Table of Contents



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 1934For the fiscal year ended December 31, 2008Oro

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)


14145 Danielson Street, Suite B, POWAY, CALIFORNIA 92064(Address of principal executive offices)

858-513-1801Registrant's telephone number, including area code

Securities
Registered Pursuant to Section 12(b) of the Act:

Title of each class

Names of each exchange on which registeredCommon Stock, par value $0.01 per share

The NASDAQGlobal Market


Securities
registered pursuant to section 12(g) of the Act:

(Title of Class)None


Indicate
by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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. o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company ý


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

Aggregate market value of voting stock held by non-affiliates as of June 30, 2008 was$29.0 million.

Common
shares outstanding as of March 12, 2009 was5,174,183

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the following documents are incorporated into this report by reference:

Part III,
Items 10, 11, 12, 13 and 14. The Registrant's definitive Proxy Statement for the 2009 Annual Meeting of Stockholders to be filed with the Commission within
120 days after the close of the fiscal year.



---





Table of Contents



ALDILA, INC.        Report on Form 10-K  For the Fiscal Year Ended December 31, 2008

INDEX



Part IItem 1.

Business

3Item 1A.

Risk Factors

10Item 1B.

Unresolved Staff Comments

13Item 2.

Properties

13Item 3.

Legal Proceedings

14Item 4.

Submission of Matters to a Vote of Security Holders

14Part IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

15Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

16Item 8.

Financial Statements and Supplementary Data

27Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

27Item 9A.

Controls and Procedures

27Item 9B.

Other Information

28Part IIIItem 10.

Directors and Executive Officers and Corporate Governance

29Item 11.

Executive Compensation

29Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

29Item 13.

Certain Relationships and Related Transactions, and Director Independence

29Item 14.

Principal and Accounting Fees and Services

29Part IVItem 15.

Exhibits, Financial Statement Schedules

30Signatures

55Exhibit Index

56


2

---





Table of Contents

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 a leading designer and manufacturer of high-quality innovative graphite
(carbon fiber-based composite) golf shafts today. Aldila conducts its operations through its subsidiaries, Aldila Golf Corp. ("Aldila Golf") and Aldila Materials Technology Corp ("AMTC"). Aldila
enjoys strong relationships with most major domestic and many foreign golf club manufacturers including Callaway Golf, TaylorMade-adidas Golf, Ping and Acushnet Company. 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 lines consist of Aldila branded and co-branded products designed for its major customers and custom club makers, as well as custom shafts developed in
conjunction with its major customers. These product lines are designed to improve the performance of any level of golfer from novice to tour professional.

In
1994, the Company started production of its principal raw material for golf shafts, graphite prepreg, which consists of carbon fibers combined with epoxy resin in sheet form. See
"ManufacturingComposite Materials." The Company now produces substantially all of its graphite prepreg requirements internally and also sells prepreg externally to third parties.

In
1998, the Company established a manufacturing facility in Evanston, Wyoming for the production of carbon fiber; in an effort to further vertically integrate its manufacturing
operations. 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 members. 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 were shared equally by the partners. The Company sold its remaining 50% interest in CFT to SGL on November 30, 2007. The Company secured a five year supply agreement with CFT. The agreement
allows, but does not require, the Company to purchase up to 900,000 pounds of carbon fiber during the first year and up to approximately 996,000 pounds of carbon fiber in years two through five.

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.

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

3

---



Table of Contents

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, the design of graphite shafts is easier to alter with respect to weight, flex, flex location, balance point 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 for many golfers 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. According to the 2008 U.S. National Consumer Survey ("2008 Survey"), conducted by The Darrell Survey Company, graphite continues to dominate the professional and consumer
wood club market. The 2008 Survey found that over 99% of new drivers purchased contained graphite shafts. In hybrid clubs, (also known as utility clubs and driving irons), 87% of the new clubs
purchased had graphite shafts, up from 80% the previous year. The acceptance of graphite shafts in irons has not achieved the same success as in woods. The 2008 Survey found that irons with graphite
shafts accounted for 27% of new club purchases.

Products

Golf Shafts

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, balance point
and torque. 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 golf shafts and new refinements on designs using current materials.

The
Company's shafts, which constituted approximately 86% of net sales in the year ended December 31, 2008, are designed in partnership with its customers (principally golf club
manufacturers) to accommodate specific golf club designs. 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 branded shafts and co-branded shafts as well as generate design ideas for customized shafts. The Company's branded and co-branded 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 as an after market re-shaft of existing
clubs. 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 $6 to $300.

The
Company introduced the NV Prototype at the 2003 PGA Merchandise Show in January 2003 and subsequently changed it to the NV®. The NV® went
on to become the most successful new product launch in the Company's history and returned Aldila to the forefront of the composite shaft industry. The NV® features the Company's
exclusive Micro Laminate Technology® ("MLT"). The Company followed up the NV® with the introduction of the NVS, NV
ProtoPype®, NV® Hybrid, NVS Hybrid and the Gamer® shafts in 2004. All of these product line extensions and new product lines target specific
objectives, whether it is for a higher initial launch angle, more controlled launch angle or reduced torque to target various golf enthusiasts. Hybrid clubs are still currently an important segment of
the golf industry for graphite shaft companies, as they are predominantly shafted with graphite shafts. They are designed to replace long irons, usually shafted with steel shafts, by providing a

4

---



Table of Contents

club
that is easier to hit and much more forgiving for the average as well as very skilled players. The Company offers a full range of shafts to fit hybrid clubs, including the DVS
Hybrid, VS Proto Hybrid, NV® Hybrid, NVS Hybrid and Gamer®. In the spring of 2006, Aldila began shipments of VS Proto and the VS
Proto Hybrid. Both are high-end, high performance shafts featuring carbon nanotubes as well as aerospace carbon fibers and Aldila's exclusive high performance
resin system. In 2007, Aldila began shipping the Aldila DVS wood and hybrid shaft. The DVS features a new responsive tip design combined with very low torque to maximize kick
at impact while still maintaining accuracy. The DVS is also constructed with Aldila's MLT and features carbon nanotubes for optimal feel and performance. The Company introduced the
VooDoo® shaft in June of 2008 featuring our S-core Technology. We began offering it on Tour with the VooDoo® name and colors in February of 2008. What
sets the VooDoo® apart from other shafts is its patent pending S-core, or stabilized core, technology designed to increase distance and provide outstanding accuracy with each
swing. The shaft utilizes a high modulus carbon fiber stabilizing rib running the length of the shaft. This internal structure greatly stabilizes the shaft's cross-section. The internal rib system
increases hoop strength and cross sectional stiffness to such an extent that it is approximately 80 percent greater than conventional graphite shafts, and up to 60 percent greater than
competitors' attempts at cross sectional stabilization. This increased stability allows the VooDoo® to better resist shaft ovaling and deformation during the swing, which maximizes energy
transfer to the ball and because the shaft's symmetry is maintained throughout the swing, it loads and unloads more consistently, enabling you to more reliably deliver the club head to the ball every
swing. With this shaft more energy is stored in pure bending and released to the ball at impact, which leads to greater ball speed. The VooDoo® was quickly embraced on the PGA, Nationwide
and European Tours. The Company believes that it will continue to be successful in the branded segment for the foreseeable future and has focused its engineering, marketing and advertising effort in
support of this business.

Composite Materials

Since 1994, the Company has manufactured prepreg material for its production of golf shafts. The Company manufactures almost all of the
prepreg that it uses in its golf shaft operations. In 1998, the Company began selling prepreg manufactured in its Poway, California manufacturing facility to third parties. Net sales of prepreg
represented approximately 14% of the Company's aggregate net sales in 2008. The Company expanded its prepreg operations beginning in 2005 and now has six, twenty-four inch wide tape lines and one,
fifty-inch wide tape line. In addition, the Company has two resin filmers which provide film sets for its prepreg operations and accommodates sales of adhesive film to external third parties.

Other Products

The Company began the manufacture of composite hockey sticks in 2000. The manufacture of composite hockey sticks is similar to that of
graphite golf shafts and uses similar raw materials. Revenues from the sale of hockey sticks were approximately 2% of net sales in 2007. The Company made a decision during the second quarter of 2007
to discontinue the manufacturing efforts of the hockey stick product lines. The Company also manufactures other tube products for various applications, all of which use manufacturing operations
similar to graphite shafts. The Company does not expect these applications to have a material affect on its operations.

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. The Company's research and
development efforts are done in-house. The Company spent

5

---



Table of Contents

approximately
$2.9 million and $2.4 million for the years ended December 31, 2008 and 2007, respectively, such costs were included in cost of sales.

