UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

(Mark One)

|ý | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2001

OR

|o | 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(State or other jurisdiction of incorporation or organization)

13-3645590(I.R.S. Employer Identification Number)12140 COMMUNITY ROAD, POWAY, CALIFORNIA 92064(Address of principal executive offices)


(858) 513-1801(Registrant's Telephone No.)

www.aldila.com

Securities Registered Pursuant to Section 12(b) of the Act:
None

Title of each class Names of each exchange on which registered
NoneSecurities 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 ý    No o

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. ý

As
of March 22, 2002, 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 $10.2 million.

As
of March 22, 2002, there were 14,843,404 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 2002 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the close of the
fiscal year.

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ALDILA, INC.        Report on Form 10-K        For the Fiscal Year Ended December 31, 2001        INDEX

|              |  |          |  |                                                                                       |  | Page
|------------- |  | -------- |  | ------------------------------------------------------------------------------------- |  | ----
|Part I        |  |          |  |                                                                                       |  |     
|              |  | Item 1.  |  | Business                                                                              |  | 3   
|              |  | Item 2.  |  | Properties                                                                            |  | 14  
|              |  | Item 3.  |  | Legal Proceedings                                                                     |  | 14  
|              |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 14  
|Part II       |  |          |  |                                                                                       |  |     
|              |  | Item 5.  |  | Market for Registrant's Common Equity and Related Stockholder Matters                 |  | 14  
|              |  | Item 6.  |  | Selected Financial Data                                                               |  | 15  
|              |  | Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 15  
|              |  | 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                                    |  | 23  
|              |  | Item 11. |  | Executive Compensation                                                                |  | 23  
|              |  | Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 23  
|              |  | Item 13. |  | Certain Relationships and Related Transactions                                        |  | 23  
|Part IV       |  |          |  |                                                                                       |  |     
|              |  | Item 14. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  | 24  
|Signatures    |  | 43      
|Exhibit Index |  | 44      

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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 demand. The Company's current golf shaft product line consists of Aldila branded products designed for custom club
makers, as well as hundreds of custom shafts developed in conjunction with its major customers. This product line is 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
1998, the Company established a manufacturing facility in Evanston, Wyoming for the production of carbon fiber. During 1998 and through the first ten months of 1999, the Company used
the material from this facility to satisfy a significant portion of its internal demand for carbon fiber in the manufacturing of golf club shafts. During 1999, the Company also produced and sold
carbon fiber from this facility to other unrelated entities for the manufacture of other carbon-based products. On October 29, 1999, SGL Carbon Fibers and Composites, Inc.
("SGL") purchased a 50% interest in the Company's carbon fiber manufacturing operation. The Company and SGL entered into an agreement to operate the facility through a limited liability
company with equal ownership interests between the joint venture partners. The Company and SGL also entered into supply agreements with the new entity, Carbon Fiber Technology LLC ("CFT"), for the
purchase of carbon fiber at cost plus an agreed upon mark-up. Profits and losses of CFT are shared equally by the partners. The Company anticipates that the carbon fiber from this facility
will primarily be consumed by the venture partners; however, any excess carbon fiber produced at this facility could be marketed for sale to unrelated third parties.

Graphite Golf Shafts

The Company was founded in San Diego, California in 1972 and was an early leader in the design and production of graphite golf shafts. 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.

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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. Graphite continues to dominate the professional and consumer woods
markets, with over 82% of new woods purchased in 2001 including graphite shafts. The acceptance of graphite shafts in irons has not achieved the same success as woods, and acceptance in irons has
declined somewhat in recent years. In 2001, approximately 22% of new irons purchased were graphite shafted.    Since many golfers consider professionals to be "opinion leaders," increased
acceptance and use of graphite shafts in irons by professionals would help broaden the overall graphite market.

Until
recently, 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. 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.

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, 2001, 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 $3 to $30.

Recently,
the Company introduced an innovative proprietary design, the Aldila "One" shaft. The Company believes that this is the first shaft design to feature multiple segments, each
with separate design characteristics, which allows for more precise performance optimization than the traditional graphite shaft design, which embodies only one set of design characteristics over its
entire length. The One shaft will be offered through distribution to the custom club market and possibly directly to consumers; it will also be included as a custom option by certain of its golf club
manufacturer customers.

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.

The
Company began the manufacture of composite hockey sticks in 2000, following several months of developmental work. The manufacture of composite hockey sticks is similar to that of
graphite golf

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shafts and uses similar raw materials. Revenues from the sale of hockey sticks were approximately 2% of net sales in 2001 and are not expected to be significant to the Company for several years.

Since
1994, the Company has manufactured prepreg material for its production of golf shafts. In 1998, the Company began selling prepreg manufactured in its Poway, California
manufacturing facility to third parties. Beginning in 1999, the Company offered for sale large bundle carbon fiber and chopped fiber from its manufacturing facility in Evanston, Wyoming. Sales of
large bundle carbon fiber continued in 1999 through October 29, 1999, the date that the Company sold a 50% interest in the carbon fiber manufacturing operation. All subsequent outside carbon
fiber revenues, if any, will be attributed to the joint venture. The Company does not anticipate outside sales of carbon fiber to be significant in 2002.

Carbon
fiber composite materials are suited for a diverse range of applications based on their distinctive combination of physical and chemical properties. See
"ManufacturingCarbon Fiber Manufacturing Process." 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 or CFT are 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, industrial products, as well as golf shafts.

Customers and Customer Relations

For fiscal year 2001, the Company had approximately 240 golf shaft customers, which included approximately 70 golf club manufacturers and more than 40
distributors, with the balance principally consisting of custom club assemblers, pro shops and repair shops. However, the majority of the Company's sales has been and may continue to be concentrated
among a relatively small number of customers. Sales to the Company's top five customers represented approximately 73%, 69% and 57% of net sales in 2001, 2000 and 1999, respectively.

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. As a result there typically are changes in the composition of the list of the Company's ten most significant customers from year to year. Due to the substantial marketplace
success of their clubs in recent periods, for the last several years the Company's two largest customers have been Callaway and TaylorMade-adidas Golf. While the Company believes its relationship with
each of these two major customers is sound, the Company is not the exclusive supplier to either Callaway or TaylorMade-adidas Golf. The Company's sales to its principal customers have varied
substantially from year to year. Sales to TaylorMade-adidas Golf represented 20%, 15% and 17% of the Company's net sales in 2001, 2000 and 1999, respectively. Sales to Callaway represented 22%, 21%
and 12% of the Company's net sales in 2001, 2000 and 1999, respectively. Sales to Ping represented 15%, 19% and 10% of the Company's net sales in 2001, 2000 and 1999, respectively. 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.

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

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education. The Company believes the physical proximity of its headquarter facilities 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 (whether as a result of diminished sales by that customer or a shaft sourced from other suppliers) 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 has very limited sales
directly to the end users of its products, the Company believes that its brand name recognition contributes to the marketability of its customers' products. In addition, Nick Price serves on the
Company's advisory staff and assists in its marketing efforts. Aldila's marketing and promotion expenditures were approximately $1.1 million, $0.8 million and $0.6 million in
2001, 2000 and 1999, respectively. The Company does not currently incur significant marketing expenses for its products other than golf shafts.

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, 2001.

Prepreg
sales and carbon fiber sales are made primarily to manufacturers of composite products. The Company has utilized its internal sales force in the marketing and sale of these
products to its customers in the past, and will continue to utilize its internal sales force for the sales of prepreg in the future.

International
sales represented 12%, 18%, and 21% of net sales for the years ended December 31, 2001, 2000 and 1999, respectively.

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 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.

Graphite
shaft designs and modifications are frequently the direct result of the combined efforts and expertise of the Company and its customers 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,

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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 composite 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. The Company's research and development
efforts recently resulted in the Aldila "One" shaft, which the Company believes to be the first shaft design featuring multiple segments, each with separate design characteristics, and which the
Company recently started marketing. 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 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, through its 50% interest in CFT, it
can also be effective in providing large bundle carbon fiber to other manufacturing applications outside of golf shafts.

The
Company has applied its carbon fiber technology on a limited basis to other products in recent years, producing hockey sticks as well as graphite tubing and other molded parts on a
special order basis.

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 its customers' orders and provide sufficient quantities on a timely basis. The Company today operates three golf shaft manufacturing facilities, one prepreg manufacturing facility (in conjunction
with one of its shaft manufacturing facilities) and through its 50% ownership interest in CFT, one carbon fiber manufacturing facility. During its 30 years of operation, the Company has
improved its manufacturing processes and believes it 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 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. The Company's shaft manufacturing facilities are located in Poway, California, Tijuana, Mexico, and Zhuhai, China, with an
increasing percentage of its shafts being manufactured outside the United States, in particular in China, in recent years.

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 at 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 at its
Evanston, Wyoming facility for consumption by its golf shaft production operation.

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Because many different forms of carbon fiber are required for golf shaft products, including some not manufactured at the CFT facility, the Company will continue to depend on outside suppliers for a
portion of its ongoing carbon fiber needs.

Prepreg Manufacturing Process.In October 1994, the Company initiated the internal production of prepreg in its Poway,
California facility. The Company believes that by producing a major portion of its 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 prepreg requirements internally. The Company is, however, dependent upon certain domestic prepreg
suppliers for types of prepreg that 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
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 prepreg operation is dependent on certain suppliers for carbon fibers, which along with epoxy resins and paper constitute the primary components in prepreg. In 2001, the
Company obtained most of its carbon fiber from CFT but also purchased carbon fiber from other carbon fiber manufacturers. The prices paid by the Company for carbon fiber decreased during 2001 due to
over capacity in the carbon fiber industry. However, management anticipates that the prices for carbon fiber will increase in the future, although it cannot predict the timing or extent of any future
price changes.

Carbon Fiber Manufacturing Process.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 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 30 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, initially for the manufacture of graphite golf shafts.

