until a lower-cost, large 
bundle carbon fiber was developed as an alternative for use in many sporting 
goods and industrial applications. Aldila was a leader in utilizing large 
bundle carbon fibers purchased from outside vendors for the manufacture of 
graphite golf shafts. With the opening of its carbon fiber facility in 
Evanston, Wyoming, Aldila now produces large bundle carbon fiber for its 
prepreg operation and graphite golf shaft production. The carbon fiber 
industry is represented by approximately ten companies that produce aerospace 
and commercial carbon fibers. Aldila now competes in the carbon fiber market 
as it offers for sale commercial carbon fibers and prepreg produced in its 
facilities. At the same time, Aldila 

                                       4
<PAGE>

continues to purchase certain types of carbon fiber from these outside 
vendors for the manufacture of golf shafts.

     In addition to aerospace applications and graphite golf shafts, 
applications for carbon fibers include thermoplastic injection molding 
compounds for electronic components such as cellular telephones and 
computers, drive shafts for trucks, natural gas vehicle fuel tanks, 
reinforcement for infrastructure repair such as bridges, lightweight tubes 
for off shore deep water oil well drilling, fishing rods, ski poles, bicycle 
tubes and frames, tennis racquets, hockey sticks and sailboat masts. 
Continuing growth in demand for carbon fibers in these applications and 
others is dependent on continuing efforts to reduce the cost of the material 
along with delivering adequate quantities of high quality carbon fiber to the 
customer.

PRODUCTS

     Aldila offers a broad range of innovative and high-quality graphite golf 
shafts designed to maximize the performance of golfers of every skill level. 
The Company manufactures hundreds of unique graphite shafts featuring various 
combinations of performance characteristics such as weight, flex, flex point 
and torque. The Company's customized shafts, which constituted approximately 
85% of net sales in the year ended December 31, 1998, are designed in 
partnership with its customers (principally golf club manufacturers) to 
accommodate specific golf club designs. The Company's standard models are 
typically sold to golf club manufacturers, distributors and golf pro and 
repair shops, and are used either to assemble a new custom club from selected 
components or to replace the steel shaft of an older club. The Company also 
helps develop cosmetic designs to give the customer's golf clubs a 
distinctive look, even when the customer does not require a shaft with 
customized performance characteristics. The prices of Aldila shafts typically 
range from $5 to $30.

     All of the Company's shafts are composite structures consisting 
principally of carbon fiber and epoxy resins. The Company's shafts may also 
include boron (added to increase shaft strength) or fiberglass. The Company 
regularly evaluates new composite materials for inclusion in the Company's 
shafts and new refinements on designs using current materials.

     During 1998, the Company sold graphite prepreg manufactured in its 
Poway, California manufacturing facility to third parties and offered for 
sale large bundle carbon fiber and chopped fiber from its manufacturing 
facility in Evanston, Wyoming. Sale of these new carbon fiber products 
commenced in the first quarter 1999.

     Carbon fiber composite materials are suited for a diverse range of 
applications based on their distinctive combination of physical and chemical 
properties. Carbon fibers are used as reinforcements in composite materials 
that combine fibers with epoxy resins or other matrix materials to form a 
substance with high strength, low weight, stiffness, resistance to corrosion, 
resistance to fatigue and capacity to dissipate heat and electrical 
conductivity. Carbon fiber materials produced by the Company would be used in 
a variety of applications such as molding compounds for the manufacture of 
electronic components, masts and spars for the marine industry, hockey 
sticks, fishing rods and other industrial products.

CUSTOMERS AND CUSTOMER RELATIONS

     For fiscal year 1998, the Company had approximately 300 customers, which 
included approximately 100 golf club manufacturers and more than 60 
distributors, with the balance principally consisting of custom club 
assemblers, pro shops and repair shops. However, the majority of the 
Company's sales have been and may continue to be concentrated among a 
relatively small number of customers. Sales to the Company's top five 
customers represented approximately 61%, 72% and 78% of net sales in 1998, 
1997 and 1996 respectively.

                                       5
<PAGE>

     Historically, Aldila's principal customers have varied as a result of 
general market trends in the golf industry, in particular the prevailing 
popularity of the various clubs that contain Aldila's shafts, and there 
typically are changes in the composition of the list of the Company's five or 
ten most significant customers from year to year as a result. Due to the 
substantial marketplace success of their clubs in recent periods, however, 
for the last several years, the Company's two largest customers have been 
Callaway and Taylor Made. Callaway, which has been the Company's largest 
customer for the last seven years but which has represented a decreasing 
percentage of the Company's sales for each of the last four years, accounting 
for 26%, 32% and 43% of the Company's net sales in 1998, 1997 and 1996 
respectively, while Taylor Made, which has been the Company's second largest 
customer for the last three years, accounted for 15%, 22% and 16% of the 
Company's net sales in 1998, 1997 and 1996, respectively. As a result of 
expected poor sales of golf clubs in 1999, particularly of premium clubs, as 
well as the increased diversification of the Company's customer base due to 
increasing penetration of graphite shafts into the value club segment of the 
industry, the Company expects that the concentration of its sales to its five 
largest customers will continue to decline in 1999. In addition, the Company 
does not expect Callaway to continue to be its largest customer in 1999. 
Because of the historic volatility of consumer demand for specific clubs, as 
well as continued competition from alternative shaft suppliers, sales to a 
given customer in a prior period may not necessarily be indicative of future 
sales and it is often difficult to project the Company's sales to a given 
customer in advance.

     Aldila sells graphite prepreg primarily to manufacturers of composite 
products such as hockey equipment, sail boat riggings and fishing rods and 
sells chopped carbon fibers to companies which produce molding compounds 
which include carbon fibers.

     The Company believes that its close customer relationships and 
responsive service have been significant elements of its success to date, 
establishing it as a premier graphite shaft company. Aldila's golf club 
manufacturer customers often work together with the Company's engineers when 
developing a new golf club in order to design a club that maximizes the 
performance features of the principal component parts: the grip, the clubhead 
and the Aldila shaft. The Company's partnership relationship with its 
customers continues after the development of clubs containing Aldila's 
shafts. Following the design process, the Company continues to provide high 
levels of customer support and service in areas such as quality control and 
assurance, timely and responsive manufacturing, delivery schedules and 
education. The Company believes its physical proximity to many of its 
customers has facilitated a high degree of customer interaction and 
responsiveness to customer needs. While the Company has had long-established 
relationships with most of its customers, it is not the exclusive supplier of 
graphite shafts to most of them and generally does not have long-term supply 
agreements with its customers. Although the Company believes that its 
relationships with its customers are good, the loss of a significant customer 
or a substantial decrease in sales to a significant customer could have a 
material adverse effect on the Company's business or operating results.

MARKETING AND PROMOTION

     The Company's marketing strategy is designed to encourage golf club 
manufacturers to select and promote Aldila shafts, and to increase overall 
market acceptance and use of graphite golf shafts. The Company utilizes a 
variety of marketing and promotional channels to increase sales of Aldila 
brand name shafts through its network of distributors, and to support 
Aldila's brand name recognition and reputation among consumers for offering 
consistently high quality products designed for a wide range of golfers. 
Although the Company does not sell directly to the end users of its products, 
the Company believes that its brand name recognition contributes to the 
marketability of its customers' products.

     Aldila's marketing and promotion expenditures were approximately $1.0 
million, $2.5 million and $2.5 million in 1998, 1997 and 1996, respectively.

                                       6
<PAGE>

SALES AND DISTRIBUTION

     Within the golf club industry, most companies do not manufacture the 
three principal components of the golf club -- the grip, the shaft and the 
clubhead --but, rather, source these components from independent suppliers 
that design and manufacture components to the club manufacturers' 
specifications. As a result, Aldila sells its graphite shafts primarily to 
golf club manufacturers and, to a lesser extent, distributors, custom club 
shops, pro shops and repair shops. Distributors typically resell the 
Company's products to custom club assemblers, pro and custom club shops, and 
individuals. The Company uses its internal sales force in the marketing and 
sale of its shafts to golf club manufacturers. Sales to golf club 
manufacturers accounted for approximately 85% of net sales for the year ended 
December 31, 1998.

     Graphite prepreg sales and carbon fiber sales are made primarily to 
manufacturers of composite products. The Company uses its internal sales 
force in the marketing and sale of these products to its customers.

     International sales represented less than 10% of net sales for the years 
ended December 31, 1998, 1997 and 1996.

PRODUCT DESIGN AND DEVELOPMENT

     Aldila is committed to maintaining its reputation as a leader in 
innovative shaft design and composite materials technology. The Company 
believes that the enhancement and expansion of its existing product lines and 
the development of new products are necessary for the Company's continued 
growth and success. However, while the Company believes that it has generally 
achieved success in the introduction of its graphite golf shafts, no 
assurance can be given that the Company will be able to continue to design 
and manufacture products that meet with market acceptance.

     The Company has been one of the leaders in developing the market for 
lower cost large bundle carbon fiber by successfully converting to this fiber 
type from a more expensive carbon fiber material for the manufacture of its 
graphite golf shafts. The Company believes that it can also be a market 
leader in providing large bundle carbon fiber to other manufacturing 
applications outside of golf shafts.

     Graphite shaft designs and modifications are frequently the direct 
result of the Company's and its customers' combined efforts and expertise to 
develop an exclusive shaft for each customer's clubs. New golf shaft designs 
are developed and tested using a CAD/CAE golf shaft analysis program, which 
evaluates a new shaft design with respect to weight, torque, flex point, tip 
and butt flexibility, swing weight and other critical shaft design criteria. 
In addition, the Company researches new and innovative shaft designs on an 
independent basis, which has enabled the Company to produce a variety of new 
standard shafts as well as generate design ideas for customized shafts. To 
improve and advance composites technology and shaft process manufacturing, 
the Company's engineers test new and existing materials, such as boron, 
kevlar, fiberglass, ceramic, thermoplastic and carbon fiber. The Company's 
design research also focuses on improvements in graphite shaft aesthetics 
since cosmetic appearance has become increasingly important to customers. 
Although the Company emphasizes these research and development activities, 
there can be no assurance that Aldila will continue to develop competitive 
products or that the Company will be able to utilize new composite material 
technology on a timely or competitive basis, or otherwise respond to emerging 
market trends.

     The Company has applied its carbon fiber technology to other products in 
recent years, engaging in limited production of graphite tubing and other 
molded parts on a special order basis.

                                       7
<PAGE>

MANUFACTURING

     The Company believes that its manufacturing expertise and production 
capacity differentiate it from many of its competitors and enable Aldila to 
respond quickly to customers orders and provide sufficient quantities on a 
timely basis. The Company today operates six golf shaft manufacturing 
facilities, one prepreg manufacturing facility (in conjunction with one of 
its shaft manufacturing facilities) and one carbon fiber manufacturing 
facility. During its 27 years of operation, the Company has improved its 
manufacturing processes and believes its has established a reputation as the 
industry's leading volume manufacturer of high-performance graphite shafts.

     SHAFT MANUFACTURING PROCESS. The process of manufacturing a graphite 
shaft has several distinct phases. Different designs of Aldila shafts require 
variations in both the manufacturing process and the materials used. In 
traditional shaft designs, treated graphite known as "prepreg" is rolled onto 
metal rods known as mandrels. The Company also manufacturers filament wound 
shafts where continuous graphite fibers are mechanically wound around a 
mandrel. Under either process, the graphite is then baked at high 
temperatures to harden the material into a golf shaft. At the end of the 
manufacturing process, the shafts are painted and stylized using a variety of 
colors, patterns and designs, including logos and other custom 
identification. Through each phase of this process, the Company performs 
quality control reviews to ensure continuing high standards of quality and 
uniformity and to meet exacting customer specifications.

     RAW MATERIALS. The primary material currently used in all of the 
Company's graphite shafts is carbon fiber, which is combined with epoxy resin 
to produce sheets of graphite prepreg. Heating and stretching the graphite 
fibers determines the tensile strength and modulus (stiffness) of the fiber. 
The Company manufacturers graphite prepreg in its Poway, California facility. 
Through 1997, the Company purchased all of its carbon fibers from outside 
vendors. Beginning in 1998, the Company manufactured carbon fiber in its 
Evanston, Wyoming facility for consumption in its golf shaft production 
operation. Because many different forms of carbon fiber are required for golf 
shaft products, the Company will continue to be reliant on outside suppliers 
for a portion of its ongoing carbon fiber needs.