Graphite Shafts

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, 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 branded shafts as well as to generate design ideas for customized shafts. To improve and advance product designs as they
relate to composite technology and the shaft manufacturing process, the Company's engineers utilize existing materials, such as boron, kevlar, fiberglass, ceramic, thermoplastic and carbon fiber. The
Company's engineers also look to newer, more advanced materials such as carbon nanotubes. Nanotechnology is a fast growing field of research that has good potential for structures such as composite
golf shafts. The Company believes it is one of the first major shaft company to employ carbon nanotubes in shaft design, and is at the forefront of utilizing this emerging technology in golf shaft
development. 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 have resulted in the Aldila "One," Aldila NV®, NVS, NV ProtoPype®, NV® Hybrid, NVS Hybrid,
Gamer®, VS Proto, VS Proto Hybrid, DVS and VooDoo® shafts. All of the NV® family of shafts feature the Company's exclusive MLT.
Although the Company emphasizes these research and development activities, there can be no assurance that Aldila will continue to develop competitive products or otherwise respond successfully to
emerging market trends.

The
Company has applied its composite materials expertise on a limited basis to other products in recent years, including hockey sticks, graphite tubing and other molded parts on a
special order basis.

Composite Materials

Composite materials are designed to supply specified products to support the Company's golf shaft manufacturing requirements and
outside sales demand. The Company is focused on developing and providing world class quality composite materials for a variety of applications other than golf. These products are developed based upon
a variety of requests and include variations in thickness, fiber types, combinations of fibers and fabrics, processing cure cycles and alternative resin matrices. The Company provides a wide range of
unidirectional prepregs, prepreg fabrics, and film adhesives with high performance resins that can be cured from 180°F to 400°F available in widths from 4 to 50 inches wide.
The Company utilizes a flexible manufacturing model that enables it to provide short lead times and accommodate customer change order requests. The Company's focus on continuous process improvement
and technological research enables the Company to be competitive in the world market as a materials supplier.

Customers and Customer Relations

The Company believes that its close customer relationships and responsive service have been significant elements of its success to
date, establishing itself as a premier graphite shaft company and expanding composite materials company. The Company has two distinct customer service departments, one for graphite shaft customers and
one for composite material customers. Each department is specialized in order to accommodate their specific customer base. The Company's graphite shaft customers often work together with the Company's
graphite shaft engineers when developing a new golf club in order to design a club that maximizes the performance features of the principal component

6

---



Table of Contents

parts:
the grip, the clubhead and the Aldila shaft. The Company's partnership relationship with its customers continues after the products have been developed. Following the design process, the
Company continues to provide high levels of customer support and service in areas such as quality control and assurance, timely and responsive manufacturing, delivery schedules and education. The
Company believes the physical proximity of its headquarter facilities to many of its graphite shaft customers has facilitated a high degree of customer interaction and responsiveness to their specific
customer needs. While the Company has had long-established relationships with most of its graphite shaft 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.

For
fiscal year 2008, the Company had approximately 918 golf shaft customers and approximately 82 composite materials customers. The golf shaft customers included approximately 104 golf
club manufacturers and more than 225 distributors, with the balance principally consisting of custom club assemblers, pro shops and repair shops. However, the majority of the Company's sales have been
and may continue to be concentrated among a relatively small number of customers. Sales to the Company's top five customers represented approximately 59% and 59% of net sales in 2008 and 2007,
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 largest customers have been Acushnet Company, Callaway Golf, and Ping. While the Company believes its relationship
with each of these major customers is good, the Company is not the exclusive supplier to any of them. The Company's sales to its principal customers have varied substantially from year to year.

Customer

2008

2007Ping


21
%

18
%Acushnet Company


16
%

21
%Callaway Golf


15
%

13
%


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.

Marketing, Advertising and Promotion

The Company's marketing efforts are geared towards its graphite shaft business. Its 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, Boo Weekley and Paula Creamer serve on the Company's advisory staff and assist in its marketing efforts. Aldila's marketing
and promotion expenditures were approximately $4.0 million and $3.3 million in 2008 and 2007, respectively. The Company does not currently incur significant marketing expenses for its
products other than golf shafts.

7

---





Table of Contents

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 and
distributors. Sales to golf club manufacturers and assemblers accounted for approximately 80% of net sales for the year ended December 31, 2008 as compared to 76% for the previous year.

Composite
materials sales, which represented 14% of the Company's 2008 net sales, are made primarily to manufacturers of composite products. The Company predominantly 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 39% and 34% of net sales for the years ended December 31, 2008 and 2007, respectively. The Company's international sales have increased from 18% in
2004 to 39% in 2008. A significant portion of the increase is attributed to increased sales to customers in China. The majority of these customers are assemblers in China, with the end product usually
being shipped back to the United States or Europe. See Note 12 in the Notes to Consolidated Financial Statements for further breakdown of our international sales and long-lived
assets.

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 and one prepreg
manufacturing facility. During its 36 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" (See Composite Materials Manufacturing Process) 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 to meet exacting customer specifications. The Company's shaft manufacturing facilities are located in Tijuana, Mexico, Zhuhai, China and Ho Chi Minh City, Vietnam. Over the past
several years the majority of the Company's shafts have been manufactured in China. The primary materials currently used in the Company's graphite shafts are prepreg, paints, inks and heat transfer
decals.

Composite Materials (Prepreg) Manufacturing Process.

The Company now produces substantially all of its prepreg requirements internally and is dependent on its own prepreg production
operation to support its shaft manufacturing requirements and for its outside sales of composite materials. The Company is, however, somewhat dependent upon certain prepreg suppliers for types of
prepreg that it does not produce and, therefore, the Company

8

---



Table of Contents

expects
to occasionally purchase some prepreg products from outside suppliers in the future for its graphite shaft business. The manufacturing of prepreg is usually a three step process: first, resin
components are mixed with catalyst to form a resin system, second: the mixed resin is applied to paper utilizing one the Company's state of the art resin filmers, and lastly the completed film
set is combined with carbon fiber and heated through various stages at various temperatures to allow the resin to release into carbon fiber and complete a roll of prepreg.

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 is the largest supplier of graphite shafts to the United States club market, 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. The Company believes that it competes in the premium branded and co-branded segment of the graphite
golf shaft industry with several companies. The
Company believes that its major competitors in this segment of the graphite shaft market include but are not limited to, Fujikura, Mitsubishi, UST, GDI and Grafalloy (a True Temper Company). This
market is a highly competitive market that requires recognized brand name that has PGA Tour acceptance to compete in this market. The largest segment of the graphite golf shaft market is the OEM shaft
market for OEM stock shafts. The competition in this market is the stiffest. In order to compete in this market a Company must meet strict shaft specifications, have a large enough scale to meet the
demand of this market, meet tight lead times and deliver quality products. The Company competes with the aforementioned competitors in this market along with golf club assemblers. Golf club assemblers
are one stop shops that assemble the clubs and often manufacture golf club heads and shafts. The Company believes it has more shaft capacity, with its multiple manufacturing locations, than its
competitors, which allows the Company some flexibility in where it produces shafts and to compete on its ability to meet tough lead times and deliver quality product. Presently, there exists
substantial excess graphite shaft manufacturing capacity both in the United States and in other countries.

The
Company also competes for sales of prepreg from its prepreg facility with other producers of prepreg, many of whom have substantially greater research and development, managerial and
financial resources than the Company. Some producers have been producing prepreg for substantially longer periods of time than the Company has, and represent significant competition to the Company.
The Company's ability to compete in the sale of prepreg is dependent to some extent on the demand from manufacturers and consumers of prepreg products to utilize the types of products the company
produces. In addition, the ability to purchase specific fiber when required, could limit the Company's ability to compete in prepreg sales.

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

9

---



Table of Contents

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, 2008, the
Company had approximately 21 domestic trademarks.

Employees

As of December 31, 2008, Aldila employed 1,303 persons on a full-time basis, including 12 in sales and marketing, 24
in research, development and engineering and 1,074 in production. The balance of employees is administrative and support staff. The number of full-time employees includes 182 persons who
are employed in the Company's Mexico facility, 592 persons who are employed in the Company's China facility, 354 persons who are employed in the Company's Vietnam facility and 180 persons who are
employed in the Company's Poway, California location in prepreg manufacturing and headquarters' facilities. As of December 31, 2008, the Company also employed 5 temporary employees. 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 first
and second quarter. The timing of customers' new product introductions has frequently mitigated the impact of seasonality in recent years.

Backlog

As of December 31, 2008, the Company had a sales backlog of approximately $8.6 million compared to approximately
$10.2 million as of December 31, 2007. Historically, the majority of the dollar volume of the Company's backlog at the end of a quarter has been shipped during the following quarter.
However, the backlog as of December 31, 2008 contains a higher percentage of orders that are scheduled for shipment beyond the following three months, particularly in the second quarter of
2008. Orders can typically be cancelled without penalty up to 30 days prior to shipment. Historically, the Company's backlog generally has been highest at the beginning of 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.

Item 1A.    Risk Factors

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 country is currently in one of the worst recession in years, coupled with the collapse of the world's financial industry and the U.S. housing markets, consumers have
drastically reduced their spending in the back half of 2008. With this recent and significant deterioration of economic conditions in the U.S. and elsewhere, there has been considerable pressure on
consumer demand, and the resulting impact on consumer spending has had and may continue to have a material adverse effect on the demand for the Company's products as well as its financial condition
and results of operations. Consumer demand and the condition of the golf retail industry may also be impacted by other external factors such as war, terrorism, geopolitical uncertainties, public
health issues, natural disasters and other business interruptions. The impact of these external factors is difficult to predict, and one or more of the factors could adversely impact the Company's
business. This has negatively impacted the golf industry, which saw a decrease in equipment sales of 6%-8% in 2008. The golf industry has historically been a recession proof industry, in
which equipment sales ranging plus or minus one to two percent. The Company saw a larger decrease in sales

10

---



Table of Contents

as
its customers reacted to their decreases by reducing their inventories. A continued decrease in consumer demand and 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 and its ability to service its credit facility.