The
Company completed construction of a 50,000 square foot carbon fiber manufacturing facility in Evanston, Wyoming during the first quarter of 1998. The company sold a 50% interest in
this facility to SGL on October 29, 1999. The Company produces large bundle carbon fiber material from acrylic fiber through a series of stretching, stabilizing and carbonizing sequences in
this facility. This material is now the primary raw material for the Company's prepreg manufacturing operation to support the manufacture of graphite golf shafts, although the Company still procures
certain types of fibers from outside vendors for the manufacture of golf shafts.

The
Company in 1998 and 1999, and CFT in 2000 and 2001 purchased substantially all of its raw acrylic fibers for the carbon fiber operation from two outside vendors, Toho Carbon
Fibers, Inc. and Courtaulds Fibres, Ltd. The Company believes these two vendors will be able to provide a reliable

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source of supply for raw materials at the anticipated operating level of CFT. However, CFT will continue to pursue alternate sources of supply for this material.

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, other composites, graphite prepreg
and 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. 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, of decreasing the selling prices of the Company's shafts. Until recently, the United States market for graphite shafts was dominated by a relatively small number of United
States based shaft manufacturers which competed predominantly for the premium shaft business. However, the Company now competes against United States and foreign-based shaft manufacturers for the
premium shaft market and competes primarily against the foreign-based shaft manufacturers for the value shaft market. 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 and value shafts. 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. 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 club head 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 prepreg from its prepreg facility and carbon fiber through its 50% interest in CFT with other producers of prepreg and carbon fibers, many of which
have substantially greater research and development, managerial and financial resources than the Company. Some producers have been producing prepreg and carbon fiber for substantially longer periods
of time than the Company has, and represent significant competition to the Company. In addition, the Company's ability to compete in the sale of 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

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large bundle carbon fiber, which is the sole type of carbon fiber manufactured by CFT and the principal type used in Aldila's 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 takes all reasonable measures to ensure
that any product bearing an Aldila trademark reflects the consistency and quality associated with the Company's products and intends to continue to protect them to the fullest extent practicable. As
of December 31, 2001 the Company had approximately 46 United States and foreign registered trademarks.

Employees

As of December 31, 2001, Aldila employed 1,107 persons on a full-time basis, including eight in sales and marketing, 19 in research and
development and engineering and 1,031 in production. The balance is administrative and support staff. The number of full-time employees includes 350 persons who are employed in the
Company's Mexico facility and 517 who are employed in the Company's China facility. Because of seasonal demands, the Company hires a significant number of temporary employees. As of
December 31, 2001, the Company also employed an additional 61 temporary employees on a full-time basis. 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 timing of
customers' new product introductions has frequently mitigated the impact of seasonality in recent years.

Backlog

As of December 31, 2001, the Company had a sales backlog of approximately $9.1 million compared to approximately $12.1 million as of
December 31, 2000. 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

Customer Concentration.The Company's sales have been, and very likely will continue to be, concentrated among a small number
of customers. In 2001, sales to the Company's top five customers represented approximately 73% 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 2001, Callaway Golf accounted for 22% of net sales, TaylorMade-adidas Golf accounted for 20% of net sales and Ping 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.

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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 Golf, Ping and TaylorMade-adidas Golf, who collectively represent in excess
of 57% of the Company's net sales in 2001, each purchased from at least two other graphite shaft suppliers. In the event Callaway Golf, Ping, TaylorMade-adidas Golf 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 demand for golf equipment generally and for their specific 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. 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.

Potential Cash Flow Shortages.The Company has cash and cash equivalents totaling $266,000 as of December 31, 2001 and
a revolving credit facility from a financial institution, which allows the Company to make advances against eligible accounts receivables and inventory. Management anticipates that these sources of
funds when combined with cash flow generated from operations will be sufficient to finance its business operations.

The
Company experienced a decrease in net sales and operating income in 2001 as a result of decreased demand for golf clubs in general. The Company expects net sales for 2002 to be
comparable to 2001 and anticipates that it will generate sufficient cash flows from operations to support the Company's requirements in 2002. If the Company is not able to generate the expected cash
flows from operations, the Company could be adversely affected.

Joint Venture Operating Carbon Fiber Facility.The Company started producing carbon fiber at its Evanston, Wyoming facility
in 1998. Since October 1999, this facility has been operated by a joint venture, 50% owned by each of the Company and SGL. As a result of the operation of this facility through the joint
venture, the Company is subject to business and financial risks, such as the risks that SGL will be unable to meet its obligations to the joint venture, that there will be operational difficulties
resulting from the split ownership, raw material supply problems, changes in demand for carbon fiber based products, or that there will be differences of opinion between the joint venture partners as
to future operations leading to an inability to make decisions when required or to the making of decisions not in the best interests of both joint venture partners.

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 starting in the latter

11

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part of 1998, the cost of production of carbon fiber at the Evanston, Wyoming facility, including the price paid for the acrylic fiber used for the manufacture of carbon fiber 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 experienced in the use of carbon fiber coupled with relatively little excess capacity. The
prices paid by the Company for carbon fiber leveled in 1998 and decreased during 1999, 2000 and 2001, due to the current state of excess-capacity in the carbon fiber manufacturing industry. Management
is not able to predict the timing or extent of any future price changes for carbon fiber; however, the Company could be negatively impacted if future increases in carbon fiber prices have a negative
impact on the Company's gross margins.

The
Company also has relationships with other outside vendors for its additional carbon fiber needs through 2001 and beyond. Depending on market conditions prevailing at the time and
extent to which production at CFT 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 CFT 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 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 has an interest in only one carbon fiber manufacturing facility. Although there is currently
excess-capacity in these industries, there have been significant market shortages of both carbon fiber and graphite prepreg in the recent past and such shortages could be expected to recur in the
future.

Reliance on Carbon Fiber Manufacturing Facility.During the period in which the Company or the joint venture has operated the
Evanston, Wyoming facility, the market for carbon fiber products has been soft, which has limited the Company's ability to take full advantage of the opportunity offered by the vertical integration of
its carbon fiber raw material usage in graphite golf shafts. In the current carbon fiber market there may not be a market at attractive prices for any carbon fiber produced in excess of the needs of
the Company and its venture partner. If the facility does not produce high quality fiber at the anticipated volumes, either because of production shortfalls or limited demand for the facility's carbon
fiber, the per pound cost of the fiber produced will likely be higher due to the substantial fixed costs involved in operating a carbon fiber production facility. In addition, if the facility is not
capable of producing carbon fiber at sufficient volumes to satisfy the demands of both venture partners, the Company would be required to purchase additional fiber from third party suppliers, which is
likely to be at higher costs to the Company than fiber acquired from the joint venture.

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.

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.

12

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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 governments of Mexico or the People's Republic of China will continue the programs currently in place or that the Company will continue to be able to benefit from these 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 the United States, including political instability, other import/export
regulations 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 is produced by the CFT facility. The Company's ability to compete in the sale of graphite
prepreg and sales of carbon fiber from CFT 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 CFT. There can be no assurance, however, that these applications will develop to the extent anticipated by the Company.

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. In particular, the Company cannot provide any assurance that its new shaft
introduction, the "One" shaft, will achieve commercial success. 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.

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.

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

13

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Company will be able to retain its existing senior management personnel or to attract additional qualified personnel.

Justice Department Investigation.During 1999 the Company received a subpoena for documents from the Antitrust Division of
the U.S. Department of Justice in connection with the on-going investigation of an alleged price fixing conspiracy in the carbon fiber and graphite prepreg industries. The Department of
Justice has informed the Company that it is not currently a target of the investigation, although it has indicated that it has not cleared the Company of any involvement in the alleged conspiracy. The
Company is cooperating with the Department of Justice's investigation.

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 three separate facilities, one located in Poway, California, one located in Tijuana, Mexico and one in the Zhuhai economic development zone of the People's
Republic of China. The Company leases a 73,000 square foot facility in Poway, California for shaft manufacturing operations and graphite prepreg production. The Mexico facility is also leased and
comprises approximately 31,000 square feet. The China facility is also leased and comprises approximately 88,000 square feet. The Company also may lease warehousing space in Mexico and China when
needed. Currently, the Company leases warehousing space in Mexico and China. In addition, the Company's 50% joint venture, CFT, owns 14 acres of land in Evanston, Wyoming on which it operates a 50,000
square foot carbon fiber manufacturing plant.

Item 3. Legal Proceedings

None.

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 2001.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

COMMON STOCK PERFORMANCE

|               |  | 2001 |      | 2000
|-------------- |  | ---- | ---- | ----
|
|First Quarter  |  | $    | 2.00 |     
|Second Quarter |  | $    | 1.75 |     
|Third Quarter  |  | $    | 1.83 |     
|Fourth Quarter |  | $    | 1.27 |     

On
March 22, 2002, the closing common stock price was $.85, and there were approximately 400 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

14

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ability to pay dividends depends on the receipt of dividends or other payments from its two principal subsidiaries, Aldila Golf Corp. ("Aldila Golf") and Aldila Materials Technology Corp.

On
March 20, 2000, the Company and Nick Price Group entered into a stock option agreement. The option agreement allows Nick Price to purchase 150,000 shares of Common Stock at a
purchase price of $1.63. The shares are not currently registered under any of the Company's stock option plans. In return for the shares, the Company is receiving the services of Nick Price at a
guaranteed minimum value of $1.50 per share, or a minimum aggregate consideration of $225,000.