     GRAPHITE PREPREG MANUFACTURING PROCESS. In October 1994, the Company 
initiated the internal production of graphite prepreg in its Poway, 
California facility. The Company believes that by producing a major portion 
of its graphite prepreg requirements internally it may better control the 
supply of raw material for shafts and may reduce the impact of potential 
future price increases. The Company now produces substantially all of its 
graphite prepreg requirements internally. The Company is, however, dependent 
upon certain domestic graphite prepreg suppliers for graphite prepreg which 
it does not produce and, therefore, the Company expects to continue to 
purchase some prepreg products from outside suppliers in the future. The 
Company is now dependent on its own prepreg production operation to support 
its shaft manufacturing requirements. Although the Company believes that 
there will continue to be alternative third party suppliers of graphite 
prepreg, there can be no assurance that unforeseen difficulties which could 
lead to an interruption in the Company's internal prepreg production will not 
occur which would result in production delays.

     The Company's graphite prepreg operation is dependent on certain 
suppliers for carbon fibers, which along with epoxy resins and paper 
constitute the primary components in graphite prepreg. In 1998, the Company 
purchased most of its carbon fiber from Hexcel (formerly Hercules, Inc.) and 
Fortafil Fibers; however, the Company also purchased carbon fiber from Toho 
Carbon Fibers, Inc. The Company experienced increases in these raw material 
component costs in 1996 and 1997 but due to a weakening in demand for carbon 
fiber overall the costs for these raw materials stabilized in 1998, and 
management anticipates that these costs will decrease in the future, although 
it cannot predict the timing or extent of any future price changes.

                                       8
<PAGE>

     CARBON FIBER MANUFACTURING PROCESS. In the first quarter of 1998 the 
Company completed construction of a 50,000 square foot carbon fiber 
manufacturing facility in Evanston, Wyoming. In this facility the Company 
produces large bundle carbon fiber material from acrylic fiber through a 
series of stretching, stabilizing and carbonizing sequences. This material is 
now the primary raw material for the Company's prepreg manufacturing 
operation to support the manufacture of graphite golf shafts.

     In 1998, the Company purchased substantially all of its raw acrylic 
fibers for the carbon fiber operation from two outside vendors. Pursuant to a 
supply agreement with the Company, Courtaulds Fibres, Ltd. ("Courtaulds") has 
agreed to supply the Company with carbon fiber precursor. The Company 
believes Courtaulds and its other vendor will provide a reliable source of 
supply for raw materials at the anticipated 1999 operating levels. However, 
the Company will continue to pursue alternate sources of supply for this 
material. See "Business Risks -- New Carbon Fiber Manufacturing Facility."

ENVIRONMENTAL MATTERS

     The Company is subject to various federal, state, local and foreign 
environmental laws and regulations, including those governing the use, 
discharge and disposal of hazardous materials as the Company uses hazardous 
substances and generates hazardous waste in the ordinary course of its 
manufacturing of graphite golf shafts, graphite prepreg, and beginning in 
1998, carbon fiber. The Company believes it is in substantial compliance with 
applicable laws and regulations and has not to date incurred any material 
liabilities under environmental laws and regulations; however, there can be 
no assurance that environmental liabilities will not arise in the future 
which may affect the Company's business.

COMPETITION

     Aldila operates in a highly competitive environment in both the United 
States and international markets for the sale of its graphite golf club 
shafts. The Company believes that it competes on the basis of its ability to 
provide a broad range of high quality, performance graphite shafts; its 
ability to deliver customized products in large quantities and on a timely 
basis to its customers; the acceptance of graphite in general, and Aldila 
shafts in particular, by professional and other golfers, whose preferences 
are to some extent subjective; and, finally, price. Recently, competition 
based primarily on price has become increasingly prevalent. Until recently, 
the United States market for graphite shafts was dominated by a relatively 
small number of United States based shaft manufacturers. The Company 
currently competes against a number of well established United States based 
shaft manufacturers for sales of premium shafts which constitute the majority 
of the Company's revenues. This competition has made it more difficult to 
retain existing customers, attract new customers and has placed increasing 
pressure on prices for the Company's premium shafts. The Company now also 
competes with foreign owned graphite shaft manufacturers for customers 
desiring lower priced value shafts. The Company only recently entered into 
this segment of the market, whereas the competing shaft manufacturers may be 
well established in this segment of the market.

     The Company believes that it is the largest supplier of graphite shafts 
in the United States, which results from its ability to establish a premium 
brand image and reputation among golf club companies as a value-added 
supplier with competitive prices.

     Aldila competes against other shaft manufacturers, both graphite and 
steel, as well as against golf club companies that produce their own shafts 
internally, some of which may have greater resources than Aldila. The Company 
also faces potential competition from those golf club manufacturers that 
currently purchase golf shaft components from outside suppliers but that may 
have, develop or acquire the ability to manufacture all or a portion of its 
graphite shafts internally. Should any of the Company's significant customers 
decide to meet any of its shaft needs internally, it could have an adverse 
effect on the Company.

                                       9
<PAGE>

     The Company expects that in the future it may also compete against 
companies who manufacture one or more of three principal components of the 
golf club -- the grip, the shaft and the clubhead and assemble completed golf 
clubs for delivery to club companies. Should any of the Company's significant 
customers decide to source their golf clubs in this manner where an Aldila 
shaft is not included, it could have an adverse effect on the Company.

     The Company also competes for sales of graphite prepreg and carbon fiber 
products with other producers of graphite prepreg and carbon fibers, many of 
which have substantially greater research and development, managerial and 
financial resources than the Company and have been producing graphite prepreg 
and carbon fiber for substantially longer periods of time than the Company 
has, and represent significant competition for the Company. In addition, the 
Company's ability to compete in the sale of graphite prepreg and carbon fiber 
is dependent to some extent on the Company's ability to cause manufacturers 
and consumers of carbon fiber-based products to utilize large bundle carbon 
fiber, which is the sole type of carbon fiber manufactured by the Company and 
the principal type used in its graphite prepreg, rather than the small 
bundle, aerospace grade carbon fiber, that predominated in the industry until 
a few years ago.

INTELLECTUAL PROPERTY

     Aldila utilizes a number of trademarks and logos in connection with the 
sale and advertising of its products. The Company believes that the strength 
of its trademarks and logos are of considerable value to its business and 
intends to continue to protect them to the fullest extent practicable. The 
Company takes all reasonable measures to ensure that any product bearing an 
Aldila trademark reflects the consistency and quality associated with the 
Company's products. As of December 31, 1998 the Company had approximately 48 
United States and foreign registered trademarks.

     The Company currently holds and protects the rights to two patents, 
although the Company does not view these patents as critical to the Company's 
business.

EMPLOYEES

     As of December 31, 1998, Aldila employed approximately 1,000 persons on 
a full-time basis, including nine in sales and marketing, 22 in research and 
development and engineering, and 920 in production, and the balance are 
administrative and support staff. The number of full-time employees also 
includes 435 persons who are employed in the Company's Mexico facilities and 
275 who are employed in the Company's China facility. Aldila considers its 
employee relations to be good.

SEASONALITY

     Because the Company's customers have historically built inventory in 
anticipation of purchases by golfers in the spring and summer, the principal 
selling season for golf equipment, the Company's operating results have been 
affected by seasonal demand for golf clubs, which has generally resulted in 
highest sales occurring in the second quarter.

     The Company experienced a substantial shaft unit volume increase in 1998 
over the previous year which followed a seasonal pattern where sales volume 
peaked in the second quarter of the fiscal year. However, based on the 
overall weak demand for golf clubs experienced in the fourth quarter of 1998 
and forecast for at least the first half of 1999, the Company anticipates its 
net sales could decline between 25% to 45% in the first half of 1999 versus 
1998 and accordingly, does not anticipate normal seasonal sales trends in 
1999.

                                       10
<PAGE>

BACKLOG

     As of December 31, 1998, the Company had a sales backlog of 
approximately $8.1 million compared to approximately $14.1 million as of 
December 31, 1997. The Company believes that the dollar volume of its current 
backlog will be shipped over the next three months. Orders can typically be 
cancelled without penalty up to 30 days prior to shipment. Historically, the 
Company's backlog generally has been highest in the first and second 
quarters, due in large part to seasonal factors. Due to the timing and 
receipt of customer orders, backlog is not necessarily indicative of future 
operating results.

BUSINESS RISKS

     NEW CARBON FIBER MANUFACTURING FACILITY. The Company has constructed a 
new facility for the manufacture of carbon fiber in Evanston, Wyoming. The 
Company has made a substantial investment in this new operation and is now 
operating at a normal rate of production after completing its start-up phase 
in the first half of 1998. Although the Company has hired individuals with 
substantial expertise in the manufacture of carbon fiber, the Company has 
only produced carbon fibers for consumption by the golf shaft manufacturing 
operation for a short-time and, therefore, there is a risk that the Company 
will be unable to continue to manufacture carbon fiber of high enough quality 
in sufficient quantities at low enough costs to justify a decision to limit 
the use of outside suppliers.

     The Company expects to be able to use its carbon fiber manufacturing 
capacity to facilitate a transition away from being a single product 
producer, to become a diversified manufacturer of carbon fiber based 
products, either through supplying other manufacturers of sporting and 
industrial applications or by acquiring other such manufacturers. Although 
the Company would still be capitalizing on its existing expertise in 
composite materials manufacturing, the transition into new carbon fiber 
applications will require the Company to develop expertise with respect to 
different manufacturing and marketing issues related to such new 
applications. The inability to develop new applications internally or to sell 
carbon fiber or prepreg to other manufacturers to absorb carbon fiber 
manufacturing capacity in excess of its golf shaft needs could have an 
adverse effect on the Company.

     MARKET PENETRATION - CARBON FIBER PRODUCTS. The Company established a 
carbon fiber manufacturing facility in Evanston, Wyoming to support the 
manufacture of graphite golf shafts but also to diversify its sales among 
other products. In recent years, the worldwide demand for carbon fiber for 
aerospace, sporting goods and industrial applications has grown rapidly as 
new applications have been advanced for consumption of this material. The 
Company's success in entering into this market with its internally produced 
carbon fiber is dependent on continued increases in demand for carbon fiber 
worldwide. However, at present there exists excess capacity for the 
manufacture of carbon fiber worldwide which has had the effect of decreasing 
the market prices for carbon fiber and products derived from carbon fiber, as 
compared to shortages and increasing prices as prevailed during 1996 and 
1997. The Company anticipates that the current state of overcapacity in the 
industry will make it difficult for the Company to take advantage of the full 
capacity of its carbon fiber plant to generate incremental profitable 
revenues through sales of carbon fiber other than its golf shafts.

     POTENTIAL CASH FLOW SHORTAGES. As a result of a significant drop-off in 
sales of golf clubs generally, particularly the premium clubs that continue 
to represent a substantial majority of the Company's sales, that started in 
the fall of 1998 and is expected to continue at least through 1999, combined 
with current overcapacity in the carbon fiber industry that is depressing 
market prices for carbon fiber products, the Company has recently 
experienced, and expects to continue to experience periodically throughout 
1999, the need for borrowings under its line of credit facility in order to 
finance its business operations. Since its initial public offering in 1993, 
the Company had been able to finance its business operations out of 
internally generated working capital without resort to any outside credit 
facility. In addition, the first semi-annual $4,000,000 principal payment 
under its outstanding senior notes is due in September 1999. The Company has 
recently been required by the financial institution providing its line of 
credit facility to secure its obligations under the facility through a pledge 
of substantially all of its assets. The line of credit facility currently 
expires 

                                       11
<PAGE>

in August 1999, although the Company is engaged in negotiations to extend or 
replace this facility in order to provide working capital borrowing capacity 
at least into 2000. In particular if the Company is not able to secure an 
adequate working capital credit facility that extends past the expiration of 
its current facility, there can be no assurance that the Company will 
generate sufficient cash flow from operations to finance its business 
operations for the remainder of 1999 and also meet its obligations under its 
senior notes.

     CUSTOMER CONCENTRATION. The Company's sales have been, and very likely 
will continue to be, concentrated among a small number of customers. In 1998, 
sales to the Company's top five customers represented approximately 61% of 
net sales. Aldila's principal customers have historically varied depending 
largely on the prevailing popularity of the various clubs that contain Aldila 
shafts. In 1998, Callaway accounted for 26% of net sales and Taylor Made 
accounted for 15% of net sales. The Company cannot predict the impact that 
general market trends in the golf industry, including the fluctuation in 
popularity of specific clubs manufactured by customers, will have on its 
future business or operating results.