Customer Concentration

The Company's sales have been, and very likely will continue to be, concentrated among a small number of customers. In 2008, sales to
the Company's top five customers represented approximately 59% 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 2008, Ping accounted for 21% of net sales, Acushnet Company accounted for 16% of net sales and Callaway
Golf accounted for 15% of net sales. The Company cannot predict the impact that general market trends in the golf industry, including the fluctuation in popularity of specific clubs manufactured by
customers, will have on its future business or operating results.

While
the Company has had long-established relationships with most of its customers, it is not the exclusive supplier of graphite shafts to most of them, and consistent with
the industry practice, generally does not have long-term contracts with its customers. We believe that Ping, Acushnet Company and Callaway Golf, who collectively represent approximately
52% of the Company's net sales in 2008, each purchased from at least two other graphite shaft suppliers. In the event Ping, Acushnet Company and Callaway 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 consumer 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 branded 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 prepreg products, it competes with other producers of prepregs, many of whom have substantially greater research and
development, managerial and financial resources than the Company and represent significant competition for the Company.

Shaft Manufacturing by Club Companies and One-Stop Shops

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 their graphite shaft requirements, or to have an increased amount of their requirements filled from one-stop shops (where main
components, shaft or head, of the golf club could be produced or purchased and

11

---



Table of Contents

assembled).
While the Company has not, to date, experienced any material decline in its sales for these reasons, should any of the Company's major customers decide to meet any significant portion of
their shaft needs either internally or through one-stop shops, it could have a material adverse impact on the Company and its financial results.

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.

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

Reliance on Offshore Manufacturing Facilities

The Company operates manufacturing facilities in Tijuana, Mexico, Zhuhai, People's Republic of China and Ho Chi Minh City, Vietnam. The
Company pays certain expenses of these facilities in Mexican pesos, Chinese renminbis and Vietnam dong, respectively, which are subject to fluctuations in currency value and exchange rates. The
facility in Tijuana, Mexico operates 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. The operation in Vietnam also enjoys advantages in regards to income taxes. There can be no assurance that the governments
of Mexico, the People's Republic of China or Vietnam 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.

Raw Material Cost/Availability

The Company's gross profit margin, in part, is dependant on the price paid for carbon fiber purchased from vendors. Historically, the
carbon fiber market has been cyclical and experienced periods of excess capacity and low prices followed by periods of little excess capacity and high prices. In the past, when there was excess
capacity, carbon fiber suppliers sold carbon fiber at reduced prices, which had the effect of increasing competition, as carbon fiber was less expensive and material was available in the graphite
shaft and composite materials businesses. During tight supply times, the Company may have difficulty in obtaining certain types of carbon fibers, which are used in the Company's graphite shafts and
composite prepreg materials.

Since
2003, the trend has been toward less excess capacity and higher prices, although beginning in 2006 prices of carbon fiber leveled somewhat. Management cannot predict the timing or
extent of

12

---



Table of Contents

future
price changes for carbon fiber, but higher prices may negatively impact the Company if the Company is not able to pass along these increases to its customers.

The
Company has relationships with vendors for its carbon fiber needs through 2009 and beyond. In the world carbon fiber market, there are a limited amount of carbon fiber manufacturers.
The Company currently purchases carbon fiber from most of these carbon fiber manufacturers, with a large part of those purchases coming from CFT. Depending on market conditions prevailing at the time
and the extent to which production at CFT meets expectations, the Company may face difficulties in obtaining adequate supplies of carbon fiber from the other vendors that the Company currently
utilizes. 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 carbon fiber market, the
Company may not have made arrangements in advance for the purchase of material amounts of carbon fiber from its existing alternative sources or identify other sources.

The
Company is dependent on its internal production of graphite prepreg to support its shaft manufacturing operations and composite materials business. If the Company's prepreg
production is interrupted for any reason and the Company is unable to secure an alternative supply of prepreg, it could have a material impact to the Company's business. The exposure to the Company
resulting from its 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. As noted
above, the carbon fiber and composite prepreg industries have encountered various capacity issues in the past, and either situation can have an adverse effect on the Company's business.

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.

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. Further, in the past, we have used equity incentive programs as part of our
overall employee compensation arrangements to both attract and retain qualified personnel. The recent decline in our stock price has negatively impacted, and may continue to negatively impact, the
value of these equity incentive and related compensation programs as retention and recruiting tools. We may need to create new or additional equity incentive programs and/or compensation packages to
remain competitive, which could be dilutive to our existing stockholders and/or adversely affect our results of operations. There is no assurance that the Company
will be able to retain its existing senior management personnel or to attract additional qualified personnel.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

The Company's principal executive offices are located in Poway, California (in the San Diego metropolitan area). The Company's golf
shafts are manufactured at three separate facilities; one located in Tijuana, Mexico, one in the Zhuhai economic development zone of the People's Republic of

13

---



Table of Contents

China
and one that is in Ho Chi Minh City, Vietnam. The Company leases a 73,000 square foot facility in Poway, California for graphite prepreg production. The Company also leases an additional 52,000
square foot facility in Poway, California for the Company's executive offices and warehouse. 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 Vietnam facility was built by the Company and operates under a 54 year land lease. The land is approximately 10,000 square meters
and the building is comprised of approximately 64,000 square feet. The Company also may lease warehousing space when needed. Currently, the Company leases warehousing space in China.

Item 3.    Legal Proceedings

The Company is not currently subject or a party to any material legal proceedings.

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 2008.

14

---





Table of Contents

PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

COMMON STOCK PERFORMANCE

2008

2007Dividends
Declared

High

Low

Dividends
Declared

High

LowFirst Quarter

$
5.15

$
11.79

$
9.49

$
0.15

$
19.24

$
14.58Second Quarter

$
0.15

$
11.25

$
5.76

$
0.15

$
16.89

$
14.52Third Quarter

$
0.00

$
5.58

$
3.66

$
0.15

$
17.00

$
14.37Fourth Quarter

$
0.00

$
7.99

$
2.21

$
0.15

$
18.12

$
15.31


On
March 12, 2009, the closing common stock price was $5.92. There were approximately 144 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Global Market, symbol: ALDA.

The
Company intends to retain earnings for use in operations and payments of cash dividends on its common stock. Cash dividends are discussed by the Company's Board of Directors and
management at each quarterly Board Meeting, and if approved, cash dividends are announced. On February 11, 2008 the Company declared a $5.00 special cash dividend per share to be paid on
March 10, 2008 to shareholders of record as of February 25, 2008. The Company announced on August 21, 2008, that its Board of Directors decided to suspend its quarterly cash
dividend.

The
Company announced on August 24, 2007 the commencement of a "Dutch auction" Tender Offer ("Offer") to acquire shares of its common stock and the termination of the Company's
open stock repurchase plan that the Company had established in July of 2006. The Offer expired at 5:00 p.m. New York Time, September 28, 2007 and was settled on October 4, 2007.
Under the Offer, the Company was able to acquire 370,845 shares of its common stock at a price of $16.85, costing the Company approximately $6.2 million. Prior to the termination of the
Company's stock buyback plan, the Company purchased 75,596 shares under this plan during 2006 and 32,661 shares in 2007.

15

---



Table of Contents

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information regarding securities authorized for issuance under the Company's equity compensation plans as
of December 31, 2008:

Plan Category

Number of
securities to be
issued upon
exercise of
outstanding
options

Weighted-
average exercise
price of
outstanding
options(2)

Number of
securities to
be issued
upon
vesting
of restricted
stock

Number of securities
remaining available for
future issuance under
equity compensation
plansEquity compensation plans approved by security holders1994 Stock Incentive Plan


155,202

$
10.72


57,651


212,853Equity compensation plans not approved by security holders1992 Stock Option Plan(1)











20,167Total


155,202





57,651


233,020


---

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")

The Company's MD&A is comprised of significant accounting estimates made in the normal course of its operations, overview of the
Company's business conditions, results of operations, liquidity and capital resources and contractual obligations. The Company did not have any off balance sheet arrangements as of December 31,
2008 or 2007. The Company's significant accounting estimates identified are, revenue recognition, accounts receivables, inventory valuation and income taxes. The Company is disclosing segment
information for two operating segments, Composite Products and Composite Materials. Composite Products is comprised of sales of golf shafts, hockey sticks and other composite products. Composite
Materials is comprised of external sales of prepreg products in the forms of uni-tapes, fabrics and film adhesives along with contributions from its interest in CFT through 2007.