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)

|                                            |                                                        | 2001                    |   | 2000    |         | 1999 |         | 1998   |   | 1997    |       
|------------------------------------------- | ------------------------------------------------------ | ----------------------- | - | ------- | ------- | ---- | ------- | ------ | - | ------- | ------
|Operating Results (Year ended December 31): |                                                        |                         |   |         |         |      |         |        |   |         |       
|                                            | Net sales                                              |                         | $ | 39,561  |         | $    | 55,859  |        | $ | 45,091  |       
|                                            | Cost of sales                                          |                         |   | 33,304  |         |      | 42,257  |        |   | 37,241  |       
|                                            |                                                        |                         |   |         |         |      |         |        |   |         |       
|                                            |                                                        | Gross profit            |   |         | 6,257   |      |         | 13,602 |   |         | 7,850 
|                                            |                                                        |                         |   |         |         |      |         |        |   |         |       
|                                            | Selling, general and administrative                    |                         |   | 6,851   |         |      | 7,483   |        |   | 7,179   |       
|                                            | Impairment of goodwill                                 |                         |   | 41,932  |         |      |        |        |   |        |       
|                                            | Impairment of trademarks & patents                     |                         |   | 12,963  |         |      |        |        |   |        |       
|                                            | Amortization of goodwill                               |                         |   | 1,410   |         |      | 1,428   |        |   | 1,428   |       
|                                            | Plant consolidation                                    |                         |   | 593     |         |      | (566    | )      |   | 900     |       
|                                            |                                                        |                         |   |         |         |      |         |        |   |         |       
|                                            |                                                        | Operating income (loss) |   |         | (57,492 | )    |         | 5,257  |   |         | (1,657
|                                            |                                                        |                         |   |         |         |      |         |        |   |         |       
|                                            | Interest expense                                       |                         |   | 375     |         |      | 900     |        |   | 1,315   |       
|                                            | Other (income), net                                    |                         |   | 65      |         |      | (570    | )      |   | (379    | )     
|                                            | Equity in earnings of joint venture                    |                         |   | (231    | )       |      | (220    | )      |   | (12     | )     
|                                            |                                                        |                         |   |         |         |      |         |        |   |         |       
|                                            | Income (loss) before income taxes                      |                         |   | (57,701 | )       |      | 5,147   |        |   | (2,581  | )     
|                                            | Provision (benefit) for income taxes                   |                         |   | (6,282  | )       |      | 1,930   |        |   | (476    | )     
|                                            |                                                        |                         |   |         |         |      |         |        |   |         |       
|                                            | Net income (loss)                                      |                         | $ | (51,419 | )       | $    | 3,217   |        | $ | (2,105  | )     
|                                            |                                                        |                         |   |         |         |      |         |        |   |         |       
|                                            | Net income (loss) per common share-basic:              |                         | $ | (3.37   | )       | $    | 0.21    |        | $ | (0.14   | )     
|                                            |                                                        |                         |   |         |         |      |         |        |   |         |       
|                                            | Net income (loss) per common share, assuming dilution: |                         | $ | (3.37   | )       | $    | 0.21    |        | $ | (0.14   | )     
|                                            |                                                        |                         |   |         |         |      |         |        |   |         |       
|Selected Operating Results                  |                                                        |                         |   |         |         |      |         |        |   |         |       
|As a Percentage of Net Sales:               |                                                        |                         |   |         |         |      |         |        |   |         |       
|                                            | Gross profit                                           |                         |   | 15.8    | %       |      | 24.4    | %      |   | 17.4    | %     
|                                            | Selling, general and administrative                    |                         |   | 17.3    | %       |      | 13.4    | %      |   | 15.9    | %     
|                                            | Operating income (loss)                                |                         |   | (145.3  | )%      |      | 9.4     | %      |   | (3.7    | )%    
|                                            | Net income (loss)                                      |                         |   | (130.0  | )%      |      | 5.8     | %      |   | (4.7    | )%    
|Financial Position (at December 31):        |                                                        |                         |   |         |         |      |         |        |   |         |       
|                                            | Working capital                                        |                         | $ | 13,851  |         | $    | 13,387  |        | $ | 15,356  |       
|                                            | Total assets                                           |                         |   | 34,886  |         |      | 105,018 |        |   | 108,889 |       
|                                            | Long-term debt, including current portion              |                         |   |        |         |      | 8,000   |        |   | 16,000  |       
|                                            | Total stockholders' equity                             |                         |   | 29,197  |         |      | 81,366  |        |   | 78,149  |       

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

OverviewBusiness Conditions

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

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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.

Until
recently, graphite shafts were principally 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 both United
States and foreign-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. Generally, value shafts have significantly lower selling prices than premium shafts and as a result contribute less to gross profit.

The
Company's sales have tended to be concentrated among a limited number of major club companies, thus making the Company's results of operations dependent on those customers, their
continued willingness to purchase a significant portion of their shafts from the Company, and their success in selling clubs containing the Company's shafts to their customers. In 2001, net sales to
Callaway Golf, TaylorMade-adidas Golf and Ping represented 22%, 20% and 15% of the Company's net sales, respectively, and the Company anticipates that these companies will continue, collectively, to
represent the largest portion of its sales in 2002. Although it is generally difficult to predict in advance the success of any particular club or of any particular manufacturer, the Company believes
that it is protected to some extent from normal periodic fluctuations in sales among the various golf club companies by virtue of the broad range of its club manufacturer customers.

Golf
club companies regularly introduce new clubs, frequently containing innovations in design. Sometimes these new clubs achieve dramatic success in the marketplace, thus increasing the
overall volatility of club sales among the major companies. While the Company seeks to have its shafts represented on as many major product introductions as possible, it can provide no assurance that
its shafts will be included in any particular "hot" club or that sales of a "hot" club that does not include the Company's shafts will not have a negative impact on the sales of those clubs that do.
The Company's sales could also suffer a significant drop-off from period to period to the extent that they may be dependent in any period on sales of one or more "hot" clubs, which then
tail off in subsequent periods when no other club offers a high level of new sales to replace the lost sales.

In
1994, the Company started manufacturing prepreg, the principal raw material in the manufacture of graphite golf shafts, at its facility in Poway, California. Most of its production of
prepreg is used internally by the Company, with the remainder sold to other composite materials manufacturers. The Company does not expect third party sales of prepreg to have a significant financial
impact on the Company for at least the next several years. In 1998, the Company established a manufacturing facility in Evanston, Wyoming for the production of carbon fiber. During 1998 and through
the first ten months of 1999, the Company used the material from this facility to satisfy a significant portion of its internal demand for carbon fiber in the manufacturing of golf club shafts. During
1999, the Company also produced and sold carbon fiber from this facility to other unrelated entities for the manufacture of other carbon-based products. On October 29, 1999, SGL Carbon Fibers
and Composite, Inc. ("SGL") purchased a 50% interest in the Company's carbon fiber manufacturing operation. The Company and SGL entered into an agreement to operate the facility
as a limited liability company with equal ownership interests between the venture partners. The Company and SGL also entered into supply agreements with the new entity, Carbon Fiber Technology LLC
("CFT"), for the purchase of carbon fiber at cost plus an agreed upon mark-up. The Company and SGL are each responsible to bear 50% of the fixed costs to operate the facility as a term of
this supply agreement. Profits and losses of CFT are shared equally by the partners. The Company anticipates that the carbon

16

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fiber from this facility will primarily be consumed by the joint venture partners; however, any excess carbon fiber produced at this facility could be marketed for sale to unrelated third parties.
The Company continues to use its share of the output of this facility to satisfy a significant portion of its internal demand for carbon fiber.

If
the carbon fiber facility is not operated at high production levels, either because of production difficulties or because there is not enough demand by the joint venture partners to
justify that level of production, the cost per unit of carbon fiber consumed by the Company (and thus the cost of producing the Company's golf shafts and other products) is increased due to spreading
the fixed costs of production over smaller volumes. If demand is lower than production capacity, CFT also runs the risk of building up excess inventory. Given the relatively low costs at the present
time in the market for carbon fiber and the highly competitive market for graphite golf shafts, the failure to operate at high levels could adversely affect the Company's gross margins or its ability
to maintain competitive prices for its products. Although third party sales of carbon fiber could help justify high production levels and thus help control unit production costs, the weakness of the
carbon fiber market and the overall excess capacity in the industry means that third party sales at CFT are not likely to be significant at least until the overall market improves significantly. The
Company does not expect third party sales at CFT or the sale of prepreg to have a significant effect on either its sales or profitability for several years.

During
the 1990's, the graphite golf shaft industry became increasingly competitive, placing extraordinary pressure on the selling prices of the Company's golf shafts and adversely
affecting its gross profit margins and level of profitability. The Company's response has been to reduce its cost structure, principally by producing its own prepreg and by shifting the largest
portion of its shaft production to its offshore facilities, while maintaining high quality and superior customer service. The cost saving benefits of its efforts to vertically integrate its
operations, particularly through carbon fiber manufacturing, have been limited somewhat due to historically low market prices for golf shaft raw materials in recent years, which, in some cases, have
made carbon fiber available in the market at attractive prices when compared to the Company's cost to purchase it from CFT. Although the Company's gross margins and profitability have continued to be
adversely affected through this period despite its efforts, management believes that these efforts have been successful to date and is allowing the Company to maintain, or in some cases enhance, its
competitive position with respect to the major United States golf club companies that are its principal customers. The Company continues to look for opportunities to cut costs and to increase its
market share.

The
pressure on selling prices of both premium and value shafts under current market conditions, and the increased percentage of overall sales represented by value shafts has resulted in
a reduction of approximately 57% in the average selling price of the Company's shafts over the last seven years, although in some cases average selling prices may increase slightly from period to
period depending on the mix of products sold. In addition, the percentage of overall golf clubs sold with graphite shafts appears to have leveled off after several decades of significant growth and
most major club companies continue to seek multiple sources of supply for their shafts and, thus, are unwilling to commit to one principal graphite shaft supplier. These trends are not likely to
reverse themselves under current market conditions. As a result, management does not anticipate meaningful overall improvement in the financial performance of the Company's golf shaft operations for
the foreseeable future.    As a result of an overall slump in golf equipment sales in 2001 as compared to 2000, the Company, as is the case with other golf equipment companies, experienced
a very disappointing year in 2001. There will continue to be fluctuations in performance on a periodic basis, driven principally by the success of its key customers in selling clubs to consumers, but
as selling prices continue to decrease, with increasing pressure on the Company's margins, increases in unit sales in the future, even to levels comparable to those achieved in 2000, are not likely to
generate operating cash flows and net income at the levels achieved in 2000 or in other, similarly successful historical years.