     While the Company has had long-established relationships with most of 
its customers, it is not the exclusive supplier of graphite shafts to most of 
them, and consistent with the industry practice, generally does not have 
long-term contracts with its customers. In this regard, Callaway and Taylor 
Made, who collectively represent in excess of 40% of the Company's sales in 
1998, each purchases from at least two other graphite shaft suppliers. In the 
event Callaway, Taylor Made or any other significant customer increases 
purchases from its other suppliers or adds additional suppliers, the Company 
could be adversely affected. Although the Company believes that its 
relationships with its customers are good, the loss of a significant customer 
or a substantial decrease in sales to a significant customer, could have a 
material adverse effect on the Company's business and operating results. In 
addition, sales by the Company's major customers are likely to vary 
dramatically from time to time due to fluctuating public acceptance of their 
products. The Company anticipates that its sales to Callaway and Taylor Made 
will decline significantly in 1999 as compared to 1998. If these sales are 
not replaced with sales to other shaft customers then such decrease could 
have an adverse effect on the Company's business and operating results.

     SHAFT MANUFACTURING BY CLUB COMPANIES. Another factor that could have a 
negative impact in the future on the Company's sales to golf club 
manufacturers would be a decision by one of its customers to manufacture all 
or a portion of its graphite shaft requirements. While the Company has not to 
date experienced any material decline in its sales for this reason, should 
any of the Company's major customers decide to meet any significant portion 
of their shaft needs internally, it could have a material adverse impact on 
the Company and its financial results.

     RAW MATERIAL COST/AVAILABILITY. The Company's gross profit margins, in 
part, are dependent on the price paid for carbon fiber purchased from outside 
vendors and more substantially in the latter part of 1998 and in 1999 the 
price paid for the acrylic fiber used for the manufacture of carbon fiber in 
Evanston, Wyoming and the other costs associated with the operation of the 
carbon fiber plant.

     The Company experienced an increase in carbon fiber prices in 1996 and 
1997 due to the growth being experienced in the use of carbon fiber coupled 
with relatively little excess capacity. However, the Company experienced 
minimal increases in raw material costs in 1998 and expects that raw material 
costs will decline in 1999 due to a moderation in demand for all forms of 
carbon fiber coupled with higher levels of available capacity for the 
production of carbon fiber and prepregs in the industry.

     The Company expects to obtain the majority of its carbon fiber from its 
new facility in Evanston, Wyoming, but has also secured contracts for most of 
its additional carbon fiber needs from outside vendors through 1999. 
Depending on market conditions prevailing at the time and extent to which 
production at its planned facility meets expectations, the Company may face 
difficulties in obtaining adequate supplies of carbon fiber from external 
sources to provide for any carbon fiber needs not met internally. If it 
appears that the carbon fiber facility is not likely to satisfy a significant 
portion of the Company's needs or if it appears that there will not be 
adequate availability in the market, the Company may not have made 
arrangements in advance for the purchase of material amounts of carbon fiber 
from alternative sources. In addition, the Company is dependent 

                                       12
<PAGE>

on its internal production of graphite prepreg to support its shaft 
manufacturing operations and has not secured adequate additional sources of 
supply should its production of prepreg be interrupted for any reason. The 
exposure to the Company resulting from its increasing reliance on its own 
internal production of the raw materials for its golf shaft business is 
enhanced because the Company currently operates only one prepreg facility and 
only one carbon fiber manufacturing facility. Although there is currently 
overcapacity in these industries, there have been significant market 
shortages of both carbon fiber and graphite prepreg in the recent past and 
such shortages should be expected to recur in the future.

     In 1998 the Company procured substantially all of its raw acrylic fibers 
for the carbon fiber operation from two outside vendors. Pursuant to a supply 
agreement with the Company, Courtaulds has agreed to supply the Company with 
carbon fiber precursor. The Company believes Courtaulds and its other vendor 
will provide a reliable source of supply of raw materials at the anticipated 
operating levels, however, any interruption of precursor supply from one or 
both of these suppliers would have a material adverse effect on the Company's 
business.

     RELIANCE ON OFF-SHORE MANUFACTURING FACILITIES. The Company operates 
manufacturing facilities in Tijuana, Mexico and Zhuhai, People's Republic of 
China. The Company pays certain expenses of these facilities in Mexican pesos 
and Chinese renminbis, respectively, which are subject to fluctuations in 
currency value and exchange rates.

     The Company operates a shaft manufacturing facility in Tijuana, Mexico 
pursuant to the "maquiladora" duty-free program established by the Mexican 
and United States governments. Such program enables the Company to take 
advantage of generally lower costs in Mexico, without paying duty on 
inventory shipped into or out of Mexico. The Company also operates in the 
People's Republic of China in a special economic zone which affords special 
advantages to companies with regards to income taxes, import and export 
duties and value added taxes. There can be no assurance that the Mexican 
government or the People's Republic of China will continue the programs 
currently in place or that the Company will continue to be able to take 
advantage of the benefits of the programs. The loss of these benefits could 
have an adverse effect on the Company's business. The Company is also subject 
to other customary risks of doing business outside of the United States, 
including political instability, other import/export regulation, and cultural 
differences.

     UTILIZATION OF CERTAIN HAZARDOUS MATERIALS. In the ordinary course of 
its manufacturing processes, the Company uses hazardous substances and 
generates hazardous waste. The Company has not to date incurred any material 
liabilities under environmental laws and regulations, and believes that it is 
in substantial compliance with applicable laws and regulations. Nevertheless, 
no assurance can be given that the Company will not encounter environmental 
problems or incur environmental liabilities in the future which could 
adversely affect its business.

     NEW PRODUCT INTRODUCTION. The Company believes that the introduction of 
new, innovative golf shafts using graphite or other composite materials will 
be critical to its future success. While the Company emphasizes research and 
development activities in connection with carbon fiber and other composite 
material technology, there can be no assurance that the Company will continue 
to develop competitive products or that the Company will be able to develop 
or utilize new composite material technology on a timely or competitive basis 
or otherwise respond to emerging market trends.

     The Company is also seeking to develop new applications for the type of 
carbon fiber that it produces in its new Wyoming facility. The Company's 
ability to compete in the sale of graphite prepreg and carbon fiber is 
dependent to some extent on the Company's ability to cause manufacturers and 
consumers of carbon fiber-based products to utilize large bundle carbon 
fiber, which is the sole type of carbon fiber manufactured by the Company. 
There can be no assurance, however, that these applications will develop to 
the extent anticipated by the Company.

                                       13
<PAGE>

     Although the Company believes that it has generally achieved success in 
the introduction of its graphite golf shafts, no assurance can be given that 
the Company will be able to continue to design and manufacture products that 
meet with market acceptance, either on the part of club manufacturers or 
golfers. The design of new graphite golf shafts is also influenced by rules 
and interpretations of the United States Golf Association ("USGA"). There can 
be no assurance that any new products will receive USGA approval or that 
existing USGA standards will not be altered in ways that adversely affect the 
sales of the Company's products.

     COMPETITION. Aldila operates in a highly competitive environment for 
golf equipment sales. The Company believes that it competes principally on 
the basis of its ability to provide a broad range of high quality, 
performance graphite shafts, its ability to deliver customized products in 
large quantities and on a timely basis; the acceptance of graphite shafts in 
general, and Aldila shafts in particular, by professionals and other golfers, 
whose preferences are to some extent subjective; and finally, price.

     Aldila competes against both domestic and foreign shaft manufacturers. 
The Company also experiences indirect competition from golf club 
manufacturers that produce their own shafts internally. Some of the Company's 
current and potential competitors may have greater resources than Aldila. The 
Company also faces potential competition from those golf club manufacturers 
that currently purchase golf shaft components from outside suppliers but that 
may have, develop or acquire the ability to manufacture shafts internally.

     As the Company further enters into the manufacture and sale of carbon 
fiber and prepreg products, it competes with other producers of carbon fibers 
and prepregs, many of which have substantially greater research and 
development, managerial and financial resources than the Company and 
represent significant competition for the Company.

     DEPENDENCE ON DISCRETIONARY CONSUMER SPENDING. Sales of golf equipment 
have historically been dependent on discretionary spending by consumers, 
which may be adversely affected by general economic conditions. The Company 
believes that golf equipment sales have remained flat in recent periods and 
may continue to be so in the future. A decrease in consumer spending on golf 
equipment or, in particular, a decrease in demand for golf clubs with 
graphite shafts could have an adverse effect on the Company's business and 
operating results.

     YEAR 2000. The Company recognizes the need to ensure its operations will 
not be adversely impacted by the inability of the Company's systems and the 
information systems of its major customers and suppliers to process data 
having dates on or after January 1, 2000. The Company has developed and 
implemented a plan to identify and resolve all of the internal Year 2000 
issues as well as evaluate its external Year 2000 exposures and risks. There 
can be no assurance that the Company's efforts to achieve Year 2000 
compliance will be successful or that third parties with whom the Company has 
material relationships will be Year 2000 compliant by January 1, 2000. An 
interruption of the company's ability to conduct its business due to a Year 
2000 problem with a third party could have an adverse effect on the Company. 
See also discussion in "Management's Discussion and Analysis of Financial 
Condition and Results of Operations - Year 2000" in this Form 10-K.

     RELIANCE ON KEY PERSONNEL. The success of the Company is dependent upon 
its senior management team, as well as its ability to attract and retain 
qualified personnel. There is competition for qualified personnel in the golf 
shaft industry as well as the carbon fiber business. There is no assurance 
that the Company will be able to retain its existing senior management 
personnel or to attract additional qualified personnel.

ITEM 2. PROPERTIES

     The Company's principal executive offices are located in a 33,000 square 
foot leased facility in Poway, California (in the San Diego metropolitan 
area). The Company's golf shafts are manufactured at six separate facilities, 
one located in the Poway, California, three others located in Tijuana, Mexico 
and two in the Zhuhai economic development zone of the People's Republic of 
China. The Company leases 61,000 square feet of office 

                                       14
<PAGE>

and manufacturing space (which was not being utilized as of December 31, 
1998) in Rancho Bernardo, California. The Company also leases a 73,000 square 
foot facility in Poway, California for shaft manufacturing operations and 
graphite prepreg production. The Tijuana, Mexico production operations are 
conducted in leased facilities that aggregate 61,000 square feet. The China 
facilities are also leased and comprises 109,000 square feet.

     In addition, the Company owns 14 acres of land in Evanston, Wyoming on 
which the Company has constructed a 50,000 square foot carbon fiber 
manufacturing plant.

ITEM 3.  LEGAL PROCEEDINGS

     There is no information required to be submitted by the Company under 
this Item.

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

     There were no matters submitted to a vote of security holders during the 
fourth quarter of fiscal 1998.

                                     PART II

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

COMMON STOCK PERFORMANCE

<TABLE>
<CAPTION>

                                    1998                               1997
         ---------------------------------------------------------------------------
         <S>                  <C>           <C>                <C>           <C>
                              HIGH          LOW                HIGH          LOW

         First Quarter        $5 15/16      $4 3/8             $6 1/16       $4 9/16

         Second Quarter       $7 15/16      $5 7/8             $5  3/4       $4 1/8

         Third Quarter        $7 3/8        $ 3 1/2            $6            $4 7/8

         Fourth Quarter       $4            $2 1/8             $6 5/8        $4 1/4

</TABLE>

     On March 22, 1999, the closing common stock price was $1.69, and there 
were approximately 460 common stockholders of record. The company believes a 
significant number of beneficial owners also own Aldila stock in "street 
name."

     Aldila, Inc. common stock is traded on the NASDAQ national market, 
symbol: ALDA.

     The Company intends to retain earnings for use in operations and does 
not anticipate paying cash dividends on the common stock in the foreseeable 
future. Aldila, Inc. is a holding company whose ability to pay dividends 
depends on the receipt of dividends or other payments from its two principal 
subsidiaries, Aldila Golf Corp. and Aldila Materials Technology Corp. The 
Company's 6.13% senior notes restrict its ability to declare or pay cash 
dividends unless certain financial criteria is satisfied.

                                       15
<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA


      The information required as to this Item is contained in the following
table.

                                  ALDILA, INC.