Critical Accounting Policies and Significant Accounting Estimates

The consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the
United States of America. As such, the Company is required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and
assumptions affect the reported amounts of assets and

16

---



Table of Contents

liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies, which the Company believes are
the most critical to aid in fully understanding and evaluating our reported financial results, include the following:

Revenue Recognition

The Company recognizes revenue from product sales at the time of shipment and passage of title. We also offer certain of our customers
the right to return shafts for
breakage within a limited time after delivery. We track such shaft breakage returns, and we record a provision for the estimated amount of such future returns, based on historical experience and any
notification we receive of pending returns at the time sales are made. The Company believes that any shafts returned for breakage will be returned within three years of the initial sale of the shaft.
The Company estimates in regards to total actual returns, that 50% will be returned in the first year after sale, 30% in the second year after sale and the remaining 20% in the third year after sale,
assuming a mid-year convention. The Company's breakage return rate has been between 0.17% and 0.91% (breakage returns divided by sales dollars) for the past ten years. The Company has
historically utilized a four-year moving average of the breakage return rate to record its estimated liability. The four-year average utilized in the accrual estimate as of
December 31, 2008 is 0.24%. The Company's breakage return rate has declined over the past years. The highest four-year average over the past ten years has been 0.60%. If the Company
were to use 0.60% in estimating its liability as of December 31, 2008, it would have the effect of increasing the liability by approximately $488,000, which would be recorded in cost of goods
sold. While breakage returns have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same return rates that we have
in the past. Any significant increase in product failure rates and the resulting returns could have a material adverse impact on our operating results for the period or periods in which such returns
materialize.

Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current
credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit
losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the
provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. In addition, the current economic environment has changed the
landscape of credit worthiness worldwide, with more and more companies forced to stretch their resources. The Company believes that its focus in this area should help to identify and prevent problem
accounts before they become significant. However, since our accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of
any one of these customers could have a material adverse impact on the collectability of our accounts receivable and our future operating results. The Company estimates its allowance for doubtful
accounts on a monthly basis, by reviewing all amounts owed to the Company and focusing on those amounts that are greater than 60 days past due. The Company reviews the customers that have
amounts greater than 60 days past due and where appropriate, establishes a reserve for the receivable amount that Company deems to be at risk in collecting. As of December 31, 2008, the
Company estimated this amount to be approximately $63,000. If the Company were to reserve for the total amount greater than 60 days past due, it would increase the allowance by approximately
$111,000, which would be recorded in administrative expense.

17

---



Table of Contents

Inventories

We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market
value of the inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and
production requirements for the next twelve months. A significant increase in the demand for our products could result in a short-term increase in the cost of inventory purchases while a
significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. Management of the Company, including but not limited to, representatives from
manufacturing, sales, accounting and officers review the inventory reserve methodology quarterly and when appropriate, establish additional reserves or reduce existing reserves.

The
Company's reserve methodology consists of the following: reviewing on hand inventories of all of its finished goods shafts and comparing inventories to historical sales trends and
anticipated sales forecasts. A 100% reserve is established for all shafts that are deemed to be obsolete. In some cases a reserve of 50% or 25% may be established to discount the product to its
estimated realizable value. Raw materials are reviewed based upon estimated future production and when appropriate, reserves are established. Shafts that are designated for rework (parts that need
additional work) are reviewed and when appropriate reserves are established. The final analysis is to review inactive inventory, and apply reserves to parts that were not included in the other
analyses and have been inactive in the system for a period of twelve months. The Company's average reserve percentage compared to gross inventory has been approximately 9% for the past five years. In
the past five years, the highest reserve percentage was approximately 10% and the lowest reserve percentage was approximately 8%. The Company's reserve percentage as of December 31, 2008 is 9%.
See the estimated impact below to cost of goods sold, utilizing the different reserve rates above:

(Amounts below in thousands)

Highest

Average

LowestGross inventory as of 12/31/08

$
12,750

$
12,750

$
12,750Reserve rate


10.4
%

8.8
%

7.7
%Estimated reserve


1,325


1,127


983Recorded Reserve as of 12/31/08


1,167


1,167


1,167Impact to costs of goods sold

$
158

$
(40
)
$
(184
)


In
the future, if our inventory were determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. Likewise, if
our inventory is determined to be undervalued, we may have over-reported our costs of goods sold in previous periods and would be required to recognize such additional operating income at
the time of sale. Therefore, although we make every effort to ensure that our forecasts of future product demands are reasonable, any significant unanticipated changes in demand could have a
significant impact on the value of our inventory and our reported operating results. The Company continues to look at ways of minimizing its inventory levels and to be more efficient. As the Company
continues to try to reduce its carrying levels of its work-in-process and finished goods inventory, it should have the effect of further reducing the amount of its inventory
reserves.

Income Taxes

On July 13, 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income
TaxesAn Interpretation of FASB Statement No. 109("FIN 48"), which clarifies the accounting for uncertainty in income taxes recognized in an entity's
financial statements in accordance with SFAS No. 109,Accounting for Income Taxes, and prescribes a recognition threshold and measurement
attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. The Company adopted the provisions of FIN 48 on January 1, 2007, and has
analyzed filing

18

---



Table of Contents

positions
in all of the federal, state, and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. As of the date of adoption, the
Company had approximately $754,000 of unrecognized tax benefits including interest. For the period ended December 31, 2008, the Company recorded an additional net unrecognized tax benefit of
$661,000 including interest. The Company attempts to identify these positions at the end of each year based upon the more than likely or not threshold established in FIN 48. The Company files
its income taxes for the previous year in the Fall of the following year. At times the estimates made at the end of the year may change when the Company files its income tax return. The Company
attempts to mitigate this; however there can be no certainty that there will not be adjustments to the Company's estimates that have previously been made. The Company had $1.6 million and
$964,000 in unrecognized tax benefits and interest as of December 31, 2008 and 2007, respectively.

OverviewBusiness Conditions

Composite Products

The Composite Products segment is mainly comprised of graphite golf shafts and, to a lesser extent, hockey sticks, (the Company exited
the hockey business in 2007). The graphite shaft market consists of customized OEM production shafts, both premium and value and Aldila branded and co-branded shafts. The Company sells
customized OEM production and co-branded shafts directly to its OEM customers and sells Aldila branded shafts
through the OEM custom stock and custom fit programs and to distributors. The Company's recent branded shaft offerings are as follows:



19

---





Table of Contents



Hybrid shafts are included in branded shafts. The Company's branded hybrid shafts have been the most popular hybrid shafts on Tour for the last several years,
often times outpacing the nearest competitor at a two to one margin. The Company's success in Branded Shafts has led to tremendous success on Tour over the past several years.



Our
entire high performance line has done well with Tour players winning using our NV®, VS Proto, DVS® and VooDoo® shafts.

Competition

The Company tries to maintain a broad customer base in both the OEM production shaft and branded shaft market segments and competes
aggressively with foreign-based shaft manufacturers for

20

---



Table of Contents

OEM
production shafts and branded shafts. However, 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 2008, net sales to Ping, Acushnet Company and Callaway Golf, represented 21%, 16% 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 2009.

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 depth and range of its customer base. 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 and at the same time,
new offerings fail to achieve a high level of new sales sufficient to exceed or replace the previous sales levels of "hot" clubs. This is especially true in the premium branded driver programs. If the
Company does not participate in these programs, it could have an adverse effect on the Company's revenues and average selling prices. Average selling prices of the Company's shafts have varied greatly
over the years based upon programs it participates in, mix of shafts, wood vs. irons, competition, retail inventory situations or a shortage of raw materials available. The Company's average selling
price decreased in 2008 by 7% as compared to 2007. See the graph of the Company's average selling price changes below.

GRAPHIC

The
Company believes that some of the success it enjoyed in 2005 and 2006 was attributed to a shortage of carbon fiber. The Company believes that some of its competitors are negatively
impacted when there is a shortage of carbon fiber, which can create a shortage of prepreg. Although, the Company does not have ownership in a carbon fiber plant any longer, it still produces the
majority of its carbon fiber prepreg, which the Company believes is a competitive advantage. In the midst of this

21

---



Table of Contents

pricing
pressure that the Company has faced over the years, the Company has attempted to reduce its cost structure in order to be competitive. In order to do so, the Company continues to look at ways
to do this, which in the past has prompted the Company to move its shaft manufacturing operations offshore, first to Mexico, then China and more recently, Vietnam in 2006. The Company manufactures the
majority of its golf shafts in China followed by Vietnam absorbing the second largest production volume.

Composite Materials

The Composite Materials segment is comprised of external sales of prepreg, film adhesives, fabrics and other materials and in 2007 the
contribution provided by the Company's 50% owned interest in CFT. The Company sold its 50% interest in CFT to its joint venture partner on November 30, 2007. As such, the Composite Materials
segment did not benefit from contributions from CFT after that date. The Company historically has not tracked inter-segment sales and has always looked at the contribution provided by Composite
Materials based upon the external sales of materials. The Company records all shared costs to Composite Products and allocates certain costs for segment reporting, such as shipping, purchasing and
other administrative costs based upon the net revenues of each segment. Costs that are specific to one segment are charged directly to the respective segment.