17

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Based on the results of 2001 and the general trends and conditions of the golf industry over the last several years, the Company addressed the issue of impairment of its
long-lived assets, specifically, goodwill, trademarks and patents. In accordance with the Company's policy, management assessed the recoverability of goodwill using undiscounted cash flow
projections based on the remaining amortization period of goodwill and trademarks of thirty-one years. The Company believes that the future projections represent management's best estimate
of future undiscounted cash flows. Based on these projections, the Company concluded that impairment existed. In determining the amount of the impairment charge, the Company utilized an independent
valuation, which resulted in a write-off of all the goodwill and intangible assets of approximately $54.9 million.

The
Company is responding to the current prospects in its core golf shaft business in a variety of ways. First, the Company has recently introduced its new and innovative "One" shaft,
which management intends to use to capture a portion of the market for premium branded custom shafts, which tend to sell at higher prices and gross margins than the standard shafts sold to club
manufacturers. The Company cannot now predict the success of this new shaft in the market, although it anticipates that if it achieves significant market acceptance, the financial benefits are not
anticipated to be material until 2003. Second, the Company continues to look for opportunities to sell its prepreg to other composite materials manufacturers and to manufacture other composite
materials products, such as hockey sticks. Although the Company has achieved some success in these areas, management continues to believe that the growth opportunities in these areas are limited and
that sales of prepreg and of other composite materials products will not be material to its results of operations for at least several years. Third, management has concluded that its ownership
interest in the joint venture that operates its carbon fiber plant does not offer significant value to the Company and is seeking to sell its interest, either to its joint venture partner, SGL, or,
with SGL's consent, to a third party, so that the capital currently committed to the joint venture could be redeployed more usefully for the Company and its stockholders. Finally, the
Company continues to be receptive to other acquisition opportunities, in areas related to its core business and otherwise, in an effort to add the potential for meaningful growth in its overall
profitability, although the Company is not actively seeking such opportunities at the present time. Although management anticipates that operating cash flow levels are likely to be measurably lower
for at least the next several years than was typical until a few years ago, given the absence of debt currently on the Company's balance sheet, the Company should be able to generate cash from
operations in excess of its needs during this period. This excess operating cash could be used for research and development or marketing activities related to its current core business or to support
expansion of its current businesses either internally or through acquisitions. At present, the Company is unable to provide any assurances that it will identify and be able to negotiate a sale of its
interest in the joint venture or that it will be able to successfully complete any potential acquisitions.

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Results of Operations

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

|                                     |                         | Year Ended December 31, |       
|------------------------------------ | ----------------------- | ----------------------- | ------
|
|Net sales                            |                         | 100.0                   | %     
|Cost of sales                        |                         | 84.2                    |       
|                                     |                         |                         |       
|                                     | Gross profit            |                         | 15.8  
|                                     |                         |                         |       
|Selling, general and administrative  |                         | 17.3                    |       
|Impairment of Goodwill               |                         | 106.0                   |       
|Impairment of Trademarks & Patents   |                         | 32.8                    |       
|Amortization of goodwill             |                         | 3.5                     |       
|Plant consolidation                  |                         | 1.5                     |       
|                                     |                         |                         |       
|                                     | Operating income (loss) |                         | (145.3
|                                     |                         |                         |       
|Other:                               |                         |                         |       
|                                     | Interest expense        |                         | 1.0   
|                                     | Other (income), net     |                         | (0.4  
|                                     |                         |                         |       
|Income (loss) before income taxes    |                         | (145.9                  | )     
|Provision (benefit) for income taxes |                         | (15.9                   | )     
|                                     |                         |                         |       
|Net income (loss)                    |                         | (130.0                  | )%    
|                                     |                         |                         |       



Net Sales.Net sales decreased $16.3 million, or 29.2%, to $39.6 million for 2001 from $55.9 million for
the prior year. The decrease in net sales was attributable to a decrease both in shaft unit sales and, to a lesser extent, in selling prices. Shaft unit sales decreased 30.1% in 2001 as compared to
2000 which was a result of lower demand for both premium and value shafts, and the average selling price of shafts sold in 2001 decreased 1.6%.

Gross Profit.Gross profit decreased $7.3 million, or 54.0%, to $6.3 million in 2001 from $13.6 million
in 2000, principally as a result of the decrease in net sales. The Company's gross profit margin decreased to 15.8% in 2001 from 24.4% in 2000, which was primarily attributed to a higher fixed cost
per unit for shafts shipped in 2001 based on lower production volumes. In addition, the Company's gross profit was negatively affected by the increase in inventory related reserves of approximately
$731,000 and approximately $485,000 related to start-up costs and production inefficiencies resulting from the transfer of additional premium shaft volume to China, which decreased gross
margin by approximately 3.1%

Operating Income/(Loss).Operating income decreased $62.7 million to a loss of $57.5 million in 2001 from
$5.3 million operating income in 2000. The majority of the decrease was attributed to the impairment of
goodwill, trademarks and patents. The Company wrote-off the remaining balance of its goodwill, trademarks and patents in accordance with SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." See"Notes to Consolidated Financial Statements", Note 5. The total amount of impairment
charges recorded in 2001 was approximately $54.9 million.

Selling,
general and administrative ("SG&A") expense decreased approximately $632,000, which was attributable to lower incentive charges of approximately $1.6 million in 2001,
which was partially

19

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offset by increased advertising and promotion expenses. SG&A in 2000 benefited from a reduction in an environmental reserve of $400,000.

The
Company recorded plant consolidation charges in 2001 of approximately $593,000 related to the closure of two shaft manufacturing facilities in Mexico. The Company has three shaft
manufacturing facilities remaining and does not anticipate recording plant closure expenses in the near future. In 2000, the Company reflected a recovery of previously recorded plant consolidation
charges in 2000 of approximately $566,000 primarily in connection with the consolidation of its domestic golf shaft manufacturing operations in California. See"Notes to Consolidated
Financial Statements", Note 10.

Other Expense/(Income).Interest expense decreased approximately $525,000 to $375,000 in 2001 as compared to $900,000 in
2000. The decrease is primarily attributed to the scheduled payments on the Company's long-term debt through 2001, which resulted in a lower debt balance for the year. The Company had a
weighted average debt outstanding of $4.0 million in 2001 compared to a weighted average debt outstanding of $12.0 million in 2000. The Company made its final debt principal payment of
$4.0 million on September 30, 2001. The weighted average interest rate on borrowings was 6.13% in 2001 and 2000. Other, net decreased by approximately $635,000 to $65,000 in 2001, from
($570,000) in 2000. The decrease is primarily attributed to a decrease in interest income of approximately $408,000 and an increase in other expense items of approximately $227,000.

Income Taxes.The Company recorded a benefit for income taxes in the amount of $6.3 million in 2001. The Company's
effective tax rate was 10.9% in 2001. The effective rate was reduced in 2001, as the Company's goodwill amortization and impairment charge are non-deductible for income tax purposes.
Included in the $6.3 million benefit recorded in 2001 was the reduction of deferred tax liabilities of approximately $5.5 million related to the deferred tax liability associated with
the Company's trademarks that were written off as noted above.



Net Sales.Net sales increased $10.8 million, or 23.9%, to $55.9 million for 2000 from $45.1 million for
the prior year. The increase in net sales was attributable to an increase in shaft unit sales at lower selling prices to the Company's club manufacturer customers partially offset by a
$4.4 million decrease in sales of other carbon fiber products in 1999. Shaft unit sales increased 45.9% in 2000 as compared to 1999 which was a result of higher demand for both premium and
value shafts, and the average selling price of shafts sold in 2000 decreased 1.5%.

Gross Profit.Gross profit increased $5.8 million, or 73.3%, to $13.6 million in 2000 from $7.9 million
in 1999, principally as a result of the increase in net sales. Gross profit was negatively impacted by 2.5% in 2000 from the carry over of higher cost inventories from 1999, which should not have an
impact in 2001. The Company's gross profit margin increased to 24.4% in 2000 from 17.4% in 1999, which was primarily attributed to a lower fixed cost per unit for shafts shipped in 2000 based on
higher production volumes.

Operating Income/(Loss).Operating income increased $6.9 million, or 417.3%, to $5.3 million in 2000 from a
$1.7 million operating loss in 1999 and increased as a percentage of net sales to 9.4% in 2000 compared to a loss of 3.7% in 1999. Selling, general and administrative expense increased $300,000
from 1999 primarily as a result of higher incentive charges, which were partially offset by a reduction in other expenditures and adjustments. Selling, general and administrative expenses decreased as
a percentage of net sales to 13.4% in 2000 as compared to 15.9% in 1999 primarily as a result of increased net sales in 2000 as compared to 1999.

The
Company has reflected recovery of previously recorded plant consolidation charges in 2000 of $566,000 and plant consolidation charges in 1999 of $900,000 primarily in connection with
the

20

---

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 10.

Other Expense/(Income).Interest expense decreased $400,000 to $900,000 in 2000 as compared to $1.3 million in 1999.
The decrease is primarily attributed to the scheduled payments on the Company's long-term debt. The Company had a weighted average debt outstanding of $12.0 million in 2000 compared
to $19.0 million in 1999. The weighted average interest rate on borrowings was 6.13% in 2000 as compared to 6.16% in 1999. Equity in earnings of joint venture increased $200,000 to $200,000 in
2000 compared to zero in 1999. The $200,000 increase was primarily attributed to a full year of operations of the joint venture in 2000 as compared to only two months of operations in 1999.