                             SELECTED FINANCIAL DATA

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
                                               -----------------------------------------------------------------------------------
                                                    1998             1997            1996             1995             1994
                                               -----------------------------------------------------------------------------------
<S>                                            <C>                 <C>              <C>             <C>              <C>
Operating Results (Year ended December 31):

      Net sales                                        $62,487          $55,636         $58,394          $56,545          $79,779
      Cost of sales                                     44,689           38,742          37,245           32,823           44,206
                                               -----------------------------------------------------------------------------------
           Gross profit                                 17,798           16,894          21,149           23,722           35,573
                                               -----------------------------------------------------------------------------------

      Selling, general and administrative                9,005           10,255           9,112           10,850           12,922
      Amortization of goodwill                           1,427            1,428           1,416            1,398            1,398
      Plant consolidation                                1,200            1,500
                                               -----------------------------------------------------------------------------------
           Operating income                              6,166            3,711          10,621           11,474           21,253
                                               -----------------------------------------------------------------------------------

      Interest expense                                   1,285            1,040           1,266            1,291            1,313
      Other (income), net                                 (218)            (418)           (727)            (857)            (297)
                                               -----------------------------------------------------------------------------------

      Income before income taxes                         5,099            3,089          10,082           11,040           20,237
      Provision for income taxes                         2,300            1,550           4,400            4,770            8,565
                                               -----------------------------------------------------------------------------------

      Net income                                        $2,799           $1,539          $5,682           $6,270          $11,672
                                               -----------------------------------------------------------------------------------
                                               -----------------------------------------------------------------------------------


      Net income per common share-basic:                 $0.18            $0.10           $0.35            $0.38            $0.70
                                               -----------------------------------------------------------------------------------
                                               -----------------------------------------------------------------------------------

      Net income per common share, assuming 
        dilution:                                        $0.18            $0.10           $0.35            $0.37            $0.69
                                               -----------------------------------------------------------------------------------
                                               -----------------------------------------------------------------------------------

Selected Operating Results
As Percentage of Net Sales:

      Gross profit                                       28.5%            30.4%           36.2%            42.0%            44.6%
      Selling, general and administrative                14.4%            18.4%           15.6%            19.2%            16.2%
      Operating income                                    9.9%             6.7%           18.2%            20.3%            26.6%
      Net income                                          4.5%             2.8%            9.7%            11.1%            14.6%

Financial Position (at December 31):

      Working capital                                  $15,731          $16,775         $28,274          $24,770          $19,080
      Total assets                                     117,034          113,128         111,935          111,853          109,557
      Long-term debt, including current portion         20,000           20,000          20,000           20,000           20,000
      Total stockholders' equity                        80,254           77,283          78,826           75,481           69,777
</TABLE>


                                       16

<PAGE>

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

OVERVIEW - BUSINESS CONDITIONS

     Aldila, Inc. and subsidiaries (the "Company") is principally engaged in 
the business of designing, manufacturing and marketing graphite (carbon fiber 
based composite) golf club shafts, with approximately 85% of its net sales 
resulting from sales to golf club manufacturers for inclusion in their clubs. 
As a result, the Company's operating results are substantially dependent not 
only on demand by its customers for the Company's shafts, but also on demand 
by consumers for clubs including graphite shafts such as the Company's.

     In 1998, the Company began production of carbon fiber at its new 
facility in Evanston, Wyoming. The Company intends to use the output of this 
facility to satisfy a significant portion of its internal demand for carbon 
fiber in the manufacturing of golf club shafts. It also is producing at this 
new facility carbon fiber in excess of what it will be able to use in the 
manufacturing of golf club shafts. The Company intends to sell such excess, 
in some cases in the form of graphite prepreg manufactured using its existing 
facility in Poway, California, as well as chopped carbon fiber to 
manufacturers of other carbon fiber-based products. The Company has not yet 
realized significant revenues from the sale of carbon fiber or graphite 
prepreg to third parties through the end of 1998. Management of the Company 
believes that the ability to manufacture carbon fiber will ultimately enable 
the Company to diversify its sales and reduce its dependence on the overall 
golf club market, while continuing to leverage the Company's existing 
composite materials expertise. The new facility underwent a "shakedown" 
period in 1998 and therefore did not operate at full capability during the 
year. Management does not expect to operate the plant at full capacity in 
1999 due to the weak demand for carbon fiber. The full benefit of this 
facility to the Company is not expected to be realized until the demand for 
the Company's carbon fiber increases which will allow the Company to produce 
at increased volume levels resulting in lower production costs.

     Historically, graphite shafts have principally been offered by 
manufacturers of higher priced, premium golf clubs, and the Company's sales 
have been predominantly of premium graphite shafts. However, in recent years 
the Company has realized substantial sales growth in the value priced segment 
of the graphite shaft market. The Company now competes aggressively with 
primarily United States based shaft manufacturers for premium graphite shafts 
and also against primarily foreign based shaft manufacturers for lower priced 
value shaft sales. The Company continues to maintain a broad customer base in 
the premium shaft market segment. While the Company's market share in the 
value segment is not as great as the premium segment, the Company has 
advanced rapidly in securing new customers in this segment in recent years. 
Presently, there exists substantial excess graphite shaft manufacturing 
capacity both in the United States and in other countries. This has had the 
effect, and is expected by management to continue to have the effect for at 
least the next several years, of decreasing the selling prices of the 
Company's shafts. Although the Company's gross profit margin is being 
adversely affected by the reduction in selling prices, the adverse effects on 
gross margin should be mitigated to some extent by efforts being taken by the 
Company to control costs, including obtaining lower prices for its raw 
materials, manufacturing its own graphite prepreg and increasing the 
percentage of its shafts being manufactured in countries with lower labor and 
overhead costs. In order to increase its capacity to manufacture shafts in a 
lower cost environment, the Company opened a second shaft manufacturing 
facility in Zhuhai, China during the first quarter of 1999.

     In recent years, the Company's results of operations have been 
materially affected on several occasions by dramatic year-to-year changes in 
sales to an individual golf club manufacturer customer. Such changes can 
result either from decisions by the customer to increase or decrease shaft 
purchases from an alternative supplier or from the traditional volatility in 
consumer demand for specific clubs. The Company believes that this volatility 
is likely to continue in the future, particularly as club manufacturers seek 
to gain competitive advantages through an increased rate of technological 
innovation in club design. The Company's results will benefit whenever it has 
an opportunity to supply shafts for the latest "hot" club and will be 
adversely affected whenever sales of clubs containing Aldila shafts drop 
dramatically. In particular, in recent years, a significant portion of the 
Company's sales has tended to be concentrated in one or two customers, 
thereby making the Company's results of operations dependent to a large 
extent on continued sales to those customers. In 1998, sales to Callaway Golf 
Company and Taylor Made Golf represented 26% and 15%, respectively, of the 
Company's total net sales. The Company anticipates that its sales, both in 
dollars and as a percentage of total sales to these two customers will 
decline significantly in 1999 as compared to 1998. If these sales are not 
replaced with sales to other shaft customers then such decrease could have an 
adverse effect on the Company's business and operating results. The Company 
believes that while it will often not be possible to predict, with any 

                                       17
<PAGE>

certainty, shifts in demand for particular clubs, the Company's broad range 
of club manufacturer customers should reduce in some cases the extent of the 
impact on the Company's financial results.

RESULTS OF OPERATIONS

     The following table sets forth operating results expressed as a 
percentage of net sales for the years indicated:

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                          --------------------------------------------------
                                                              1998              1997              1996
                                                          --------------------------------------------------
<S>                                                       <C>               <C>               <C>
Net sales                                                     100.0%            100.0%            100.0%

Cost of sales                                                  71.5              69.6              63.8
                                                          -------------     -------------     --------------
         Gross profit                                          28.5              30.4              36.2
                                                          -------------     -------------     --------------
Selling, general and administrative                            14.4              18.4              15.6

Amortization of goodwill                                        2.3               2.6               2.4

Plant consolidation                                             1.9               2.7
                                                          -------------     -------------     --------------
         Operating income                                       9.9               6.7              18.2
                                                          -------------     -------------     --------------
Other:

         Interest expense                                       2.0               1.9               2.2

         Other (income), net                                   (0.3)             (0.8)             (1.2)
                                                          -------------     -------------     --------------
Income before income taxes                                      8.2               5.6              17.2
Provision for income taxes                                      3.7               2.8               7.5
                                                          -------------     -------------     --------------
Net income                                                      4.5%              2.8%              9.7%
                                                          -------------     -------------     --------------
                                                          -------------     -------------     --------------

</TABLE>

1998 COMPARED TO 1997

     NET SALES. Net sales increased $6.9 million, or 12.3%, to $62.5 million 
for 1998 from $55.6 million for the prior year. The increase in net sales was 
attributable to increased shaft unit sales to the Company's club manufacturer 
customers as well as a $1.5 million increase in sales of other carbon fiber 
products in 1998 as compared to 1997. Shaft unit sales increased 22% in 1998 
as compared to 1997, which was offset by a 12% decrease in the average 
selling price of shafts sold, as a result of a change in product mix to lower 
priced value shafts.

     Based on the overall weak demand for golf clubs experienced in the 
fourth quarer of 1998 and forecast for at least the first half of 1999, the 
Company anticipates its net sales could decline between 25% to 45% in the 
first half of 1999 versus 1998.

                                       18
<PAGE>

     GROSS PROFIT. Gross profit increased $0.9 million, or 5.4%, to $17.8 
million in 1998 from $16.9 million in 1997 principally as a result of the 
increase in net sales. Gross profit was negatively impacted in 1998 by $1.6 
million in charges against cost of sales related to production ramp-up in the 
new facility in Evanston, Wyoming ($0.7 million) and inventory markdowns on 
carbon fiber recorded in the fourth quarter of 1998 ($0.9 million). Including 
these charges, the Company's gross profit margin decreased to 28.5% in 1998 
compared to 30.4% in 1997. Before considering these charges, gross profit 
margin in 1998 increased by 0.7% over the 1997 gross profit margin to 31.1%.

     The Company anticipates its gross profit margin will be negatively 
impacted in 1999 by the anticipated lower shaft sales volumes forecast for 
the Company and also as the early production quantities of Evanston, Wyoming 
produced carbon fiber is relieved from inventories to cost of sales in the 
form of graphite shaft sales containing carbon fiber produced at relatively 
higher production costs.

     OPERATING INCOME. Operating income increased $2.5 million, or 66.2%, to 
$6.2 million in 1998 from $3.7 million in 1997 and increased as a percentage 
of net sales to 9.9% in 1998 compared to 6.7% in 1997. Selling, general and 
administrative expense decreased as a percentage of net sales to 14.4% in 
1998 as compared to 18.4% in 1997 primarily as a result of lower advertising, 
promotional and other administrative expenses in 1998 compared to 1997.

     The Company has reflected plant consolidation charges in 1998 ($1.2 
million) and 1997 ($1.5 million) in connection with the consolidation of its 
domestic golf shaft manufacturing operations in Rancho Bernardo, California 
into its facility in Poway, California. See - "Notes to Consolidated 
Financial Statements", Note 8.

     INTEREST EXPENSE. Interest expense was $1.3 million in 1998 and $1.0 
million in 1997. A total of $20.0 million in long term borrowings remained 
outstanding during each period. In 1997, $0.2 million of interest was 
capitalized during the construction period for the Company's new carbon fiber 
manufacturing facility. The weighted average interest rate on borrowings was 
6.13% in 1998 and 1997

     INCOME TAXES. The Company's effective tax rate in 1998 was 45.1% as 
compared to 50.2% in 1997. The decrease resulted primarily from the increase 
in profit before tax with constant non-deductible amortization of goodwill in 
each year.

1997 COMPARED TO 1996

     NET SALES. Net sales decreased $2.8 million, or 4.7%, to $55.6 million 
for 1997 from $58.4 million for the prior year. Unit sales increased 8% in 
1997 as compared to 1996, which was offset by a 11.9% decrease in the average 
selling price of shafts sold. The average selling price for shafts sold 
decreased in 1997 as a result of a change in product mix to lower priced 
value shafts as well as heightened competition for premium golf shafts.

     GROSS PROFIT. Gross profit decreased $4.3 million, or 20.1% to $16.9 
million in 1997 from $21.1 million in 1996 primarily as a result of the lower 
average selling prices for shafts sold and increases in raw material costs. 
The Company's gross profit margin deceased to 30.4% in 1997 from 36.2% in 
1996 as a result of the factors noted above.

     OPERATING INCOME. Operating income decreased $6.9 million, or 65.1%, to 
$3.7 million in 1997 from $10.6 in 1996 and decreased as a percentage of net 
sales to 6.7% in 1997 compared to 18.2% in 1996, primarily as a result of the 
lower gross profit and a $1.5 million plant consolidation charge recorded in 
the fourth quarter of 1997. The Company plans to consolidate its domestic 
golf shaft manufacturing operations located in Rancho Bernardo, California 
into its facility in Poway, California. The $1.5 million charge reflects 
$900,000 for write-downs of plant and equipment, $450,000 for estimated 
losses on the Rancho Bernardo facility lease, and $150,000 of other 
associated consolidation costs. See - "Notes to Consolidated Financial 
Statements", Note 8.