The
Company began to manufacture composite materials in 1994. Initially, the prepreg produced was mainly consumed by the Composite Products segment. Until the current year, 2008, the
Company's external sales of prepreg and other materials had increased over the past several years. Sales of prepreg, as a percentage of net sales, were 14% for the period ended December 31,
2008 versus 15% for the comparable period in 2007. The Company has spent a significant amount of money over the past several years to increase the capacity of its prepreg operations in support of its
external sales of prepreg and Composite Products operations. Over the last several years, the Company has put in place two prepreg production lines, a second resin filmer and completed the
installation of a wide prepreg tape line during the first quarter of 2008. The prepreg lines add to the Company's capacity of prepreg to support both the Composite Materials and Composite Products
segments. The additional resin filmer will support the Company's wide tape line and provide backup film capacity as the Company had previously only one resin filmer. In addition, the wide tape line
will allow the Company to enter some markets it has previously not been able to access.

The
Company continues to look for opportunities to sell its prepreg and film adhesive products to other fabricators of products manufactured from composite materials. The Company has
achieved some success in these areas and management believes that growth opportunities in these areas will continue to exist. In addition, management believes that vertical integration through its
prepreg operation has 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.

2008 Compared to 2007

Net Sales

2008

2007

Chg

% ChgComposite Products

$
46,023

$
59,097

$
(13,074
)

(22
)%Composite Materials


7,583


10,049


(2,466
)

(25
)%Total Net Sales

$
53,606

$
69,146

$
(15,540
)

(22
)%


22

---



Table of Contents

Composite Products

Composite Products net sales decreased by $13.1 million for 2008 as compared to 2007. The Company's average selling price of
golf shafts decreased by 7% and overall units declined by 14% for 2008 as compared to 2007. The decrease in average selling prices was mainly attributed to mix of shafts sold. The decrease in units is
mainly attributed to the overall state of the golf industry, which is suffering through the recession as are other industries. The golf industry was historically thought to be recession proof, with
equipment sales that typically did not fluctuate by more than 1%-2% a year. Experts estimate that golf equipment sales were down 6%-8% in 2008. The Company's units were down
approximately 5% year over year going into the fourth quarter and suffered a decrease in units of 35% for the fourth quarter 2008 as compared to the fourth quarter of 2007 as the recession worsened
along with the continued collapse of the financial industry and housing market. The Company believes that it is positioned well with its customers when the economic conditions improve. The decrease in
Composite Products sales were attributed to decreases in sales of branded and co-branded shafts, while OEM shaft sales remained relatively flat for 2008 as compared to 2007. Branded golf
shaft sales declined by 37% and co-branded golf shaft sales declined by 58%. Branded and co-branded golf shaft sales decreased to 32% of Composite Products sales in 2008 from
44% in 2007. The decreases in branded shaft sales were attributed to a relatively weak demand of driver club units, which represent the best opportunities for branded shaft products. The Company has
seen increased competition in this segment of the golf shaft market. Although, the Company's branded shaft sales have decreased year over year, the Company's branded shafts are still performing well
on the professional golf tours. In addition to the decreases in shaft sales, sales of composite hockey sticks decreased by $1.7 million as the Company exited this business in 2007.

Composite Materials

Composite Materials net sales decreased by $2.5 million for 2008 as compared to 2007 and represented approximately 14% of the
Company's consolidated net revenues for 2008. The majority of our Composite Materials business is to customers in the recreational products industry. Our customers businesses have been impacted by the
weak economy similar to what is impacting the Composite Products segment. We believe this to be temporary and our investments made in terms of capacity and personnel will resume their momentum as
economic factors improve for our customer base. The Company has added capacity in this segment over the past couple of years to support the Composite Products segment and for outside sales of
Composite Materials. The Company continues to attempt to diversify its customer base in this segment so as not be highly concentrated in the recreational products industry.

Gross Profit

2008

2007

Chg

% ChgComposite Products

$
7,771

$
15,528

$
(7,757
)

(50
)%Composite Materials


1,795


4,437


(2,642
)

(60
)%Total Gross Profit

$
9,566

$
19,965

$
(10,399
)

(52
)%


Composite Products

Composite Products gross profit decreased by approximately $7.8 million, or 50% in 2008 as compared to 2007. The decrease in
Composite Products gross profit was mainly attributed to the decrease in branded and co-branded golf shaft sales in 2008 as compared to 2007. Composite Products gross profit also suffered
from increases in manufacturing costs attributed to lower manufacturing volumes of Composite Products and Composite Materials and increases in research and development

23

---



Table of Contents

spending.
Composite Products gross margin decreased to 17% for 2008 as compared to 26% for 2007. The Company believes that its gross margin will improve as it continues to build more shafts in Vietnam
as compared to Mexico. The Company is continuing to transfer programs to Vietnam as they become qualified. The Company's gross profit was negatively affected by additional inventory reserves of
$619,000 in 2008 as compared to $640,000 in 2007. The increase in reserves in 2008 and 2007 were offset by the sales of product that was fully reserved for of $128,000 in 2008 and $36,000 in 2007. The
net effect of the inventory reserve adjustments was a decrease in gross profit of $491,000 in 2008 and a decrease in gross profit of $604,000 in 2007.

Composite Materials

The Composite Materials gross profit decreased by approximately $2.7 million, or 60%, in 2008 as compared to 2007. The decrease
was mainly attributed to a decrease in contribution provided by the operations of CFT in 2008 versus 2007, as the Company sold its remaining 50% interest in CFT to its joint venture partner during the
fourth quarter of 2007, the loss of sales of Composite Materials and higher manufacturing costs based on lower production volumes in 2008 as compared to 2007.

Operating (Loss) Income

2008

2007

Chg

% ChgGross profit

$
9,566

$
19,965

$
(10,399
)

(52
)%Selling, General & Administrative ("SG&A) ExpenseComposite Products


12,182


11,344


838


7
%Composite Materials


991


912


79


9
%Total SG&A


13,173


12,256


917


7
%Operating (Loss) IncomeComposite Products


(4,411
)

4,184


(8,595
)

(205
)%Composite Materials


804


3,525


(2,721
)

(77
)%Operating Income

$
(3,607
)
$
7,709

$
(11,316
)

(147
)%Operating Margin


(7
)%

11
%

(18
)%


Operating
income decreased by approximately $11.3 million, or 147%, in 2008 as compared to 2007. The decrease was attributed to a decrease in gross profit and an increase in SG&A.
The Company's SG&A expenses increased by approximately $917,000 in 2008 as compared to 2007. SG&A increased as a percentage of revenues to 25% in 2008 as compared to 18% for 2007. The increase was
primarily attributed to a 22% increase in advertising and promotion expenses in support of the Company's branded and co-branded products and an increase in selling expense of 19% in 2008
as compared to 2007. These increases were partially offset by decreases in professional fees during the year. Although professional fee expense decreased in the year, SG&A was negatively impacted by
approximately $337,000 in one-time expenses associated with the establishment of its credit facility, the restatement of its previously issued financial statements in 2006 and the payment
of a $5.00 special dividend. The Company does not expect to incur these expenses in 2009. In addition, the Company plans to reduce its advertising and marketing spending in 2009. The Company's stock
based compensation expense was $302,000 in 2008 versus $323,000 in 2007. The Company anticipates that stock based compensation expense will increase due to potential future grants of equity awards.

24

---





Other Income (Expense)

2008

2007

Chg

% ChgOperating income

$
(3,607
)
$
7,709

$
(11,316
)

(147
)%Interest income


308


910


(602
)

(66
)%Interest expense


(284
)




(284
)

(100
)%Gain on sale of joint venture





16,334


(16,334
)

(100
)%Other, net


179


(22
)

201


813
%Equity in earnings of joint venture





435


(435
)

(100
)%Total other income


203


17,657


(17,454
)

(99
)%(Loss) income before income taxes

$
(3,404
)
$
25,366

$
(28,770
)

(113
)%


Other
income decreased by approximately $17.5 million for 2008, or 99%, as compared to 2007. The majority of the decrease was attributed to the $16.3 million gain on the
sale of the Company's remaining 50% interest in CFT recorded in 2007 and the decrease in interest income and loss of equity in earnings provided by CFT. In addition, the Company had interest expense
on its credit facility in 2008 as compared to nothing in 2007.

(Loss) Income before taxes

2008

2007

Chg

% Chg(Loss) income before income taxes

$
(3,404
)
$
25,366

$
(28,770
)

(113
)%(Benefit) provision for income taxes


(901
)

9,413


(10,357
)

(110
)%Net income

$
(2,503
)
$
15,953

$
(18,413
)

(115
)%Effective tax rate


26
%

37
%

9
%Profit margin


(5
)%

23
%

(28
)%


The
Company recorded a benefit for income taxes in the amount of $901,000 in 2008 as compared to a provision for income taxes of $9.4 million for 2007. The Company also records
interest expense for its unrecognized tax benefits in the provision for income taxes. The Company had a net increase in its accrual for unrecognized tax benefits of $661,000 during 2008. The increase
was attributed to a revision of prior year estimates and tax positions taken during the 2008 Period, which were partially offset by decreases in positions attributed to a lapse of statute of
limitations (see Note 9 in the Notes the Consolidated Financial Statements). The revision of prior year estimates is associated with the California R&D credit for the tax years
2001-2007. The Company has been under audit from the California Franchise Tax Board ("FTB") since 2007 for the taxable years 2001-2004 and received a preliminary finding during
the third quarter of 2008. The FTB is disallowing a portion of the Company's R&D credits taken. The Company is currently appealing the finding.