Income Taxes.The Company recorded a provision for income taxes of $1.9 million in 2000 primarily as a result of the
Company's pretax income. Included in the provision for 2000 was a tax benefit of $400,000 from a revision of prior years' estimates and a tax benefit of $300,000 attributed to increased activity in
foreign operations. The tax benefit items were partially offset by the Company's non-deductible amortization of goodwill. The Company's effective tax rate was 37.5% in 2000 compared to a
tax
benefit of 18% in 1999. The Company should continue to realize a reduced effective tax rate, as compared to its previous income generating years, to the extent that the statutory income tax rates
where it has foreign operations are lower than the statutory income tax rates in the United States.

Liquidity and Capital Resources

The Company has in place a $12.0 million revolving credit facility from a financial institution, which is secured by substantially all the assets of Aldila
Golf and guaranteed by the Company. Borrowings under the line of credit bear interest, at the election of the Company, at the bank reference rate or at the adjusted Eurodollar rate plus 2.5%, with a
minimum rate of 7%. Availability for borrowings under the Line of Credit, based on eligible accounts receivable and inventories, was approximately $3.6 million at December 31, 2001. The
line of credit renews effective July 9, 2002, unless terminated as of that date. Either party may terminate the line of credit agreement by giving the other party 90 days written notice
prior to the renewal date. The Company does not plan to terminate this agreement without having another facility in place and is not aware of any intention by the financial institution to terminate
the agreement. There are no termination penalties for early termination during the renewal periods.

The
Company made its final $4.0 million principal payment on its senior notes on September 30, 2001. The senior notes bore interest at 6.13%. Semi-annual
principal payments of $4.0 million, plus accrued interest, were made September 30, 1999 through September 30, 2001.

On
October 29, 1999, the Company received approximately $7.0 million from the sale of a 50% interest in its carbon fiber manufacturing operation. These funds have been used
to meet the working capital requirements of the Company and the scheduled principal payments due under the senior notes.

Cash
(including cash equivalents) provided by operating activities in 2001 was $688,000, compared to $9.0 in 2000. This decrease resulted principally from a decrease in net income and
changes in working capital. Excluding the effects of the impairment charges, income decreased by approximately $5.2 million. Working capital increased approximately $464,000 in 2001, after
payment of $8.0 million of debt during the year. The Company used $835,000 for capital expenditures during 2001. Management anticipates capital expenditures to approximate $500,000 for 2002.
The Company may also incur capital expenditures over the next several years to expand and enhance the production capacity of the CFT operation in Evanston, Wyoming in order to take advantage of new
opportunities brought to CFT and further reduce production costs for the carbon fiber acquired by the Company, in addition to an obligation to support one half of CFT's fixed annual cost. The Company
believes that it will have adequate cash resources, including anticipated cash flow and borrowing availability, to meet its obligations at least through 2002.

21

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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. The timing of
customers' new product introductions has frequently mitigated the impact of seasonality in recent years.

Item 7a. Quantitative and Qualitative Disclosures about Market Risk

The Company's only indebtedness as of December 31, 2000 was related to its fixed rate financing which was zero as of December 31, 2001. The Company
has taken advances against the line of credit in 2001 to meet short-term working capital requirements, which are at variable rates, however the Company did not have any borrowings against
the line of credit as of December 31, 2000 or 2001. 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.

"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995

With the exception of historical information (information relating to 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 responsibility 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 on Form 10-K and elsewhere in the Company's filings with the Securities and Exchange Commission.

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

None.

22

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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
2002 Annual Meeting of Stockholders for the year ended December 31, 2001, which will be filed with the Commission within 120 days of the end of the fiscal year covered by this report
("2002 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 2002 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 2002 Proxy Statement.

Item 13. Certain Relationships and Related Transactions

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

23

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PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K





No
reports on Form 8-K were filed during the quarter ended December 31, 2001.

See
item (a)3 above.



24

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ALDILA, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (In thousands, except share data)

|                                                                       |                                                                                                                                            | December 31,
2001          |        | December 31,
2000
|---------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------ | -----------------
|ASSETS                                                                 |                                                                                                                                            |                            |        |                  
|CURRENT ASSETS:                                                        |                                                                                                                                            |                            |        |                  
|                                                                       | Cash and cash equivalents                                                                                                                  |                            | $      | 266              
|                                                                       | Marketable securities                                                                                                                      |                            |        |                 
|                                                                       | Accounts receivable                                                                                                                        |                            |        | 3,977            
|                                                                       | Income taxes receivable                                                                                                                    |                            |        | 723              
|                                                                       | Inventories                                                                                                                                |                            |        | 11,472           
|                                                                       | Deferred tax assets                                                                                                                        |                            |        | 2,366            
|                                                                       | Prepaid expenses and other current assets                                                                                                  |                            |        | 595              
|                                                                       |                                                                                                                                            |                            |        |                  
|                                                                       |                                                                                                                                            | Total current assets       |        |                  
|PROPERTY, PLANT AND EQUIPMENT                                          |                                                                                                                                            |                            | 7,634  |                  
|INVESTMENT IN JOINT VENTURE                                            |                                                                                                                                            |                            | 7,466  |                  
|TRADEMARKS AND PATENTS, less accumulated amortization of $0 and $3,940 |                                                                                                                                            |                            |       |                  
|GOODWILL, less accumulated amortization of $0 and $12,718              |                                                                                                                                            |                            |       |                  
|OTHER ASSETS                                                           |                                                                                                                                            |                            | 387    |                  
|                                                                       |                                                                                                                                            |                            |        |                  
|TOTAL ASSETS                                                           |                                                                                                                                            | $                          | 34,886 |                  
|                                                                       |                                                                                                                                            |                            |        |                  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                   |                                                                                                                                            |                            |        |                  
|CURRENT LIABILITIES:                                                   |                                                                                                                                            |                            |        |                  
|                                                                       | Accounts payable                                                                                                                           |                            | $      | 2,921            
|                                                                       | Accrued expenses                                                                                                                           |                            |        | 2,627            
|                                                                       | Income taxes payable                                                                                                                       |                            |        |                 
|                                                                       | Long-term debt, current portion                                                                                                            |                            |        |                 
|                                                                       |                                                                                                                                            |                            |        |                  
|                                                                       |                                                                                                                                            | Total current liabilities  |        |                  
|LONG-TERM LIABILITIES:                                                 |                                                                                                                                            |                            |        |                  
|                                                                       | Deferred tax liabilities                                                                                                                   |                            |        | 67               
|                                                                       | Deferred rent                                                                                                                              |                            |        | 74               
|                                                                       |                                                                                                                                            |                            |        |                  
|                                                                       |                                                                                                                                            | Total liabilities          |        |                  
|                                                                       |                                                                                                                                            |                            |        |                  
|COMMITMENTS AND CONTINGENCIES (Notes 12, 13 and 14)                    |                                                                                                                                            |                            |        |                  
|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 14,843,404 shares in 2001 and 15,462,204 shares in 2000 |                            |        | 149              
|                                                                       | Additional paid-in capital                                                                                                                 |                            |        | 41,883           
|                                                                       | Retained earnings (Accumulated deficit)                                                                                                    |                            |        | (12,835          
|                                                                       |                                                                                                                                            |                            |        |                  
|                                                                       |                                                                                                                                            | Total stockholders' equity |        |                  
|                                                                       |                                                                                                                                            |                            |        |                  
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                             |                                                                                                                                            | $                          | 34,886 |                  
|                                                                       |                                                                                                                                            |                            |        |                  

See
notes to consolidated financial statements.

25

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ALDILA, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        (In thousands, except per share data)

|                                                               |                                     | Year ended December 31, |        
|-------------------------------------------------------------- | ----------------------------------- | ----------------------- | -------
|
|NET SALES                                                      |                                     | $                       | 39,561 
|COST OF SALES                                                  |                                     |                         | 33,304 
|                                                               |                                     |                         |        
|                                                               | Gross profit                        |                         |        
|                                                               |                                     |                         |        
|SELLING, GENERAL AND ADMINISTRATIVE                            |                                     |                         | 6,851  
|IMPAIRMENT OF GOODWILL                                         |                                     |                         | 41,932 
|IMPAIRMENT OF TRADEMARKS & PATENTS                             |                                     |                         | 12,963 
|AMORTIZATION OF GOODWILL                                       |                                     |                         | 1,410  
|PLANT CONSOLIDATION                                            |                                     |                         | 593    
|                                                               |                                     |                         |        
|                                                               | Operating income (loss)             |                         |        
|                                                               |                                     |                         |        
|OTHER EXPENSE (INCOME):                                        |                                     |                         |        
|                                                               | Interest expense                    |                         |        
|                                                               | Other, net                          |                         |        
|                                                               | Equity in earnings of joint venture |                         |        
|                                                               |                                     |                         |        
|INCOME (LOSS) BEFORE INCOME TAXES                              |                                     |                         | (57,701
|PROVISION (BENEFIT) FOR INCOME TAXES                           |                                     |                         | (6,282 
|                                                               |                                     |                         |        
|NET INCOME (LOSS)                                              |                                     | $                       | (51,419
|                                                               |                                     |                         |        
|NET INCOME (LOSS) PER COMMON SHARE-BASIC                       |                                     | $                       | (3.37  
|                                                               |                                     |                         |        
|NET INCOME (LOSS) PER COMMON SHARE, ASSUMING DILUTION          |                                     | $                       | (3.37  
|                                                               |                                     |                         |        
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING           |                                     |                         | 15,269 
|                                                               |                                     |                         |        
|WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES |                                     |                         | 15,269 
|                                                               |                                     |                         |        

See
notes to consolidated financial statements.