                                       19
<PAGE>

     Selling, general and administrative expense increased to $10.3 million 
(or 18.4% of net sales) in 1997 from $9.1 million (or 15.6% of net sales) in 
1996 primarily as a result of increased administrative expenses in 1997 as 
compared to 1996 and as a result of approximately $0.6 million in start-up 
costs recorded in the fourth quarter of 1997 related to the Company's new 
carbon fiber manufacturing facility.

     INTEREST EXPENSE. Interest expense was $1.0 million in 1997 and $1.3 
million in 1996. A total of $20.0 million in long term borrowings remained 
outstanding during each period, but in 1997 $0.2 million of interest was 
capitalized during the construction period for the Company's new carbon fiber 
manufacturing facility. The weighted average interest rate on borrowings was 
6.13% in 1997 and 1996 .

     INCOME TAXES. The Company's effective tax rate in 1997 was 50.2% as 
compared to 43.6% in 1996. The increase resulted primarily from the decrease 
in profit before tax with constant non-deductble amortization of goodwill in 
each year.

LIQUIDITY AND CAPITAL RESOURCES

     Since November 1993, the only indebtedness of the Company has been $20.0 
million in 6.13% senior notes due 2001. Generally, the Company has not 
required borrowings to finance its operations or provide working capital but 
in 1999 the Company will require additional borrowings to support its working 
capital needs on a short-term basis. The Company's $20.0 million in 6.13% 
senior notes require semi-annual principal payments of $4.0 million beginning 
September 30,1999 through September 30, 2001. The Company has in place a $5.0 
million line of credit facility from a financial institution which is secured 
by substantially all the assets of the Company. This line of credit facility, 
which was initially established in March of 1998, was amended in March of 
1999 and has a maturity date of August 30, 1999. The Company did not take 
advances against the line of credit in 1998, although it did so the first 
quarter of 1999. Borrowings under the line of credit bear interest, at the 
election of the Company, at the bank reference rate (7.75% at December 31, 
1998) plus 0.5% or at the LIBOR rate plus 2.0%. The line of credit requires 
the maintenance of certain financial ratios. As of December 31, 1998, the 
Company was in compliance with all covenants under the amended line of credit 
agreement.

     Cash (including cash equivalents) provided by operating activities in 
1998 was $4.6 million compared to $1.2 in 1997. This increase resulted 
principally from the increase in net income and decrease in cash used for 
working capital items in 1998 as compared to 1997. The Company used $5.9 
million for capital expenditures during 1998, primarily related to the 
completion of construction of a new facility for the manufacture of carbon 
fiber and for the new shaft manufacturing facility in China. Other than 
maintenance capital expenditures in the ordinary course of business (which 
the Company does not expect to be significant), the only planned capital 
expenditures over the next twelve months are in connection with the 
completion of the new China shaft facility. Management anticipates capital 
expenditures over the next 12 months to approximate $1.5 million.

     The Company may from time to time consider the acquisition of businesses 
complementary to the Company's business. The Company could require additional 
debt financing if it were to engage in a material acquisition in the future.

SEASONALITY

     Because the Company's customers have historically built inventory in 
anticipation of purchases by golfers in the spring and summer, the principal 
selling season for golf equipment, the Company's operating results have been 
affected by seasonal demand for golf clubs, which has generally resulted in 
highest sales occurring in the second quarter.

                                       20
<PAGE>

     The Company experienced a substantial shaft unit volume increase in 1998 
over the previous year which followed a seasonal pattern where sales volume 
peaked in the second quarter of the fiscal year. However, based on the 
overall weak demand for golf clubs experienced in the fourth quarter of 1998 
and forecast for at least the first half of 1999, the Company anticipates its 
net sales could decline between 25% to 45% in the first half of 1999 versus 
1998 and accordingly, does not anticipate normal seasonal sales trends in 
1999.

     YEAR 2000. The Company recognizes the need to ensure its operations will 
not be adversely impacted by the inability of the Company's information 
systems and the information systems of its major customers and suppliers to 
process data having dates on or after January 1, 2000 (the "Year 2000" 
issues).

     The Company has evaluated its information technology ("IT") and non-IT 
systems, including but not limited to computer hardware and software, alarm 
systems, manufacturing equipment and software, and all other mechanical 
equipment, to determine areas of exposure to potential Year 2000 issues. 
Based on this evaluation, a plan was developed and implemented to identify 
and resolve all of the internal Year 2000 issues. The Company has tested its 
critical systems and believes them to be Year 2000 compliant. However, the 
Company has not completed the testing phase for its non critical systems. The 
Company believes that it will complete its Year 2000 plan by the end of the 
second quarter 1999.

     Included in the Company's plan is the evaluation of its external Year 
2000 exposure and risks. The Company is still in the process of contacting 
its major external customers and suppliers to determine their Year 2000 
readiness and evaluate risk factors associated with them. The possibility 
exists that the Company's manufacturing operations could be affected by 
external suppliers systems that are not year 2000 compliant. Key risk areas 
identified by the Company include its energy suppliers to its facility in 
Evanston, Wyoming as well as electrical providers to the Company in Tijuana, 
Mexico and Zhuhai, China. If one of these providers is not able to provide 
the necessary requirements to the Company, there likely would not be a 
reasonable alternative available to the Company and as a result the Company's 
business could be negatively impacted.

     To date, the Company has not expended a significant amount in 
identifying and fixing Year 2000 issues and estimates it will not incur a 
significant amount for remediation of its remaining Year 2000 issues. Total 
expenditures are not expected to exceed $100,000. In addition, based on its 
efforts to date, the Company does not anticipate any significant risk of 
failure leading to material financial impact resulting from the Year 2000 
issue. Consequently, the Company does not intend to create a contingency plan.

     There can be no assurance that the Company's efforts to achieve Year 
2000 compliance will be successful or that third parties with whom the 
Company has material relationships will be Year 2000 compliant by January 1, 
2000. An interruption of the Company's ability to conduct its business due to 
a Year 2000 problem with a third party, such as those noted above, could have 
an adverse effect on the Company.

 "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT 
OF 1995

     With the exception of historical information (information relating the 
Company's financial condition and results of operations at historical dates 
or for historical periods), the matters discussed in this Management's 
Discussion and Analysis of Financial Condition and Results of Operations are 
forward-looking statements that necessarily are based on certain assumptions 
and are subject to certain risks and uncertainties. These forward-looking 
statements are based on management's expectations as of the date hereof, that 
necessarily contain certain assumptions and are subject to certain risks and 
uncertainties. The Company does not undertake any responsibilities to update 
these statements in the future. The Company's actual future performance and 
results could differ from that contained in or suggested by these forward 
looking statements as a result of the factors set forth in this Management's 
Discussion and Analysis of Financial Condition and Results of Operations, the 
Business Risks described in Item 1 of this Report of Form 10-K and elsewhere 
in the Company's filings with the Securities and Exchange Commission.

                                       21
<PAGE>

ITEM 7a.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company's only indebtedness as of December 31, 1998 was related to 
its fixed rate financing. The Company anticipates that it will require 
advances against the line of credit in 1999 to meet short-term working 
capital requirements, which are at variable rates. The Company believes that 
its exposure to market risk relating to interest rate risk is not material. 
The Company is exposed to foreign exchange risk to the extent of adverse 
fluctuations in the Mexican peso and the Chinese renminbi. Based on 
historical movements of these currencies, the Company does not believe that 
reasonably possible near-term changes in these currencies will have a 
material adverse effect on the Company's financial position or results of 
operations. The Company believes that its business operations are not exposed 
to market risk relating to commodity price risk or equity price risk.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required as to this Item is incorporated by reference 
from the consolidated financial statements and supplementary data listed in 
Item 14 of Part IV of this report.

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

     There is no information required to be submitted by the Company under 
this Item.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required as to this Item is incorporated by reference 
from the section headed "Election of Directors" in the Company's Proxy 
Statement for the 1999 Annual Meeting of Stockholders for the year ended 
December 31, 1998, which will be filed with the Commission within 120 days of 
the end of the fiscal year covered by this report ("1999 Proxy Statement").

ITEM 11.  EXECUTIVE COMPENSATION

     The information required as to this Item is incorporated herein by 
reference from the data under the caption "Executive Compensation" in the 
1999 Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required as to this Item is incorporated herein by 
reference from the data under the caption "Security Ownership of Certain 
Beneficial Owners and Management" in the 1999 Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     There is no information required to be submitted by the Company under 
this Item.

                                       22
<PAGE>

                                    PART IV

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

(a) Documents included as part of this report:

    1.    The consolidated financial statements for the Registrant are 
          included in this report.

                 Consolidated Balance Sheets at
                        December 31, 1998 and 1997;

                 Consolidated Statements of Income for
                        the years ended December 31,
                        1998, 1997 and 1996;

                 Consolidated Statements of Stockholders' Equity
                        for the years ended December 31, 1998,
                        1997 and 1996;

                 Consolidated Statements of Cash Flows
                        for the years ended December 31,
                        1998, 1997 and 1996;

                 Notes to Consolidated Financial Statements

                 Independent Auditors' Report.

2.  All financial statement schedules have been omitted because they are not
    required or the information required to be set forth therein is included in
    the consolidated financial statements or the notes thereto.

3.  See the Index to Exhibits on page 39 of this Form 10-K. Management
    contracts or compensatory plans or arrangements required to be filed as
    exhibits to this report are identified on the Index to Exhibits by an
    asterisk.

(b) Reports on Form 8-K:

    No reports on Form 8-K were filed during the quarter ended December 31, 
1998.

                                       23
<PAGE>

                                              ALDILA, INC. AND SUBSIDIARIES
                                               CONSOLIDATED BALANCE SHEETS

                                            (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,          DECEMBER 31,
                                                                                         1998                  1997
                                                                                  -------------------   -------------------
<S>                                                                                <C>                   <C>
ASSETS

CURRENT ASSETS: 
          Cash and cash equivalents                                                           $1,972                $3,046
          Accounts receivable                                                                  3,421                 4,640
          Income taxes receivable                                                                  -                    14
          Inventories                                                                         17,326                13,186
          Deferred tax assets                                                                  5,126                 2,902
          Prepaid expenses and other current assets                                            1,006                   734
                                                                                  -------------------   -------------------
               Total current assets                                                           28,851                24,522

PROPERTY, PLANT AND EQUIPMENT                                                                 27,649                26,170

TRADEMARKS AND PATENTS, less accumulated amortization
           of $3,070 and $2,634                                                               14,268                14,704

GOODWILL, less accumulated amortization of $9,862 and $8,435                                  46,198                47,625

DEFERRED FINANCING FEES, less accumulated amortization of
          $198 and $159                                                                           68                   107
                                                                                  -------------------   -------------------

TOTAL ASSETS                                                                                $117,034              $113,128
                                                                                  -------------------   -------------------
                                                                                  -------------------   -------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

          Accounts payable                                                                    $3,658                $4,051
          Accrued expenses                                                                     3,897                 3,696
          Income taxes payable                                                                 1,565                     -
          Long-term debt, current portion                                                      4,000                     -
                                                                                  -------------------   -------------------
               Total current liabilities                                                      13,120                 7,747

LONG-TERM LIABILITIES:

          Long-term debt                                                                      16,000                20,000
          Deferred tax liabilities                                                             7,143                 7,487
          Deferred rent liabilities                                                              517                   611
                                                                                 -------------------   -------------------
               Total liabilities                                                              36,780                35,845
                                                                                  -------------------   -------------------

COMMITMENTS AND CONTINGENCIES ( Notes 10 and 12 )

STOCKHOLDERS' EQUITY:

          Preferred stock, $.01 par value; authorized 5,000,000 shares;
               no shares issued
          Common stock, $.01 par value; authorized 30,000,000 shares;
               issued and outstanding 15,462,204 and 15,428,871 shares                           155                   154
          Additional paid-in capital                                                          42,627                42,456
          Retained earnings                                                                   37,472                34,673
                                                                                  -------------------   -------------------
               Total stockholders' equity                                                     80,254                77,283
                                                                                  -------------------   -------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                  $117,034              $113,128
                                                                                  -------------------   -------------------
                                                                                  -------------------   -------------------
</TABLE>

                      See notes to consolidated financial statements.