Liquidity and Capital Resources

Cash and cash equivalents ("cash") decreased by approximately $23.4 million for 2008 as compared to 2007. The decrease in cash
was mainly attributed to dividend payments of $27.3 million, capital expenditures of approximately $1.4 million and income tax payments of $4.8 million, which was partially offset
by net borrowings of $8.2 million under the Company's credit facility with Key Bank. The Company entered into the credit facility with Key Bank on February 8, 2008 and recently modified
the agreement on February 9, 2009. (See Note 6 to the consolidated financial statements).

The
Company used approximately $1.4 million for capital expenditures during 2008 as compared to $6.3 million during 2007. The majority of the capital expenditures in 2008
were attributed to investment in the Composite Products segment. The Company has spent approximately $1.0 million in support of

25

---



Composite
Products and $351,000 for Composite Materials, which was attributed to the final installation of the wide tape line. Management anticipates that capital expenditures will not exceed
$1.0 million for 2009.

The
Company declared and paid a special $5.00 cash dividend to shareholders during the 2008. The special dividend payments to shareholders totaled $25.8 million. In addition to
the special dividend, the Company paid two $0.15 per share quarterly dividends during the 2008. The Company's dividend policy is reviewed quarterly during the Company's Board of Directors meetings and
subject to Board approval. The Company announced on August 21, 2008 that it was discontinuing its quarterly dividend. The Company borrowed $14.5 million from Key Bank during 2008 to help
support the special dividend paid and paid back $6.3 million during 2008. The borrowing is comprised of a term loan and a revolving line of credit. The Company borrowed $5.0 million
against the term loan, which is payable over a five year period with final maturity in February 2013. The Company makes monthly principal payments of $83,333, plus interest, to Key Bank against the
term loan. The Company borrowed $9.5 million against the revolving line of credit during the 2008 and paid back $5.5 million during 2008. Although the Company did not need that level of
borrowing against the revolver for operations, it had to borrow at the end of each quarterly period to meet its minimum cash covenant included in the credit facility. At the end of each quarter, the
Company is required to maintain a minimum of $5.0 million in a domestic cash position. The Company made $833,000 in principal payments against its term loan.

Although
the Company has experienced a 22% decrease in sales in 2008 as compared to 2007, the Company believes that it is well positioned with its customers when economic conditions
improve. We believe that our cash available from future operating and financing activities will be adequate to meet our anticipated requirements for working capital, capital expenditures, debt service
and the payment of any future dividends, if granted by the Company's Board of Directors in the next twelve months. There
can be no assurance, however, that our business will generate future positive operating cash flows. If we are unable to generate sufficient cash flow from operations, we may be required to sell
assets, reduce capital expenditures or obtain additional financing and there is no assurance we will be able to do so on a timely basis or on satisfactory terms.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS")
No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and establishes a hierarchy that categorizes and
prioritizes the sources to be used to estimate fair value. SFAS No. 157 also expands financial statement disclosures about fair value measurements. Under SFAS No. 157, fair value is
defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. SFAS 157 also
establishes a three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the valuation methodologies in measuring fair value. On February 12,
2008, FASB issued FASB Staff Position (FSP) No. FAS 157-2,Effective Date of FASB Statement No. 157(FSP 157-2),
which delays the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis. We elected a partial deferral of SFAS No. 157 under the provisions of FSP 157-2 related to the measurement of fair value used when
evaluating other long-lived assets for impairment. On October 10, 2008, the FASB issued FSP 157-3,Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active, (FSP 157-3), which clarifies application of SFAS No. 157 in a market that is not active. FSP
157-3 was effective upon issuance, including prior periods for which financial statements have not been issued. The Company does not expect that the adoption of SFAS No. 157 or FSP
157-3 to have a material affect to its financial statements.

26

---



In
June 2008, FSP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities," ("FSP
EITF 03-6-1"), was issued. FSP EITF 03-6-1 requires unvested share-based payment awards that contain non-forfeitable rights to
dividends or dividend equivalents to be treated as participating securities as defined in EITF Issue No. 03-6, "Participating Securities and the Two-Class Method under
FASB Statement No. 128," and, therefore, included in the earnings allocation in computing earnings per share under the two-class method described in SFAS No. 128, "Earnings
Per Share." FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those
years. Upon adoption, all previously reported earnings per share data must be retroactively adjusted to conform with the
requirements of the FSP. The Company is currently evaluating the impact of the adoption of FSP EITF 03-6-1 on its calculation of earnings per share.

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

This Annual Report on Form 10-K and certain information incorporated herein by reference contain forward-looking
statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Annual Report on
Form 10-K, other than statements that are purely historical, are forward-looking statements.

Words
such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and similar expressions also identify forward-looking statements. Forward-looking statements
are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking
statements. 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 15 of Part IV of this report.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On August 15, 2007 the Company dismissed its accountants Squar, Milner, Miranda, Peterson and Williamson, LLP ("Squar
Milner") and on August 20, 2007 appointed Mayer Hoffman McCann P.C. as its independent accountants. The change in independent accountants was approved by the Company's Audit Committee. During
the Company's fiscal years ended December 31, 2006 and December 31, 2005 and the subsequent interim periods through August 15, 2007 there were no disagreements with Squar Milner,
or their predecessor firm Peterson and Co. LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements,
if not resolved to the satisfaction of Squar Milner, would have caused Squar Milner to make reference thereto in their report on the financial statements for such years. See the Company's Current
Report filed on Form 8-K on August 17, 2007.

Item 9A.    Controls and Procedures

As of the end of the period covered by this report, Aldila management, including the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of our

27

---



disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that
such disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to Aldila required to be included in Aldila's periodic filings under the
Exchange Act.

Management's Report on Internal Control Over Financial Reporting

The Company's management is responsible for establishing and maintaining effective internal control over financial reporting (as
defined in Rule 13a-15(f) of the Securities Exchange Act). Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31,
2008. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in its report entitledInternal
ControlIntegrated Framework.Based on the assessment, management believes that, as of December 31, 2008, the Company's internal control over financial
reporting is effective based on those criteria.

Because
of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to
future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in internal control.There have been no significant changes in internal controls or in factors that could significantly affect
internal
controls, including any corrective actions with regard to significant deficiencies and material weaknesses, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed
their evaluation.

This
annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report
was not subject to attestation by the Company's independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only
management's report in this annual report.

Item 9B.    Other Information

None.

28

---





Table of Contents

PART III

Item 10.    Directors and Executive Officers and Corporate Governance

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 2009 Annual Meeting of Stockholders for the year ended December 31, 2008, which will be filed with the Commission within 120 days of the end of the fiscal year
covered by this report ("2009 Proxy Statement").

The
Company adopted a Code of Business Conduct and Ethics on December 31, 2002 governing its officers, directors and employees, including our principal executive officer,
principal financial officer,
principal accounting officer or controller, or persons performing similar functions.

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 2009 Proxy Statement.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

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 and Related Stockholder Matters" in the 2009 Proxy Statement.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

The information required as to this Item as it pertains to Director Independence is incorporated by reference from the section headed
"Election of Directors" in the 2009 Company's Proxy Statement.

Item 14.    Principal Accounting Fees and Services

The information required as to this Item is incorporated herein by reference from the data under the caption "Independent Accountant
Fees" in the 2009 Proxy Statement.

29

---





Table of Contents

PART IV

Item 15.    Exhibits, Financial Statement Schedules

Consolidated Balance Sheets at December 31, 2008 and 2007;

31Consolidated Statements of Operations for the years ended December 31, 2008 and 2007;

32Consolidated Statements of Stockholders' Equity for the years ended December 31, 2008 and
2007;

33Consolidated Statements of Cash Flows for the years ended December 31, 2008, and 2007;

34Notes to Consolidated Financial Statements

35Report of Independent Registered Public Accounting Firm

53










30

---





Table of Contents



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

December 31,
2008

December 31,
2007ASSETSCURRENT ASSETS:Cash and cash equivalents

$
6,157

$
29,529Accounts receivable, net


6,407


8,684Income taxes receivable


2,272


Inventories


11,583


13,861Deferred tax assets


809


1,521Prepaid expenses and other current assets


484


578Total current assets


27,712


54,173PROPERTY, PLANT AND EQUIPMENT, NET


12,789


13,308DEFERRED TAXES


1,187


750OTHER NON-CURRENT ASSETS


244


257TOTAL ASSETS

$
41,932

$
68,488LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES:Accounts payable

$
3,420

$
4,758Income taxes payable





4,266Accrued expenses


2,307


2,564Short term debt


5,000


Other current liability


117


137Total current liabilities


10.844


11,725LONG-TERM LIABILITIES:Deferred rent


153


170Long term debt


3,167


Other long-term liabilities


1,508


827Total liabilities


15,672


12,722COMMITMENTS AND CONTINGENCIES (NOTE 11)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 5,174,183 shares as of December 31, 2008 and 5,154,235 shares as of
December 31, 2007


52


51Additional paid-in capital


44,121


43,702(Accumulated deficit) retained earnings


(17,913
)

12,013Total stockholders' equity


26,260


55,766TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
41,932

$
68,488


See
notes to consolidated financial statements.