26

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ALDILA, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        (In thousands)

|                                                     |                                                                                          | Year ended December 31,                    |                                  
|---------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------ | ---------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                                                                          |                                            |                                  
|                                                     | Net income (loss)                                                                        |                                            | $                                
|                                                     | Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                            |                                  
|                                                     |                                                                                          | Depreciation and amortization              |                                  
|                                                     |                                                                                          | Gain on joint venture transaction          |                                  
|                                                     |                                                                                          | Loss on disposal of fixed assets           |                                  
|                                                     |                                                                                          | Impairment of goodwill                     |                                  
|                                                     |                                                                                          | Impairment of trademarks & patents         |                                  
|                                                     |                                                                                          | Undistributed income of joint venture, net |                                  
|                                                     |                                                                                          | Changes in assets and liabilities:         |                                  
|                                                     |                                                                                          |                                            | Accounts receivable              
|                                                     |                                                                                          |                                            | Inventories                      
|                                                     |                                                                                          |                                            | Deferred tax assets              
|                                                     |                                                                                          |                                            | Prepaid expenses and other assets
|                                                     |                                                                                          |                                            | Accounts payable                 
|                                                     |                                                                                          |                                            | Accrued expenses                 
|                                                     |                                                                                          |                                            | Income taxes payable/receivable  
|                                                     |                                                                                          |                                            | Deferred tax liabilities         
|                                                     |                                                                                          |                                            | Deferred rent                    
|                                                     |                                                                                          |                                            |                                  
|                                                     |                                                                                          |                                            |                                  
|                                                     |                                                                                          |                                            |                                  
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                                                                                          |                                            |                                  
|                                                     | Purchase of property and equipment                                                       |                                            |                                  
|                                                     | Proceeds from sales of property, plant and equipment                                     |                                            |                                  
|                                                     | Proceeds from sales in joint venture transaction                                         |                                            |                                  
|                                                     | Purchase of marketable securities                                                        |                                            |                                  
|                                                     | Proceeds from sales of marketable securities                                             |                                            |                                  
|                                                     | Investment in joint venture                                                              |                                            |                                  
|                                                     | Distribution from joint venture                                                          |                                            |                                  
|                                                     | Other                                                                                    |                                            |                                  
|                                                     |                                                                                          |                                            |                                  
|                                                     |                                                                                          |                                            |                                  
|                                                     |                                                                                          |                                            |                                  
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                                                                                          |                                            |                                  
|                                                     | Principal payments on long-term debt                                                     |                                            |                                  
|                                                     | Repurchases of common stock                                                              |                                            |                                  
|                                                     | Other, net                                                                               |                                            |                                  
|                                                     |                                                                                          |                                            |                                  
|                                                     |                                                                                          |                                            |                                  
|                                                     |                                                                                          |                                            |                                  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                          |                                            | (5,337                           
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR         |                                                                                          |                                            | 5,603                            
|                                                     |                                                                                          |                                            |                                  
|CASH AND CASH EQUIVALENTS, END OF YEAR               |                                                                                          | $                                          | 266                              
|                                                     |                                                                                          |                                            |                                  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:   |                                                                                          |                                            |                                  
|                                                     | Net assets contributed to joint venture                                                  |                                            |                                  
|                                                     | Cash paid during the year for:                                                           |                                            |                                  
|                                                     |                                                                                          | Interest                                   |                                  
|                                                     |                                                                                          | Income taxes                               |                                  

See notes to consolidated financial statements.

27

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ALDILA, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (In thousands)

|                             |  | Common Stock |   |   |     |   |   |        |  
|---------------------------- |  | ------------ | - | - | --- | - | - | ------ | -
|
|
|Balance at January 1, 1999   |  | 15,462       |   | $ | 155 |   | $ | 42,627 |  
|Net loss                     |  |              |   |   |     |   |   |        |  
|                             |  |              |   |   |     |   |   |        |  
|Balance at December 31, 1999 |  | 15,462       |   |   | 155 |   |   | 42,627 |  
|Net income                   |  |              |   |   |     |   |   |        |  
|                             |  |              |   |   |     |   |   |        |  
|Balance at December 31, 2000 |  | 15,462       |   |   | 155 |   |   | 42,627 |  
|Repurchases of common stock  |  | (619         | ) |   | (6  | ) |   | (744   | )
|Net loss                     |  |              |   |   |     |   |   |        |  
|                             |  |              |   |   |     |   |   |        |  
|Balance at December 31, 2001 |  | 14,843       |   | $ | 149 |   | $ | 41,883 |  
|                             |  |              |   |   |     |   |   |        |  

See
notes to consolidated financial statements.

28

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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 ("AMTC"), 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. The Company accounts for its joint venture investment in Carbon Fiber Technology
("CFT") under the equity method of accounting.

Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that effect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of
contingencies 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 and title is
transferred to the customer in the period the sale is reported.

Cash Equivalents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.

Marketable SecuritiesManagement determines the appropriate classification of marketable debt and equity securities at the
time of purchase. The Company did not have any marketable securities at December 31, 2001. At December 31, 2000, the Company's portfolio consisted of high-grade commercial
paper. The securities were classified as held-to-maturity and were carried at amortized cost, which approximates fair value. The average maturity period was approximately
270 days.

Fair Value of Financial InstrumentsThe fair value of short-term marketable securities, 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. The fair value of investments is determined
using quoted market prices for those securities.

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 value.

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:

YearsMachinery and equipment

5-10Office furniture and equipment

3-10


29

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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 were amortized on a straight-line basis over 40 years and
17 years, respectively. Amortization expense was $435,000 in each of 2001, 2000 and 1999. See "Evaluation of Long-Lived Assets".

GoodwillGoodwill represents the excess of cost over fair value of net assets acquired and was amortized over 40 years
on a straight-line basis. See "Evaluation of Long-Lived Assets".

Evaluation of Long-lived AssetsStatement of Financial Accounting Standards ("SFAS") No. 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 may not
be recoverable. The Company's policy is to evaluate, at each balance sheet date, the appropriateness of the carrying values of long-lived assets on the basis of estimated undiscounted
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. In 2001, the Company recorded an impairment charge of $54.9 million related to goodwill, trademarks and patents. See Note 5.

Deferred Financing CostsCosts associated with the issuance of debt are amortized over the life of the related debt using the
straight-line method. Such amortization is included in interest expense.

Net Income Per Common ShareNet income (loss) 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
issuable shares. Net income per common share assuming dilution includes 142,000 dilutive equivalent shares from outstanding stock options for 2000, which are not included in the calculation of net
income per common sharebasic. Options to purchase 3,114,284 and 3,159,268 shares of common stock as of December 31, 2001 and December 31, 1999, respectively, at prices
ranging from $1.38 to $16.38 per share were not included in the computation of diluted EPS because the effect of such options would be anti-dilutive. Such options expire at various dates
through December of 2010.

Income TaxesIncome taxes are provided utilizing the liability method. The liability method requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities. Valuation allowances are
established when necessary to reduce deferred income tax assets to amounts more likely than not to be realized.

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.

30

---

Recently Issued Accounting PronouncementsIn June of 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement requires all derivatives to be recorded on the balance sheet at fair value and established accounting
standards for hedging activities. In June 1999, the FASB issued SFAS No. 137, which amended SFAS No. 133 by deferring its effective date one year to fiscal years beginning after
June 15, 2000. In June 2000, the FASB issued SFAS No. 138, which amended certain accounting and reporting standards of SFAS No. 133. The adoption of SFAS No. 133 as
of January 1, 2001 did not have a material effect on the Company's financial statements.

In
June 2001 the FASB approved SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively
prohibits the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142 requires companies to cease amortizing goodwill and
intangible assets with indefinite useful lives that existed at June 30, 2001, and any new goodwill resulting from acquisitions completed after June 30, 2001 will not be amortized. The
Company is required to adopt SFAS No. 142 on January 1, 2002. SFAS No. 142 also establishes a new method of testing goodwill and intangible assets with indefinite useful lives for
impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value.

In
August 2001 the FASB approved SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 establishes a single
accounting model, based on the framework of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," for
long-lived assets to be disposed by sale, whether previously held and used or newly acquired. In addition, SFAS No. 144 resolved significant implementation issues related to SFAS
No. 121. The adoption of SFAS No. 142 & 144 will not have a material effect on the Company's financial statements as its goodwill, trademarks and patents were written off in
accordance with SFAS No. 121. See Note 5.

ReclassificationsCertain reclassifications have been made to prior years' financial statements to conform to current year
classifications.

2. ACCOUNTS RECEIVABLE

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

2001

2000Trade accounts receivable

$
4,128

$
7,594Less: allowance for doubtful accounts


(151
)

(210
)Accounts receivable

$
3,977

$
7,384


31

---

3. INVENTORIES

Inventories at December 31, net of reserves of $3,261,000 and $2,530,000, in 2001 and 2000, respectively, consist of the following (in thousands):

2001

2000Raw materials

$
4,100

$
4,916Work-in-process


3,757


3,433Finished goods


3,615


2,652Inventories

$
11,472

$
11,001


4. PROPERTY, PLANT AND EQUIPMENT

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

2001

2000Machinery and equipment

$
14,257

$
16,150Office furniture and equipment


1,813


1,910Leasehold improvements


8,055


7,671Property and equipment not yet in service


46


9324,171


25,824Less: accumulated depreciation and amortization


(16,537
)

(16,547
)Property, plant and equipment

$
7,634

$
9,277


Depreciation
and amortization expense was $1,849,000, $2,060,000 and $4,070,000 in 2001, 2000 and 1999, respectively.

5. GOODWILL, TRADEMARKS AND PATENTS

During the fourth quarter of fiscal year 2001, the Company identified certain conditions including a continued decrease in average selling prices, declining
margins, an increase in foreign competition and continued volatility in the golf industry as indicators of asset impairment. These conditions led to operating results and forecasted future results
that were substantially less favorable than had been previously anticipated. In accordance with the Company's policy and SFAS No. 121, management assessed the recoverability of goodwill and
other intangible assets using undiscounted cash flow projections based on the remaining amortization period of goodwill and trademarks of thirty-one years. These projections represent the
Company's best estimate as of December 31, 2001 of the future undiscounted cash flows using the methodology described above. Based on these projections, the Company concluded that impairment
existed. In determining the amount of the impairment charge, the Company utilized an independent valuation, which resulted in a write-off of all goodwill and intangible assets of
approximately $54.9 million.