                                       24
<PAGE>

                                         ALDILA, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF INCOME

                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                    YEAR ENDED
                                                                                   DECEMBER 31,
                                                                  ----------------------------------------------
                                                                      1998            1997            1996
                                                                  -------------   -------------   --------------
<S>                                                                 <C>             <C>              <C>
NET SALES                                                              $62,487         $55,636          $58,394
COST OF SALES                                                           44,689          38,742           37,245
                                                                  -------------   -------------   --------------
          Gross profit                                                  17,798          16,894           21,149
                                                                  -------------   -------------   --------------

SELLING, GENERAL AND ADMINISTRATIVE                                      9,005          10,255            9,112
AMORTIZATION OF GOODWILL                                                 1,427           1,428            1,416
PLANT CONSOLIDATION                                                      1,200           1,500                -
                                                                  -------------   -------------   --------------
          Operating income                                               6,166           3,711           10,621
                                                                  -------------   -------------   --------------

OTHER:

          Interest expense                                               1,285           1,040            1,266
          Other (income), net                                             (218)           (418)            (727)
                                                                  -------------   -------------   --------------

INCOME BEFORE INCOME TAXES                                               5,099           3,089           10,082
PROVISION FOR INCOME TAXES                                               2,300           1,550            4,400
                                                                  -------------   -------------   --------------

NET INCOME                                                              $2,799          $1,539           $5,682
                                                                  -------------   -------------   --------------
                                                                  -------------   -------------   --------------

NET INCOME PER COMMON SHARE-BASIC                                        $0.18           $0.10            $0.35
                                                                  -------------   -------------   --------------
                                                                  -------------   -------------   --------------

NET INCOME PER COMMON SHARE,
          ASSUMING DILUTION                                              $0.18           $0.10            $0.35
                                                                  -------------   -------------   --------------
                                                                  -------------   -------------   --------------

WEIGHTED AVERAGE NUMBER OF
         COMMON SHARES OUTSTANDING                                      15,452          15,625           16,411
                                                                  -------------   -------------   --------------
                                                                  -------------   -------------   --------------

WEIGHTED AVERAGE NUMBER OF
         COMMON AND COMMON EQUIVALENT
         SHARES                                                         15,519          15,738           16,434
                                                                  -------------   -------------   --------------
                                                                  -------------   -------------   --------------
</TABLE>


               See notes to consolidated financial statements.


                                       25
<PAGE>

                         ALDILA, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                              Common Stock            Additional
                                                   -------------------------------     Paid-in        Retained
                                                          Shares          Amount       Capital        Earnings          Total
                                                   ------------------------------- --------------  --------------  ---------------
<S>                                                     <C>              <C>           <C>           <C>               <C> 
Balance at January 1, 1996                                  16,574            $166        $47,863         $27,452          $75,481
Repurchases of common stock                                   (563)             (6)        (2,331)                          (2,337)

Net income                                                                                                  5,682            5,682
                                                   --------------- --------------- --------------  --------------  ---------------

Balance at Deccember 31, 1996                               16,011             160         45,532          33,134           78,826
Repurchases of common stock                                   (600)             (6)        (3,159)                          (3,165)
Common stock issued upon stock option exercises,
     including income tax benefits of $12                       18                             83                               83
 
Net income                                                                                                  1,539            1,539
                                                   --------------- --------------- --------------  --------------  ---------------

Balance at December 31, 1997                                15,429             154         42,456          34,673           77,283
Common stock issued upon stock option exercises,
     including income tax benefits of $16                       33               1            171                              172

Net income                                                                                                  2,799            2,799
                                                   --------------- --------------- --------------  --------------  ---------------

Balance at December 31, 1998                                15,462            $155        $42,627         $37,472          $80,254
                                                   --------------- --------------- --------------  --------------  ---------------
                                                   --------------- --------------- --------------  --------------  ---------------
</TABLE>


                    See notes to consolidated financial statements.


                                       26

<PAGE>

                         ALDILA, INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                  YEAR ENDED
                                                                                                 DECEMBER 31,
                                                                                -----------------------------------------------
                                                                                   1998             1997              1996
                                                                                ------------     ------------     -------------
<S>                                                                             <C>              <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

         Net income                                                                  $2,799           $1,539            $5,682
         Adjustments to reconcile net income to net cash
           provided by operating activities:
               Depreciation and amortization                                          5,996            5,373             4,931
               Loss on disposal of fixed assets                                         258                -                 -
               Changes in assets and liabilities:
                      Accounts receivable                                             1,219           (2,180)              708
                      Inventories                                                    (4,140)          (5,377)           (1,735)
                      Deferred tax assets                                            (2,224)            (601)              507
                      Prepaid expenses and other current assets                        (272)            (266)              274
                      Accounts payable                                                 (393)           1,989            (2,168)
                      Accrued expenses                                                  201            1,419              (948)
                      Income taxes payable/receivable                                 1,579             (115)              189
                      Deferred tax liabilities                                         (344)            (419)             (134)
                      Deferred rent liabilities                                         (94)            (152)             (114)
                                                                                ------------     ------------     -------------
                           Net cash provided by operating activities                  4,585            1,210             7,192
                                                                                ------------     ------------     -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
         Purchase of property and equipment, net                                     (5,886)         (14,791)           (4,407)
         Other                                                                           55               33              (117)
                                                                                ------------     ------------     -------------
                           Net cash used for investing activities                    (5,831)         (14,758)           (4,524)
                                                                                ------------     ------------     -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
        Proceeds from issuance of common stock                                          156               71                 -
        Repurchase of common stock                                                        -           (3,165)           (2,337)
        Tax benefit from exercise of stock options                                       16               12                 -
                                                                                ------------     ------------     -------------
                           Net cash provided by (used for) financing activities         172           (3,082)           (2,337)
                                                                                ------------     ------------     -------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                 (1,074)         (16,630)              331
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                          3,046           19,676            19,345
                                                                                ------------     ------------     -------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                               $1,972           $3,046           $19,676
                                                                                ------------     ------------     -------------
                                                                                ------------     ------------     -------------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
        Cash paid during the year for:
              Interest                                                               $1,246           $1,226            $1,226
              Income taxes                                                           $3,273           $2,674            $3,841

</TABLE>

                       See notes to consolidated financial statements.

                                       27
<PAGE>

                          ALDILA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     THE COMPANY - Aldila, Inc. (a Delaware Corporation) (The "Company") 
designs, manufacturers and markets graphite golf club shafts for sale 
principally in the United States.

     PRINCIPLES OF CONSOLIDATION - The consolidated financial statements of 
the Company include the accounts of the Company and its wholly-owned 
subsidiaries, Aldila Materials Technology Corporation, Aldila Golf, and 
Aldila Golf's subsidiaries, Aldila de Mexico, Aldila Graphite Products 
(Zhuhai) Company Ltd. and Aldila Foreign Sales Corporation. All intercompany 
transactions and balances have been eliminated in consolidation.

     USE OF ESTIMATES - The preparation of financial statements in conformity 
with generally accepted accounting principles requires management to make 
estimates and assumptions. The recorded amounts of assets, liabilities, 
revenues and expenses are affected by such estimates and assumptions. Actual 
results could differ from estimates.

     REVENUE RECOGNITION - The Company recognizes revenues as of the date 
merchandise is shipped to its customers.

     CASH EQUIVALENTS - The Company's investment policy is to invest its 
excess cash in corporate debt, tax-exempt and government securities, bank 
related instruments and money market accounts. The Company considers all 
highly liquid investments purchased with an original maturity of three months 
or less to be cash equivalents. The Company has not historically experienced 
losses on such investments.

     The fair value of short-term financial instruments, including cash and 
cash equivalents, trade accounts receivable and payable and certain accrued 
expenses approximate their carrying amounts in the financial statements due 
to the short maturity of such instruments.

     ACCOUNTS RECEIVABLE - The Company sells graphite golf club shafts 
primarily to golf club manufacturers on credit terms. Historically, credit 
losses have been minimal in relation to the credit extended.

     INVENTORIES - Inventories are stated at the lower of first-in, first-out 
(FIFO) cost or market.

     PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. 
Repairs and maintenance are charged to expense as incurred. The Company 
depreciates its property and equipment using the straight-line method over 
the estimated useful lives of the assets, as follows:

<TABLE>
<CAPTION>
                                                           Years
                                                           -----
             <S>                                           <C>
             Building                                         39

             Machinery and equipment                        5-10

             Office furniture and equipment                 3-10

</TABLE>

     Leasehold improvements are amortized over the shorter of the asset life 
or the remaining term of the related lease.

     TRADEMARKS AND PATENTS - Trademarks and patents are being amortized on a 
straight-line basis over 40 years and 17 years, respectively. Amortization 
expense was $435,000 in each of 1998, 1997 and 1996.

                                       28
<PAGE>

     GOODWILL - Goodwill represents the excess of cost over fair value of net 
assets acquired and is being amortized over 40 years on a straight-line basis.

     EVALUATION OF TRADEMARKS, PATENTS AND GOODWILL - SFAS 121, "Accounting 
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be 
Disposed of" requires that impairment losses be recognized when the carrying 
value of an asset exceeds its fair value. The Company's policy is to 
evaluate, at each balance sheet date, the appropriateness of the carrying 
values of the unamortized balances of trademarks, patents and goodwill on the 
basis of estimated future cash flows and other factors. If such evaluation 
were to indicate a material impairment of these intangible assets, such 
impairment would be recognized by a write down of the applicable asset to its 
estimated fair value.

     DEFERRED FINANCING COSTS - Costs associated with the issuance of debt 
are amortized over the life of the related debt using the interest method. 
Such amortization is included in interest expense.

     NET INCOME PER COMMON SHARE - In December 1997, the Company adopted the 
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128 
"Earnings Per Share", which requires the presentation of net income per 
common share - basic and net income per common share assuming dilution 
("EPS") amounts on the face of the income statement. Net income per common 
share - basic is calculated based upon the weighted average number of shares 
outstanding during the year, while diluted EPS also gives effect to all 
potential dilutive common shares outstanding during each year such as 
options, warrants and contingently issueable shares. The EPS data for 1996 
has been restated to conform to the requirements of SFAS No. 128.

     Net income per common share, assuming dilution includes 67,000, 113,000 
and 22,000 dilutive equivalent shares from outstanding stock options for 
1998, 1997 and 1996, respectively, which are not included in the calculation 
of net income per common share - basic. Options to purchase 1,230,534 shares 
of common stock at prices ranging from $4.94 to $16.38 per share were not 
included in the computation of diluted EPS at December 31, 1998 because the 
effect of such options would be anti-dilutive. Such options expire at various 
dates through May of 2008.

     ACCOUNTING FOR STOCK BASED COMPENSATION - SFAS No. 123, "Accounting for 
Stock-Based Compensation," encourages, but does not require companies to 
record compensation cost for stock-based employee compensation plans at fair 
value. The Company has chosen to continue to account for stock-based 
compensation using the intrinsic value method prescribed in Accounting 
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," 
and related interpretations. Accordingly, compensation cost for stock options 
is measured as the excess, if any, of the quoted market price of the 
Company's stock at the date of the grant over the amount an employee must pay 
to acquire the stock.

     SEGMENT DISCLOSURES - In June 1997, the Financial Accounting Standards 
Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and 
Related Information," which revises reporting requirements and definitions 
for segments of business operations, based on management's approach to 
segment reporting. It establishes requirements to report selected segment 
information quarterly and to report entity-wide disclosures about products 
and services, major customers, and the material countries in which the entity 
holds assets and reports revenue. The Company adopted SFAS No. 131 as of 
December 31, 1998. See Note 13.

                                       29
<PAGE>

2.   ACCOUNTS RECEIVABLE

     Accounts receivable at December 31 consist of the following (in 
thousands):

<TABLE>
<CAPTION>
                                                                         1998            1997
                                                                     ------------    ------------
        <S>                                                          <C>             <C>
        Trade accounts receivable                                    $   4,821       $   5,769
        Less:  allowance for doubtful accounts                            (640)           (369)
        Less:  allowance for sales returns                                (760)           (760)
                                                                     ------------    ------------
                 Accounts Receivable                                 $   3,421       $   4,640
                                                                     ------------    ------------
                                                                     ------------    ------------

</TABLE>

3.   INVENTORIES

     Inventories at December 31 consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                           1998           1997
                                                                       -----------    -----------
                        <S>                                            <C>            <C>
                        Raw materials                                    $11,210          $7,514
                        Work-in-process                                    3,141           2,108
                        Finished goods                                     2,975           3,564
                                                                       -----------    -----------
                            Inventories                                  $17,326         $13,186
                                                                       -----------    -----------
                                                                       -----------    -----------

</TABLE>

4.   PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment at December 31 consist of the following 
(in thousands):

<TABLE>
<CAPTION>

                                                                                1998                1997
                                                                           -------------      --------------
               <S>                                                         <C>                <C>
               Land                                                              $140                 $140
               Machinery and equipment                                         22,683               14,524
               Building                                                         5,894
               Office furniture and equipment                                   1,842                1,938
               Leasehold improvements                                           8,830                7,359
               Property and equipment not yet in service                        2,518               13,088
               Other                                                              196                  167
                                                                           -------------      --------------
                                                                               42,103               37,216
               Less accumulated depreciation and
                    amortization                                              (14,454)             (11,046)
                                                                           -------------      --------------
               Property, plant and equipment                                  $27,649              $26,170
                                                                           -------------      --------------
                                                                           -------------      --------------

</TABLE>

     Depreciation and amortization expense was $4,094,000, $3,471,000 and 
$3,036,000 in 1998, 1997 and 1996, respectively. $225,000 of interest was 
capitalized in 1997.