31

---





Table of Contents



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

Year ended
December 31,2008

2007NET SALES

$
53,606

$
69,146COST OF SALES


44,040


49,181Gross profit


9,566


19,965SELLING, GENERAL AND ADMINISTRATIVE


13,173


12,256Operating (loss) income


(3,607
)

7,709OTHER INCOME (EXPENSE):Interest income


308


910Interest expense


(284
)

Gain on sale of joint venture





16,334Other, net


179


(22
)Equity in earnings of joint venture





435(LOSS) INCOME BEFORE INCOME TAXES


(3,404
)

25,366(BENEFIT) PROVISION FOR INCOME TAXES


(901
)

9,413NET (LOSS) INCOME

$
(2,503
)
$
15,953NET (LOSS) INCOME PER COMMON SHAREBASIC

$
(0.48
)
$
2.94NET (LOSS) INCOME PER COMMON SHARE, ASSUMING DILUTION

$
(0.48
)
$
2.91WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING


5,162


5,433WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES


5,162


5,485


See
notes to consolidated financial statements.

32

---





Table of Contents



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

Common Stock



Retained
Earnings
(Accumulated
Deficit)Additional
Paid-in
CapitalShares

Amount

TotalBalance at January 1, 2007


5,524

$
55

$
49,903

$
(632
)
$
49,326Repurchases of common stock


(404
)

(4
)

(6,731
)




(6,735
)Stock-based compensation


10





323





323Common stock issued upon stock option exercises, including income tax benefits of $73


24





207





207Adoption of FIN 48











(50
)

(50
)Dividend payments











(3,258
)

(3,258
)Net income











15,953


15,953Balance at December 31, 2007


5,154


51


43,702


12,013


55,766Stock-based compensation


19





402


(100
)

302Common stock issued upon stock option exercises


1


1


17





18Dividend payments











(27,323
)

(27,323
)Net loss











(2,503
)

(2,503
)Balance at December 31, 2008


5,174

$
52

$
44,121

$
(17,913
)
$
26,260


See
notes to consolidated financial statements.

33

---





Table of Contents



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

Year ended
December 31,2008

2007CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income

$
(2,503
)
$
15,953Adjustments to reconcile net (loss) income to net cash (used for) provided by operating activities:Depreciation and amortization


1,866


1,587Stock-based compensation


302


323Loss on disposal of fixed assets


9


106Undistributed income of joint venture, net





(382
)Gain on sale of joint venture





(16,334
)Changes in assets and liabilities:Restricted cash





1,444Accounts receivable, net


2,277


178Inventories


2,278


(170
)Deferred tax assets


275


233Prepaid expenses and other assets


89


235Accounts payable


(1,338
)

279Accrued expenses


(257
)

522Income taxes payable/receivable


(6,537
)

5,503Other current liability


(20
)

87Deferred rent and other long-term liabilities


663


948Net cash (used for) provided by operating activities


(2,896
)

10,512CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment


(1,357
)

(6,253
)Proceeds from sales of property, plant and equipment


19


67Purchases of marketable securities





(14,200
)Proceeds from sales of marketable securities





25,500Distributions from joint venture





286Proceeds from sale of joint venture





19,521Net cash (used for) provided by investing activities


(1,338
)

24,921CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings against term loan


5,000


Payments for term loan


(833
)

Borrowings against line of credit


9,500


Payments for line of credit


(5,500
)

Repurchases of common stock





(6,735
)Benefit from exercise of stock options





73Proceeds from issuance of common stock


18


134Dividend payments


(27,323
)

(3,258
)Net cash used for financing activities


(19,138
)

(9,786
)NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS


(23,372
)

25,647CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR


29,529


3,882CASH AND CASH EQUIVALENTS, END OF YEAR

$
6,157

$
29,529SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the year for:Income taxes

$
4,805

$
2,870Interest

$
273

$



See notes to consolidated financial statements.

34

---





Table of Contents

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. In addition, the Company sells composite prepregs and other related composite materials.

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 Corp. ("Aldila Golf"), and Aldila Golf's subsidiaries, Aldila de Mexico, Aldila Carbon Fiber Products (Zhuhai)
Company Ltd and Aldila Composite Products Company Ltd. All intercompany transactions and balances have been eliminated in consolidation. The Company accounts for its previously owned
joint venture investment in Carbon Fiber Technology LLC ("CFT") under the equity method of accounting. The Company sold its remaining 50% investment in CFT during the fourth quarter of 2007.

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 affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingencies affected by such
estimates including but limited to: returns for breakage,
allowance for doubtful accounts, inventory obsolescence and provision for income taxes, and assumptions. Actual results could differ from these estimates.

Revenue RecognitionThe Company recognizes revenues from product sales upon transfer of title to the customer at the time of shipment. The Company
offers discounts to certain customers based on early payment. Sales to these customers are recognized on a gross basis, and sales discounts are recorded at the time the discount is taken by the
customer. Recording revenue net of discounts would not have a significant effect on net sales or on the net realizable value of accounts receivable. Sales discounts for the years ended
December 31, 2008 and 2007 were $174,000 and $232,000, respectively, representing less than 1% of gross revenues. The Company also offers certain of our customers the right to return shafts for
breakage within a limited time after delivery. We track such shaft breakage returns, and we record a provision for the estimated amount of such future returns, based on historical experience and any
notification we receive of pending returns at the time sales are made. The amount recorded as of December 31, 2008 and 2007 was $110,000 and $135,000, respectively.

Cash Equivalents and Marketable SecuritiesThe Company considers all highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents. All short-term, highly liquid investments having original maturities greater than ninety days are considered to be marketable securities. Management determines
the appropriate classification of marketable debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company's cash was not invested in
any such highly liquid investments, including money market mutual funds as of December 31, 2008.

Fair Value of Financial InstrumentsThe Company adopted Financial Accounting Standards Board Statement No. 157, Fair Value Measurements, as of
January 1, 2008, which did not have a material impact on the consolidated financial statements. Certain financial instruments are carried at cost on the consolidated balance sheets, which
approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expense and
other short-term liabilities. Because the Company's outstanding long-term debt was

35

---



Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

modified
on December 31, 2008, the Company believes that the carrying amount of such debt would approximate its fair value.

Accounts ReceivableThe Company sells graphite golf club shafts primarily to golf club manufacturers and distributors on credit terms. The Company
also sells composite materials to manufacturers of other composite based products on credit terms. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts.
The Company's estimate is based on historical collection experience and a monthly review of the current status of outstanding customer balances. 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. The inventory balance,
which includes material, labor and manufacturing overhead costs, is recorded net of an estimated allowance for obsolete or unmarketable inventory. The estimated allowance for obsolete or unmarketable
inventory is based upon management's understanding of market conditions and forecasts of future product demand, all of which are subject to change. If actual charges for obsolescence or unmarketable
inventory significantly exceed the estimated allowance, the Company's operating results would be significantly adversely affected.

Property, Plant 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


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

Evaluation of Long-lived AssetsThe Company's policy is to assess potential impairments to its long-lived assets at least
annually or when there is evidence that events or changes in circumstances have made recovery of the assets carrying value unlikely and
the carrying amount of the asset exceeds the estimated undiscounted future cash flows. If such evaluation were to indicate a material impairment of these long-lived assets, such impairment
would be recognized by a write down of the applicable asset to its estimated fair value under Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets".

Warranty ReserveThe Company provides a warranty to its customers for shaft breakage in the normal course of business. The Company accrues for the
estimated warranty based on historical experience at time of sale. The estimated warranty is calculated based upon a rolling four-year ratio of breakage returns to sales applied to current
year sales. (See Note 5).

AdvertisingThe Company advertises primarily through print media. The Company's policy is to expense advertising costs, including production costs, as
incurred. Advertising expenses for 2008 and 2007 were $1.6 million, and $1.6 million, respectively.

Shipping and Handling CostsShipping and handling costs are classified as cost of sales.

36

---



Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Research & Development ("R&D")The Company performs internal research and development efforts. Research and development expenses were
approximately $2.9 million and $2.4 million for 2008 and 2007, respectively; such expenses are recorded in cost of sales.

Foreign Currency TranslationThe Company's foreign subsidiaries are a direct and integral component or extension of the parent company's operation.
The daily operations of foreign subsidiaries are dependent on the economic environment of the parent's currency. In addition, the changes in the foreign subsidiary's individual assets and liabilities
directly affect the cash flow of the parent company. The functional currency of foreign subsidiaries is the US dollar. During the years ended December 31,
2008, 2007 and 2006, net foreign currency translation gains and losses included in the Company's Statements of Operations were insignificant.