6. INVESTMENT IN JOINT VENTURE

The Company and SGL each own 50% of CFT in a joint venture to produce carbon fiber. CFT, which was previously a wholly owned subsidiary of AMTC was formed on
October 29, 1999. AMTC contributed net assets with a book value of approximately $13,276,000. SGL purchased a 50% interest

32

---

in AMTC's carbon fiber manufacturing operations for approximately $6,972,000 in cash, which resulted in a gain of approximately $334,000. Based on the member's respective ownership interest in the
joint venture, profits and losses are allocated equally to each member. The Amended and Restated Limited Liability Company Agreement provides that CFT is to continue until December 31, 2099
unless it is dissolved earlier, its affairs are wound up and final liquidating distributions are made pursuant to the Amended and Restated Limited Liability Company Agreement. The Company's equity in
earnings from the joint venture for the year ended December 31, 2001, 2000 and 1999 was approximately $231,000, $220,000 and $12,000, respectively. The Company's investment includes the
unamortized excess of the Company's investment over its equity in the joint venture net assets. The excess was approximately $124,000 at December 31, 2001 and is being amortized on a
straight-line basis over an initial estimated economic useful life of approximately 101 months.

7. ACCRUED EXPENSES

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

2001

2000Payroll and employee benefits

$
958

$
2,518Transfer pricing reserve


677


677Warranty reserve


485


691Marketing and promotional expense


207


136Duty reserve


126


10Legal and professional fees


58


76Interest payable


3


126Other


113


110Accrued expenses

$
2,627

$
4,344


8. LONG-TERM DEBT

Senior NotesThe Company placed $20.0 million in principal amount of senior notes with an institutional investor on
November 30, 1993. The notes bore interest at 6.13%, payable semi-annually on March 31 and September 30. The final semi-annual principal payments of
$4.0 million were made on March 31 and September 30, 2001.

Revolving Credit AgreementOn July 9, 1999, Aldila Golf, a wholly owned subsidiary of the Company, entered into a Loan
and Security Agreement (the "Agreement") with a financial institution which provides Aldila Golf with up to $12.0 million in secured financing. The Agreement has a three-year term
and is secured by substantially all of the assets of Aldila Golf and guaranteed by the Company. Advances under the Agreement are made based on eligible accounts receivable and inventories of Aldila
Golf and bear interest at the Adjusted Eurodollar rate (as defined) plus 2.5% or at the bank reference rate at the election of the Company subject to a minimum rate of 7%. The Agreement requires the
Company to maintain a minimum level of tangible net worth (as defined). As of December 31, 2001 and 2000 there were no outstanding borrowings. The Agreement will terminate on July 9,
2002 and automatically shall be renewed for successive one-year periods. Either party may terminate the Agreement by giving the other party 90 days prior written notice to the
renewal date.

33

---

9. STOCKHOLDERS' EQUITY

The Company announced on January 17, 2001 that its board of directors authorized the repurchase of up to 1.0 million shares of the Company's common
stock (or up to 6.5% of the 15,462,204 shares then issued and outstanding). The Company repurchased 618,800 shares on the open market, at an approximate cost of $1.21 per share during 2001. The
Company announced on January 22, 2002 an increase in the number of shares authorized for purchase in its current share buyback program from 1.0 million to 2.0 million shares of
the Company's common stock.

10. 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
the fourth quarter ended December 31, 1999, the Company recorded an additional plant consolidation charge in the amount of $900,000 (after tax $540,000 or $.03 per share) for
the remaining estimated loss ($650,000) on the Rancho Bernardo Facility and an estimated plant charge ($250,000) associated with the shut down of the Plant 1 manufacturing operation in China. The
cumulative charges for the Rancho Bernardo facility for years 1997-1999 were approximately $3.3 million (after tax $2.0 million). The charge associated with the China
facility reflects approximately $200,000 of non-cash write-downs and $50,000 for other associated costs.

In
the first quarter ended March 31, 2000, the Company completed a Lease Termination Agreement ("Termination Agreement") with the landlord of the Rancho Bernardo manufacturing
facility. The Termination Agreement allowed the Company to buy itself out of the remaining years of the lease for a sum of $900,000. The Termination Agreement was finalized and the payment was made on
February 18, 2000. As such, the Company reversed approximately $566,000 of previously accrued plant consolidation charges.

The
Company was informed in April 2001 by one of its major customers that they would like to have the majority of their shafts manufactured in China. Based on this request, and
the Company's general
strategy of shifting the manufacture of premium product lines from North America and Mexico to China, the Company decided to shut down two of its manufacturing facilities in Mexico, leaving the
Company with one remaining facility in Mexico. As a result of this decision, the Company laid off 323 employees and disposed of excess equipment from the two facilities. The Company recorded a plant
consolidation charge in the amount of $593,000 during 2001. The charge was comprised of approximately $305,000 in severance and related benefits, $159,000 in write-downs of excess equipment and
$129,000 in other related costs. There is nothing left to be paid as of December 31, 2001 related to the Mexico plant consolidation.

34

---

11. INCOME TAXES

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

|          |                                      | 2001  |   | 2000   |        | 1999 |      
|--------- | ------------------------------------ | ----- | - | ------ | ------ | ---- | -----
|Current:  |                                      |       |   |        |        |      |      
|          | Federal                              |       | $ | (1,370 | )      | $    | 1,056
|          | State                                |       |   | (194   | )      |      | 267  
|          | Foreign                              |       |   | 260    |        |      | 256  
|          |                                      |       |   |        |        |      |      
|          |                                      | Total |   |        | (1,304 | )    |      
|          |                                      |       |   |        |        |      |      
|Deferred: |                                      |       |   |        |        |      |      
|          | Federal                              |       |   | (3,889 | )      |      | 266  
|          | State                                |       |   | (1,089 | )      |      | 85   
|          |                                      |       |   |        |        |      |      
|          |                                      | Total |   |        | (4,978 | )    |      
|          |                                      |       |   |        |        |      |      
|          | Provision (benefit) for income taxes |       | $ | (6,282 | )      | $    | 1,930
|          |                                      |       |   |        |        |      |      

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):

2001

2000Inventories

$
2,028

$
1,475Accrued expenses


431


1,298Allowance for doubtful accounts


65


90Deferred expenses


47


270State income taxes


(205
)

169Deferred tax assets  current

$
2,366

$
3,302


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):

2001

2000Trademarks and patents

$


$
5,855Property and equipment


(349
)

(158
)Other


282


284Deferred tax liabilities  long term

$
67

$
5,981


35

---

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

|                                               |                | 2001  |       | 2000 |      | 1999  |      
|---------------------------------------------- | -------------- | ----- | ----- | ---- | ---- | ----- | -----
|Statutory rate                                 |                | (34.0 | )%    | 34.0 | %    | (34.0 | )%   
|State income taxes, net of Federal tax benefit |                | (1.5  | )     | 4.6  |      | (0.3  | )    
|Goodwill Impairment                            |                | 24.7  |       |     |      |      |      
|Non-deductible amortization                    |                | 0.8   |       | 9.4  |      | 19.1  |      
|Revision of prior years' tax estimates         |                |      |       | (7.3 | )    |      |      
|Foreign earnings taxed at different rates      |                | 0.5   |       | (2.9 | )    |      |      
|Other items                                    |                | (1.4  | )     | (0.3 | )    | (3.2  | )    
|                                               |                |       |       |      |      |       |      
|                                               | Effective rate |       | (10.9 | )%   | 37.5 | %     | (18.4
|                                               |                |       |       |      |      |       |      

The
Company has adopted the position under APB 23 that earnings of its foreign subsidiaries will be permanently reinvested outside of the United States. As such, United States deferred
taxes have not been provided for on these earnings.

12. 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 4,100,000 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 SFAS 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 2001 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 (loss) and earnings per share would
have been reduced to the pro forma amounts indicated below:

|                                                                     |  | 2001 |         | 2000 |   | 1999  | 
|-------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ----- | 
|Net income (loss)  pro forma (in thousands)                         |  | $    | (51,929 | )    | $ | 2,352 | 
|Net income (loss) per share, basic and assuming dilution  pro forma |  | $    | (3.40   | )    | $ | 0.15  | 

The
pro forma effect on net income (loss) is not representative of the pro forma effect on net income (loss) 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 2001, 2000 and 1999 was estimated at $0.75,
$0.85 and $0.74, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 0% dividend yield, volatility of 49% in 2001, 47% in
2000 and 43% in 1999, risk free rate of return of 5.0% in 2001, 6.7% in 2000 and 5.9% in 1999 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

36

---

the Company's fixed stock option plans as of December 31, 2001, 2000 and 1999 and activity during the years then ended is presented below:

|                           |  | 2001      |   | 2000 |      | 1999
|-------------------------- |  | --------- | - | ---- | ---- | ----
|
|Outstanding at January 1   |  | 3,106,640 |   | $    | 4.09 |     
|Granted                    |  | 678,814   |   | $    | 1.54 |     
|Exercised                  |  |          |   |      |     |     
|Terminated                 |  | (697,484  | ) | $    | 4.85 |     
|                           |  |           |   |      |      |     
|Outstanding at December 31 |  | 3,087,970 |   | $    | 3.36 |     
|                           |  |           |   |      |      |     

The
following table summarizes information about stock options outstanding and exercisable at December 31, 2001:

Options OutstandingOptions ExercisableWeighted
Average
Remaining
Contractual
Life (Yrs.)Range of
Exercise
Prices

Number
Outstanding at December 31, 2001

Weighted
Average
Exercise
Price

Number
Exercisable at December 31, 2001

Weighted
Average
Exercise
Price$1.38-$2.36

1,747,714

8.3

$
1.61

659,729

$
1.64$4.44-$7.06

1,287,756

5.0

$
5.35

1,287,756

$
5.35$12.56-$14.13

52,500

2.4

$
13.01

52,500

$
13.01$1.38-$14.13

3,087,970

6.8

$
3.36

1,999,985

$
4.33


As
of December 31, 2001, 2000 and 1999, 1,999,985, 2,101,164 and 1,530,870 shares were exercisable under the Plans at a weighted average exercise price of $4.33, $5.03 and $5.74
per share, respectively.