                                       30
<PAGE>

5.   ACCRUED EXPENSES

     Accrued expenses at December 31 consist of the following (in thousands):

<TABLE>
<CAPTION>

                                                                             1998              1997
                                                                         ------------      --------------
               <S>                                                       <C>               <C>
               Payroll and employee benefits                                   $832              $871
               Plant consolidation                                            1,726             1,491
               Interest payable                                                 306               306
               Other                                                          1,033             1,028
                                                                         ------------      --------------
                        Accrued Expenses                                     $3,897            $3,696
                                                                         ------------      --------------
                                                                         ------------      --------------

</TABLE>

6.   LONG-TERM DEBT

     SENIOR NOTES -The Company has $20.0 million in principal amount of 
senior notes placed with an institutional investor on November 30, 1993. The 
notes bear interest at 6.13%, payable semi-anually on March 31 and September 
30. Semi-annual principal payments of $4.0 million will be due beginning 
September 30, 1999 through September 30, 2001. The senior notes contain 
certain restrictions, including limitations on additional borrowings, the 
payment of dividends and capital stock repurchases. Under the most 
restrictive provision of the note agreement, approximately $13.7 million of 
retained earnings is unrestricted and available for such borrowings and 
expenditures. The senior notes also require the maintenance of certain 
financial ratios. As of December 31, 1998, the Company was in compliance with 
all covenants under the senior notes. None of the restrictions contained in 
the senior notes are expected to have a significant effect on the ability of 
the Company to operate. The fair value of the fixed rate senior notes 
approximates their carrying amount based on the estimated current incremental 
borrowing rates for similar obligations with similar terms.

     LINE OF CREDIT - The Company has in place a $5.0 million line of credit 
facility from a financial institution which is secured by substantially all 
of the assets of the Company. This line of credit facility, which was 
initially established in March of 1998, was amended in March of 1999 and has 
a maturity date of August 30, 1999. The Company did not take advances against 
the line of credit in 1998. Borrowings under the line of credit bear 
interest, at the election of the Company, at the bank reference rate (7.75% 
at December 31, 1998) plus 0.5% or at the LIBOR rate plus 2.0%. The line of 
credit requires the maintenance of certain financial ratios. As of December 
31, 1998, the Company was in compliance with all covenants under the amended 
line of credit agreement.

7.   STOCKHOLDERS' EQUITY

     On October 26, 1995, the Board of Directors of the Company authorized 
the repurchase of up to 2.5 million shares of the Company's common stock. The 
Company intends to repurchase shares from time to time in the market at then 
prevailing prices, depending on market and general economic conditions. The 
Company repurchased 600,000 shares at an average price of $5.28 per share in 
1997 and approximately 563,000 shares at an average price of $4.15 per share 
in 1996.

                                       31
<PAGE>

8.   PLANT CONSOLIDATION

     In November of 1997, the Company announced its plans to consolidate its 
United States graphite golf shaft manufacturing facilities by integrating its 
operations in Rancho Bernardo, California with its operations in Poway, 
California. In connection with this decision, a charge in the amount of 
$1,500,000 (after tax $900,000 or $0.06 per share) was recorded in the fourth 
quarter ended December 31, 1997. The charge reflected $900,000 of non-cash 
write-downs for plant and equipment, $450,000 for the estimated future losses 
on the Rancho Bernardo facility lease and $150,000 for other associated 
consolidation costs.

     In the fourth quarter ended December 31, 1998, the Company recorded an 
additional plant consolidation charge in the amount of $1,200,000 (after tax 
$720,000 or $0.05 per share) for estimated future losses on the Rancho 
Bernardo facility lease in excess of the provision established in the fourth 
quarter of 1997. The total plant consolidation charge of $2,700,000 
represents management's best estimate of the costs to vacate and sublease 
this facility. The Company remains obligated under an operating lease for 
this property through December 31, 2001.

9.   INCOME TAXES

     The components of the provision for income taxes are as follows (in 
thousands):

<TABLE>
<CAPTION>

                                                          1998             1997             1996
                                                      ------------     ------------    ------------
<S>                                                   <C>              <C>
Current:
         Federal                                           $4,088           $2,014           $3,095
         State                                                764              544              930
                                                      ------------     ------------    ------------
             Total                                          4,852            2,558            4,025
                                                      ------------     ------------    ------------
Deferred:
         Federal                                           (2,030)            (734)             287
         State                                               (538)            (287)              88
                                                      ------------     ------------    ------------
             Total                                         (2,568)          (1,021)             375
                                                      ------------     ------------    ------------
Tax benefit credited directly to
         additional paid-in-capital                            16               13
Provision for income taxes                                 $2,300           $1,550           $4,400
                                                      ------------     ------------    ------------
                                                      ------------     ------------    ------------

</TABLE>

     Net deferred income taxes included in current assets in the balance 
sheet at December 31, consist of the tax effects of temporary differences 
related to the following (in thousands):

<TABLE>
<CAPTION>
                                                                       1998               1997
                                                                       ----               ----
<S>                                                                    <C>              <C>
Inventories                                                            $2,712           $1,280
Accrued expenses                                                        1,098            1,047
Allowance for doubtful accounts and
      sales returns                                                       600              484
Deferred expenses                                                         520
State income taxes                                                        196               91
                                                                   ------------     ------------
Deferred tax assets - current                                          $5,126           $2,902
                                                                   ------------     ------------
                                                                   ------------     ------------

</TABLE>

                                       32
<PAGE>

     Net deferred income taxes included in long-term liabilities in the 
balance sheet at December 31 consist of the tax effects of temporary 
differences related to the following (in thousands):

<TABLE>
<CAPTION>

                                                                       1998             1997
                                                                       ----             ----
<S>                                                                <C>              <C>
Trademarks and patents                                                 $6,252           $6,454
Property and equipment                                                    413              728
Other                                                                     478              305
                                                                   ------------     ------------
Deferred tax liability - long term                                     $7,143           $7,487
                                                                   ------------     ------------
                                                                   ------------     ------------

</TABLE>

     Differences between the statutory federal income tax rate and the 
effective tax rate as a percentage of income taxes are summarized below.

<TABLE>
<CAPTION>
                                                                     1998               1997              1996
                                                                     ----               ----              ----
       <S>                                                           <C>                <C>               <C>
       Statutory rate                                                 34.0%              34.0%             35.0%
       State income taxes, net of Federal tax benefit                  2.9                7.9               6.7
       Non-deductible amortization                                     9.7               15.9               5.0
       Other items                                                    (1.5)              (7.6)             (3.1)
                                                                     -------            -------           ------
       Effective rate                                                 45.1%              50.2%             43.6%
                                                                     -------            -------           ------
                                                                     -------            -------           ------

</TABLE>

10.  STOCK OPTION PLAN

     In 1992, the Company adopted a Stock Option Plan for management. The 
Company has reserved 526,292 shares for issuance under this Plan. Options are 
granted at the fair market value of the shares at the date of grant, 
generally become fully vested three years after grant, and expire ten years 
from the date of grant.

     In May of 1994, the stockholders adopted the 1994 Stock Incentive Plan 
for employees, directors and consultants of the Company. The Company has 
reserved 3,100,000 shares for issuance under this Plan. Options are granted 
at the fair market value of the shares at the date of grant, generally become 
fully vested three years after grant, and expire ten years from the date of 
grant.

     The Company has adopted the disclosure-only provisions of Financial 
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." 
Accordingly, no compensation expense has been recognized for its stock option 
plan. Had compensation cost for the company's stock option awards been 
determined based upon the fair value at the grant date for awards from 1995, 
through 1998 and recognized on a straight-line basis over the related vesting 
period, in accordance with the provisions of SFAS No. 123, the Company's net 
income and earnings per share would have been reduced to the pro forma 
amounts indicated below:

<TABLE>
<CAPTION>

                                                               1998             1997             1996
                                                          -------------    -------------    -------------
     <S>                                                  <C>              <C>              <C>
     Net income - pro forma                                   $1,616             $864           $5,232
                  (in thousands)
     Net income per share, basic and                           $0.10            $0.05            $0.32
                  assuming dilution - pro forma

</TABLE>

                                       33
<PAGE>

     The pro forma effect on net income is not representative of the pro 
forma effect on net income in future years because it does not take into 
consideration pro forma compensation expense related to grants made prior to 
1995. The weighted average fair value of options granted under the Company's 
stock option plans during 1998, 1997 and 1996 were estimated at $3.18, $2.02 
and $1.91 respectively, on the date of grant using the Black-Scholes 
option-pricing model with the following weighted-average assumptions: 0% 
dividend yield, expected volatility of 43% in 1998 and 34% in 1997 and 1996, 
risk free rate of return of 5.7% in 1998 and 6.3% in 1997 and 1996 and 
expected lives of five years. The estimated fair value of options granted is 
subject to the assumptions made and if the assumptions changed, the estimated 
fair value amounts could be significantly different.

     A summary of the Company's fixed stock option plans as of December 31, 
1998, 1997 and 1996 and activity during the years then ended is presented 
below:

<TABLE>
<CAPTION>

                                   1998                               1997                               1996
                        -------------------------------     ------------------------------    -----------------------------
                                              Weighted                         Weighted                          Weighted
                                              Average                           Average                          Average
                                              Exercise                         Exercise                          Exercise
                             Shares            Price             Shares          Price             Shares         Price
                        ------------------ -------------    --------------- --------------    --------------- -------------
<S>                     <C>                <C>              <C>             <C>               <C>             <C>
     Outstanding at
         January 1           2,003,992         $5.56            1,193,064        $6.09             593,064        $7.55
     Granted                   480,000         $6.94            1,058,814        $4.85             610,000        $4.67
     Exercised                 (33,333)        $4.70              (17,719)       $4.00
     Terminated               (308,500)        $6.05             (230,167)       $5.21             (10,000)       $5.41
                             ----------                         ----------                       ----------       -----
     Outstanding at
         December 31         2,142,159         $5.81            2,003,992        $5.56           1,193,064        $6.09
                             ----------        -----            ----------       -----           ----------       -----
                             ----------        -----            ----------       -----           ----------       -----

</TABLE>

     The following table summarizes information about stock options 
outstanding and exercisable at December 31, 1998:

<TABLE>
<CAPTION>

                                                       Options Outstanding                    Options Exercisable
                                                ----------------------------------     ---------------------------------
                                                     Weighted
                                   Number             Average           Weighted              Number          Weighted
         Range of               Outstanding          Remaining          Average             Exercisable        Average
         Exercise             at December 31,       Contractual         Exercise          at December 31,     Exercise
          Prices                    1998            Life (Yrs.)          Price                  1998            Price
----------------------------------------------- ------------------- --------------     -------------------- -------------
<S>                         <C>                 <C>                 <C>                <C>                  <C>
           $2.00                    35,086             3.7               $2.00                 35,086            $2.00
       $4.44 - $7.06             1,979,923             8.2               $5.37                849,601            $5.07
      $12.56 - $16.38              127,150             4.6              $13.65                127,150           $13.65
                            ------------------- ------------------- --------------     -------------------- -------------
       $2.00 - $16.38            2,142,159             7.9               $5.81              1,011,837            $6.04
                            ------------------- ------------------- --------------     -------------------- -------------
                            ------------------- ------------------- --------------     -------------------- -------------
</TABLE>


     As of December 31, 1997 and 1996, 600,861 and 283,838 shares were
exercisable under the Plans at a weighted average exercise price of $7.16 and
$8.47 per share respectively.