As
of December 31, 2001, an aggregate of 1,060,976 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.

On
March 20, 2000, the Company and Nick Price Group entered into a stock option agreement. The option agreement allows Nick Price to purchase 150,000 shares of Common Stock at a
purchase price of $1.63 per share. The shares are not currently registered under the Plans. In return for the shares, the Company is receiving the services of Nick Price at a guaranteed minimum value
of $1.50 per share, or a minimum aggregate consideration of $225,000. The Company recognized compensation expense and a liability of approximately $66,000 in 2001 and $103,000 in 2000.

13. 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.

37

---

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 contributions vest over four years based on years of service. The
Company's contributions amounted to approximately $62,000, $48,000 and $53,000 in 2001, 2000 and 1999, respectively.

14. 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 $1,183,000, $1,316,000 and $1,245,000 for 2001, 2000 and 1999, respectively. As of December 31, 2001, future minimum lease
payments for all operating leases are as follows (in thousands):

2002

$
1,0402003


8362004


6612005


3412006


145Thereafter


979$
4,002


15. 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 "Disclosures about Segments of an Enterprise and Related Information", the Company considers its
business to consist of one reportable operating segment.

The
Company markets its products domestically and internationally, with its principal international market being Europe. The table below contains information about the geographical areas
in which the Company operates. Revenues are attributed to countries based on location in which the sale is settled. Long-lived assets are based on the country of domicile. Sales to a major
customer represented 22%, 21%, and 12% of net sales in 2001, 2000, and 1999, respectively. Sales to a second customer

38

---

represented 20%, 15%, and 17% of net sales in 2001, 2000, and 1999, respectively. Sales to a third customer represented 15%, 19% and 10% of net sales in 2001, 2000 and 1999, respectively.

2001

Sales

Long-Lived Assets(in thousands)United States

$
34,746

$
12,520Scotland


167


England


1,792


China


648


2,607Mexico


74


360Other Foreign Countries


2,134


Total

$
39,561

$
15,487


2000

Sales

Long-Lived AssetsUnited States

$
45,634

$
71,140Scotland


887


England


3,529


China


2,080


2,772Mexico





105Other Foreign Countries


3,729


Total

$
55,859

$
74,017


1999

Sales

Long-Lived AssetsUnited States

$
35,470

$
74,077Scotland


4,194


England


2,231


China





3,269Mexico





183Other Foreign Countries


3,196


Total

$
45,091

$
77,529


39

---

16. 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, 2001 (in thousands, except per share
data):

|                                                      |  | Quarter Ended |       
|----------------------------------------------------- |  | ------------- | ------
|
|2001:                                                 |  |               |       
|Net sales                                             |  | $             | 14,582
|Gross profit (loss)                                   |  |               | 4,152 
|Net income (loss)                                     |  |               | 988   
|Net income (loss) per common share, assuming dilution |  | $             | 0.06  
|2000:                                                 |  |               |       
|Net sales                                             |  | $             | 16,713
|Gross profit                                          |  |               | 2,986 
|Net income                                            |  |               | 580   
|Net income per common share, assuming dilution        |  | $             | 0.04  

17. RELATED PARTY TRANSACTIONS

During 1999, the Company entered into a joint venture for the production of carbon fiber with SGL (see Note 6). Prior to the joint venture, the Company
recognized revenues for the sale of carbon fiber to SGL in the amount of $4,184,000 in 1999. The amount owed to CFT as of December 31, 2001 and 2000 was approximately $206,000 and $403,000,
respectively.

40

---



ALDILA INC. AND SUBSIDIARIES        SCHEDULE IIC VALUATION AND QUALIFYING ACCOUNTS        For the years ended December 31, 2001, 2000 and 1999

|Description                          |  | Balance at
beginning
of year |         | Charged to
costs and
expenses |   | Deductions |  | Balance at
end of year
|------------------------------------ |  | ---------------------------- | ------- | ----------------------------- | - | ---------- |  | ----------------------
|Year ended December 31, 1999         |  |                              |         |                               |   |            |  |                       
|Allowance for uncollectible accounts |  | $                            | 639,526 |                               | $ | 180,000    |  | $                     
|Year ended December 31, 2000         |  |                              |         |                               |   |            |  |                       
|Allowance for uncollectible accounts |  | $                            | 253,614 |                               | $ | 260,000    |  | $                     
|Year ended December 31, 2001         |  |                              |         |                               |   |            |  |                       
|Allowance for uncollectible accounts |  | $                            | 209,635 |                               | $ | 156,000    |  | $                     

41

---

INDEPENDENT AUDITORS' REPORT

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

We
have audited the accompanying consolidated balance sheets of Aldila, Inc. and its subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement
schedule listed on page 41. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 as of December 31, 2001 and 2000 and the
results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

/s/  DELOITTE
& TOUCHELLP

San
Diego, California
February 25, 2002

42

---



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:         

|Signature                                   |  | Title                                                                                  |  | Date          
|------------------------------------------- |  | -------------------------------------------------------------------------------------- |  | --------------
|                                            |  |                                                                                        |  |               
|/s/PETER R. MATHEWSONPeter R. Mathewson     |  | Chief Executive Officer and Director (Principal Executive Officer)                     |  | March 22, 2002
|/s/ROBERT J. CIERZANRobert J. Cierzan       |  | Vice President, Finance (Principal Financial Officer and Principal Accounting Officer) |  | March 22, 2002
|/s/PETER E. BENNETTPeter E. Bennett         |  | Director                                                                               |  | March 22, 2002
|/s/MARVIN M. GILES, IIIMarvin M. Giles, III |  | Director                                                                               |  | March 22, 2002
|/s/LLOYD I MILLER, IIILloyd I. Miller, III  |  | Director                                                                               |  | March 22, 2002
|/s/JOHN J. HENRYJohn J. Henry               |  | Director                                                                               |  | March 22, 2002
|/s/CHAPIN NOLENChapin Nolen                 |  | Director                                                                               |  | March 22, 2002
|/s/THOMAS A. BRANDThomas A. Brand           |  | Director                                                                               |  | March 22, 2002

43

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EXHIBIT INDEX

|Exhibit
Number |  | Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | Page
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|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 incorporated 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 incorporated 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).                                                                                                                                                                                                                                                |  |     
|*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).                                                                                                                                                                                                                            |  |     

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|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).                                                                         |  | 
|10.11  |  | 1994 Stock Incentive Plan of the Company, as amended. (Filed as Exhibit A to the Company's 1997 Proxy Statement dated March 26, 1997 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. (Filed 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 the Company and Union Bank of California, N.A. (Filed as Exhibit 10.16 to the Company's Report on Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference).                                                                      |  | 
|10.17  |  | Member Interest Purchase Agreement dated as of October 20, 1999 among SGL Carbon Fibers and Composites, Inc., SGL Technik GmbH, Aldila Materials Technology Corp. and the Company. (Filed as Exhibit 10.17 to the
Company's Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference.) |  | 
|*10.18 |  | Loan and Security Agreement by and between Aldila Golf Corp. and Foothill Capital Corporation dated July 9, 1999. (Filed as Exhibit 10.1 to the Company's Report on Form 10-Q for the quarterly period ended June 30, 1999
and incorporated herein by reference).                                                           |  | 
|*10.19 |  | Severance Protection Agreement dated March 11, 1999 between the Company and Gary T. Barbera. (Filed as Exhibit 10.2 to the Company's Report on Form 10-Q for the quarterly period ended June 30, 1999 and incorporated herein
by reference).                                                                                |  | 
|*10.20 |  | Severance Protection Agreement dated March 11, 1999 between the Company and Peter R. Mathewson. (Filed as Exhibit 10.3 to the Company's Report on Form 10-Q for the quarterly period ended June 30, 1999 and incorporated
herein by reference).                                                                             |  | 

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|*10.21 |  | Severance Protection Agreement dated March 11, 1999 between the Company and Robert J. Cierzan. (Filed as Exhibit 10.4 to the Company's Report on Form 10-Q for the quarterly period ended June 30, 1999 and incorporated
herein by reference). |  | 
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|*10.22 |  | Severance Protection Agreement dated March 11, 1999 between the Company and Michael J. Rossi. (Filed as Exhibit 10.5 to the Company's Report on Form 10-Q for the quarterly period ended June 30, 1999 and incorporated
herein by reference).  |  | 
|10.23  |  | 1994 Stock Option Plan of the Company, as amended. (Filed as attachment A-1 in the Company's 2000 Proxy Statement and registered on the Company's Form S-8(Registration No. 333-57754) and incorporated herein by
reference).                  |  | 
|11.1   |  | Statement re: Computation of Net Income per Common Share                                                                                                                                                                                       |  | 
|21.1   |  | Subsidiaries of the Company.                                                                                                                                                                                                                   |  | 
|23.1   |  | Independent Auditors' Consent                                                                                                                                                                                                                  |  | 
|99.0   |  | Aldila, Inc. Audit Committee Charter included as Exhibit A in the Company's 2001 Proxy dated April 4, 2001 and incorporated herein by reference.                                                                                               |  | 
|99.1   |  | Carbon Fiber Technology, LLC financial statements as of and for the year ended December 31, 2001.                                                                                                                                              |  | 

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