                                       34
<PAGE>

     As of December 31, 1998, an aggregate of 1,006,787 shares remain available
for grant under the Plans. In addition, during each of 1994 and 1993, options
covering 26,314 shares were granted to two directors of the Company apart from
the Stock Option Plans. The options were granted at $14.13 and $16.38 per share,
respectively. The terms of these options are consistent with those granted under
the 1992 Stock Option Plan.

11.  EMPLOYEE BENEFIT PLAN

     In July of 1994, the Company adopted the Aldila, Inc. 401(k) Savings Plan
(the "Plan") for employees of the Company and its subsidiaries. The Plan became
effective on October 1, 1994. This defined contribution plan allows employees
who satisfy the age and service requirements of the Plan to contribute up to 19%
of pre-tax wages, limited to the maximum amount permitted under federal law. The
Company matches the first 4% of wages contributed by employees at a rate of
$0.25 for every $1.00. The Company's matching contribution vests over four years
based on years of service. The Company's contributions amounted to $53,000,
$61,000 and $54,000 in 1998, 1997 and 1996, respectively.

12.  COMMITMENTS AND CONTINGENCIES

     The Company leases building space and certain equipment under operating
leases. The Company's leases for office and manufacturing space contain rental
escalation clauses and renewal options. Rental expense for the Company was
$1,046,000, $1,404,000 and $1,270,000 for 1998, 1997 and 1996, respectively.

     As of December 31, 1998, future minimum lease payments for all operating
leases are as follows (in thousands):

<TABLE>
               <S>                                      <C>
                1999                                     $1,814
                2000                                      1,213
                2001                                      1,117
                2002                                        347
                2003                                        361
                Thereafter                                1,898
                                                          -----
                                                         $6,750
                                                          -----
                                                          -----
</TABLE>

13.  SEGMENT INFORMATION

     The Company designs and manufacturers graphite shafts for golf club
manufacturers. In doing so, the Company also manufactures carbon fiber and
prepreg materials which are utilized in the manufacture of graphite golf shafts.
In accordance with SFAS No. 131, the Company considers its business to consist
of one reportable operating segment.

     Sales to a major customer represented 26%, 32%, and 43% of net sales in
1998, 1997, and 1996, respectively. Sales to a second customer represented 15%,
22%, and 16% of net sales in 1998, 1997, and 1996, respectively.

                                       35
<PAGE>

14.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following is a summary of the quarterly results of operations for the
two years in the period ended December 31, 1998 (in thousands, except per share
data):

<TABLE>
<CAPTION>
                                                                         Quarter Ended
                                    -------------------------------------------------------------------------------------
                                         March 31,              June 30,            September 30,        December 31,
                                    -------------------     ----------------     ------------------    ------------------
<S>                                 <C>                     <C>                  <C>                   <C>
    1998:

    Net Sales                             $19,117               $21,153                 $13,609               $8,608
    Gross profit                            5,840                 5,976                   4,111                1,871
    Net income (loss)                       1,141                 1,564                     755                 (661)
    Net income (loss) per common
         share, assuming dilution           $0.07                 $0.10                   $0.05               ($0.04)
-------------------------------------------------------------------------------------------------------------------------
    1997:

    Net sales                             $14,601               $17,008                 $12,772              $11,255
    Gross profit                            4,817                 5,698                   3,934                2,445
    Net income (loss)                         933                 1,376                     791               (1,561)
    Net income (loss) per common
     share, assuming dilution               $0.06                 $0.09                   $0.05               ($0.10)
</TABLE>


                                       36
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Aldila, Inc.:

We have audited the consolidated balance sheets of Aldila, Inc. and its
subsidiaries (the "Company") as of December 31, 1998 and 1997 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1998
and 1997 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.

Deloitte & Touche LLP

San Diego, California

February 3, 1999 (March 22, 1999 as to the 
effects of the amendment to the line of credit 
described in Note 6)

                                       37
<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.

                                  ALDILA, INC.

                                  By:           /s/ Gary T. Barbera
                                       ---------------------------------------
                                                  Gary T. Barbera
                                               Chairman of the Board,
                                               Chief Executive Officer

<TABLE>
<CAPTION>
                    SIGNATURE                             TITLE                                        DATE
                    ---------                             -----                                        -----
<S>                                                <C>                                             <C>
                 /s/ Gary T. Barbera               Chief Executive Officer                         March 22, 1999
     ------------------------------------            and Director (Principal
                     Gary T. Barbera                 Executive Officer)

               /s/ Robert J. Cierzan               Vice President, Finance                         March 22, 1999
     ------------------------------------            (Principal Financial Officer
                   Robert J. Cierzan                 and Principal Accounting Officer)

                                                   Chairman Emeritus of the Board                  March   , 1999
     ------------------------------------            and Director
                  Vincent T. Gorguze     

              /s/ Peter R. Mathewson               Vice President and Director                     March 22, 1999
     ------------------------------------
                  Peter R. Mathewson

                /s/ Peter E. Bennett               Director                                        March 22, 1999
     ------------------------------------
                    Peter E. Bennett

            /s/ Marvin M. Giles, III               Director                                        March 22, 1999
     ------------------------------------
                Marvin M. Giles, III

                   /s/ John J. Henry               Director                                        March 22, 1999
     ------------------------------------
                       John J. Henry

                                                   Director                                        March   , 1999
     ------------------------------------
                Donald C. Klosterman

                /s/ Wm. Brian Little               Director                                        March 22, 1999
     ------------------------------------
                    Wm. Brian Little

                    /s/ Chapin Nolen               Director                                        March 22, 1999
     ------------------------------------
                        Chapin Nolen

                 /s/ Thomas A. Brand               Director                                        March 22, 1999
     ------------------------------------
                     Thomas A. Brand
</TABLE>

                                       38
<PAGE>

                                  EXHIBIT INDEX
<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER                  EXHIBIT                                                                     PAGE
       -------                 -------                                                                     ----
       <S>              <C>                                                                                <C>
         2.1  --        Agreement of Purchase and Sale, dated as of December 14,
                           1991, by and among Aldila Acquisition Corp., Aldila,
                           Inc. and all of the Shareholders of Aldila, Inc., as
                           amended by the First Amendment dated January 9, 1992
                           by and among Aldila Acquisition Corp., Aldila, Inc.
                           and all the Shareholders of Aldila, Inc. (Filed as
                           Exhibit 2.1 to the Company's Registration Statement
                           on Form S-1 (Registration No. 33-61560)and in-
                           corporated herein by reference).

         3.1  --        Restated Certificate of Incorporation.  (Filed as
                           Exhibit 3.1 to the Company's Registration Statement
                           on Form S-1 (Registration No. 33-70010) and in-
                           corporated herein by reference).

         3.2  --        Restated By-Laws of the Company.  (Filed as Exhibit 3.2
                           to the Company's Registration Statement on Form S-1
                           (Registration No. 33-61560) and incorporated herein
                           by reference).

         4.1  --        Specimen form of Company's Common Stock Certificate.
                           (Filed as Exhibit 4.1 to the Company's Registration
                           Statement on Form S-1 (Registration No. 33-61560)
                           and incorporated herein by reference).

         4.2  --        Note Purchase Agreement dated as of November 1, 1993,
                           with respect to the Company's 6.13% Senior Notes due
                           2001.  (Filed as Exhibit 4.2 to the Company's Report
                           on Form 10-K for the year ended December 31, 1993 and
                           incorporated herein by reference).

         4.3  --        Form of 6.13% Senior Note due 2001.  (Filed as Exhibit
                           4.3 to the Company's Report on Form 10-K for the year
                           ended December 31, 1993 and incorporated herein by
                           reference).

       *10.1  --        1992 Stock Option Plan of the Company, as amended.
                           (Filed as Exhibit 10.6 to the Company's Registration
                           Statement on Form S-1 (Registration No. 33-61560)
                           and incorporated herein by reference).

       *10.2  --        Form of Stock Option Agreement in connection with Stock
                           Option Plan. (Filed as Exhibit 10.7 to the Company's
                           Registration Statement on Form S-1 (Registration
                           No. 33-61560) and incorporated herein by reference).
</TABLE>
                                       39
<PAGE>

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER                  EXHIBIT                                                                     PAGE
       -------                 -------                                                                     ----
       <S>              <C>                                                                                <C>
       *10.3  --        Executive Bonus Plan of the Company.  (Filed as Exhibit
                           10.2 to the Company's Report on Form 10-Q for the
                           quarterly period ended September 30, 1994 and
                           incorporated herein by reference).

        10.4  --        Form of Indemnification Agreement between the Company
                           and its directors and executive officers. (Filed as
                           Exhibit 10.13 to the Company's Registration Statement
                           on Form S-1 (Registration No. 33-61560) and
                           incorporated herein by reference).

        10.5  --        Business Park Net Lease dated as of May 29, 1987,
                           between the Company and Kaiser Development Company as
                           amended by the First Amendment to Lease dated as of
                           January 12, 1992, between the Company and Bedford
                           Development Company. (Filed as Exhibit 10.15 to the
                           Company's Registration Statement on Form S-1
                           (Registration No. 33-61560) and incorporated herein
                           by reference).

        10.6  --        Lease Agreement dated as of October 15, 1990, between
                           the Company and Baja del Mar, S.A. de C.V. (Filed as
                           Exhibit 10.16 to the Company's Registration Statement
                           on Form S-1 Registration No. 33-61560) and
                           incorporated herein by reference).

        10.7  --        Lease Agreement dated as of August 30, 1993, between the
                           Company and T.M. Cobb Company.  (Filed as Exhibit
                           10.16 to the Company's Registration Statement on Form
                           S-1 (Registration No. 33-70010) and incorporated
                           herein by reference).

        10.8  --        First Amendment to Lease Agreement dated as of August
                           30, 1993, between the Company and T.M. Cobb Company.
                           (Filed as Exhibit 10.14 to the Company's Report on
                           Form 10-K for the year ended December 31, 1993 and
                           incorporated herein by reference).

        10.9  --        Lease Agreement dated as of November 30, 1993, between
                           the Company and T.M. Cobb Company.  (Filed as Exhibit
                           10.15 to the Company's Report on Form 10-K for the
                           year ended December 31, 1993 and incorporated herein
                           by reference).

       *10.10  --       Form of Stock Option Agreement, dated October 5, 1993,
                           between Marvin M. Giles, III and the Company. (Filed
                           as Exhibit 10.18 to the Company's Registration
                           Statement on Form S-1 (Registration No. 33-70010) and
                           incorporated herein by reference).
</TABLE>
                                       40
<PAGE>

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER                  EXHIBIT                                                                     PAGE
       -------                 -------                                                                     ----
       <S>              <C>                                                                                <C>
        10.11  --       1994 Stock Incentive Plan of the Company as amended
                           (filed as Exhibit A to the Company's 1996 Proxy
                           Statement dated March 28, 1996 and incorporated
                           herein by reference).

        10.12  --       Form of Stock Option Agreement in connection with the
                           1994 Stock Incentive Plan (filed as Exhibit 10.1 to
                           the Report on Form 10-Q for the quarterly period
                           ended September 30, 1994 and incorporated herein
                           by reference).

        10.13  --       Lease Agreement dated May 15, 1995 between the Company
                           and Desarrollo Industrial de Tijuana, S.A. de C.V.
                           (Filed as Exhibit 10.1 to the Company's Report on
                           Form 10-Q for the quarterly period ended June 30,
                           1995 and incorporated herein by reference).

        10.14  --       Supply Agreement commencing January 1, 1998 between
                           Courtaulds Fibres, Ltd. And Aldila Materials
                           Technology Corp. (Filed as Exhibit 10.20 to the
                           Company's Report on Form 10-K for the year ended
                           December 31, 1997 and incorporated herein by
                           reference).

        10.15  --       Loan agreement dated March 27, 1998 between Aldila, Inc.
                           and Union Bank of California, N.A. (Field as Exhibit
                           10.1 to the Company's Report on Form 10-Q for the
                           quarterly period ended March 31, 1998 and
                           incorporated herein by reference).

        10.16  --       First Amendment to Loan Agreement dated March 22, 1999 
                           between Aldila, Inc. and Union Bank of California,
                           N.A.

        11.1  --        Statement re:  Computation of Net Income per Common
                           Share

        21.1  --        Subsidiaries of the Company (Filed as Exhibit 21.1 to
                           the Company's Report on Form 10-K for the year ended
                           December 31, 1997 and incorporated herein by
                           reference.)

        23.1  --        Independent Auditors' Consent

        27.1  --        Financial Data Schedule
</TABLE>

*Indicates management contracts or compensatory plans or arrangements required
to be filed as exhibits to this Report on Form 10-K.


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