(Loss) Earnings Per Share ("EPS")Earnings per sharebasic is calculated based upon the weighted average number of shares outstanding
during the year, while diluted also gives effect to all potential dilutive common shares outstanding during each year such as options, restricted stock, warrants and other contingently issuable
shares. Options to purchase 155,202 and 66,737 shares of common stock as of December 31, 2008 and 2007, respectively, at prices ranging from $1.12 to $27.01 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 2016.

Income TaxesIncome taxes are provided utilizing the asset and liability method. The asset and 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At December 31, 2008, the Company has two stock-based compensation plans, which are described more
fully in Note 8. Beginning in fiscal year 2006, the Company accounts for share-based compensation arrangements in accordance with the provisions of SFAS No. 123R ("SFAS 123R")
"Share-Based Payment," which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. The Company
uses the Black-Scholes option pricing model to estimate the fair value of its stock options at the date of grant. The Black-Scholes option pricing model requires the input of subjective assumptions to
calculate the value of stock options. The Company uses historical data among other information to estimate the expected price volatility, the expected option life and the expected forfeiture rate. In
accordance with SFAS 123R, the Company records compensation expense for Restricted Stock Awards based on the estimated fair value of the award on the date of grant. The estimated fair value is
determined based on the closing price of the Company's Common Stock on the award date multiplied by the number of awards expected to vest. The number of awards expected to vest is based on the number
of awards granted adjusted by estimated forfeiture rates. The total compensation cost is then recognized ratably over the vesting period.

Concentration RiskThe Company maintains some of its cash in bank deposit accounts, which may be uninsured or exceed the federally insured limits. No
losses have been experienced related to such accounts. The Company believes it places its cash with quality financial institutions and is not exposed to any significant concentration of credit risk on
cash.

37

---



Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Supplier Concentration RiskThe Company has relationships with vendors for its carbon fiber needs through 2009 and beyond. In the world carbon fiber
market, there are a limited amount of carbon fiber manufacturers. The Company currently purchases carbon fiber from most of these carbon fiber manufacturers. Depending on market conditions prevailing
at the time, the Company may face difficulties in obtaining adequate supplies of carbon fiber from vendors other than those that the Company currently utilizes.

Recently Issued Accounting PronouncementsIn September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard ("SFAS") No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and establishes a
hierarchy that categorizes and prioritizes the sources to be used to estimate fair value. SFAS No. 157 also expands financial statement disclosures about fair value measurements. Under SFAS
No. 157, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. SFAS 157 also establishes a three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the valuation methodologies in measuring
fair value. On February 12, 2008, FASB issued FASB Staff Position (FSP) No. FAS 157-2,Effective Date of FASB Statement
No. 157(FSP 157-2), which delays the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the financial statements on a recurring basis. We elected a partial deferral of SFAS No. 157 under the provisions of FSP
157-2 related to the measurement of fair value used when evaluating other long-lived assets for impairment. On October 10, 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When the Market
for That Asset Is Not Active, (FSP 157-3), which clarifies application of
SFAS No. 157 in a market that is not active. FSP 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued.

In
June 2008, FSP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities," ("FSP
EITF 03-6-1"), was issued. FSP EITF 03-6-1 requires unvested share-based payment awards that contain non-forfeitable rights to
dividends or dividend equivalents to be treated as participating securities as defined in EITF Issue No. 03-6, "Participating Securities and the Two-Class Method under
FASB Statement No. 128," and, therefore, included in the earnings allocation in computing earnings per share under the two-class method described in SFAS No. 128, "Earnings
Per Share." FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those
years. Upon adoption, all previously reported earnings per share data must be retroactively adjusted to conform with the
requirements of the FSP. The Company is currently evaluating the impact of the adoption of FSP EITF 03-6-1 on its calculation of earnings per share.

2. ACCOUNTS RECEIVABLE

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

2008

2007Trade accounts receivable

$
6,470

$
8,725Less: allowance for doubtful accounts


(63
)

(41
)$
6,407

$
8,684


38

---



Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVENTORIES

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

2008

2007Raw materials

$
7,970

$
9,429Work-in-process


424


918Finished goods


3,189


3,514Net inventories

$
11,583

$
13,861Inventory reserves included in net inventories

$
1,167

$
1,182


4. PROPERTY, PLANT AND EQUIPMENT

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

2008

2007Machinery and equipment

$
20,233

$
17,632Office furniture and equipment


1,938


1,924Leasehold improvements


10,692


9,902Building and land


2,870


2,837Property and equipment not yet in service


487


3,130Total gross fixed assets


36,220


35,425Less: accumulated depreciation and amortization


(23,431
)

(22,117
)Fixed assets

$
12,789

$
13,308


Depreciation
and amortization expense were $1.9 million and $1.6 million for the years ended December 31, 2008, and 2007, respectively.

5. ACCRUED EXPENSES

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

2008

2007Payroll and employee benefits

$
1,811

$
1,778Warranty reserve(1)


110


135Legal and professional fees





12Due to SGL





327Other


386


312Accrued expenses

$
2,307

$
2,564






39

---



Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. ACCRUED EXPENSES (Continued)



2008

2007Beginning Balance

$
135

$
157Settlement of Warranty


(105
)

(151
)Adjustments to Warranty


80


129Ending Balance

$
110

$
135


6. DEBT

The Company entered into a Credit and Security Agreement ("Credit Facility") with KeyBank National Association ("Key Bank") effective February 8, 2008. The Credit Facility was
comprised of a Term Loan Commitment ("Term Loan") of $5.0 million and a Maximum Revolving Amount ("Revolver") of $10.0 million, for a total Credit Facility of $15.0 million. The
Credit Facility is for a term of 5 years, terminating on February 8, 2013. The Company's assets serve as collateral for the Credit Facility. The interest rate of borrowing against the
Credit Facility can be either at a Base Rate or Eurodollar Rate. Base Rate is defined as a rate per annum equal to the greater of (a) the Prime Rate or (b) one-half of one
percent (.50%) in excess of the Federal Funds Effective Rate. Eurodollar Rate is a LIBOR rate plus 1.75%. The Company must maintain certain Financial Covenants ("Covenants") in accordance with the
Credit Facility, which are as follows: a Leverage Ratio which cannot exceed 2.0 to 1.0, a Fixed Charge Coverage Ratio not to be less than 1.2 to 1.0 and the Company must maintain a Minimum Cash
Balance equal to or greater than $5.0 million. The Credit Facility was filed as exhibit 10.24 in the Company's 2007 Annual Report filed on Form 10-K.

On
February 9, 2009 the Company entered into a Loan Modification Agreement ("Agreement") with an effective date of December 31, 2008. The Agreement modifies the Credit
Facility as follows:



The
Company incurred a loan modification fee of $90,000 concurrently with entering the Agreement. As the modification was not deemed to be significant enough to warrant treatment as a
debt extinguishment, pursuant to the guidance provided by FASB Emerging Issues Task Force ("EITF") 96-19,"Debtor's Accounting for a Substantive Modification and Exchange of Debt
Instruments." The loan modification fee will be capitalized and amortized over the remaining life of the Agreement. As of December 31, 2008, the Company was in compliance with the Minimum Cash
Balance covenant.

40

---



Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. DEBT (Continued)



December 31,
2008

December 31,
2007Revolving line of credit

$
4,000

$
Current portion of long term debt


1,000


Short term debt

$
5,000

$





December 31,
2008

December 31,
2007Term Loan

$
4,167

$
Less: current portion of long term debt


(1,000
)

Long term debt


3,167


Total debt

$
8,167

$



Short term debtShort term debt is comprised of its revolving line of credit and the current portion of long term debt. The Company has borrowed
$4.0 million against the Revolver as of December 31, 2008, with $2.5 million maturing on January 6, 2009 at an interest rate of 3.25% and $1.5 million maturing on
February 28, 2009 at an interest rate of 3.93%. The weighted average interest rate of the Company's short term borrowings is 3.51%. The Company must pay a .25% commitment fee for the average
unused portion of the Revolver for any given period. On January 6, 2009, the Company paid the $2.5 million against the Revolver, which matured on such date and on February 27,
2009 the Company paid $1.5 million against the Revolver.

Long term debtThe Company borrowed $5.0 million during the first quarter of 2008 against the Term Loan. The interest rate of the Term Loan is
LIBOR plus 1.75% and adjusts each month. As of December 31, 2008, the interest rate was 3.62%. The Company must make monthly payments of $83,333 plus interest. The Company has paid $833,000
against the Term Loan in 2008.



Amount

YearTerm Loan

$
1,000


2009Revolver borrowing $2.5 million at 3.25%


2,500


2009Revolver borrowing $1.5 million at 3.93%


1,500


2009Term Loan


1,000


2010Term Loan


1,000


2011Term Loan


1,000


2012Term Loan


167


2013Total debt

$
8,167


41

---



Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. STOCKHOLDERS' EQUITY

The Company declared and paid a $5.00 per share special dividend and two $0.15 per share quarterly dividends to holders of its common stock in 2008. The $5.00 special dividend was paid
March 6, 2008. The Company paid $27.3 million in dividends during the year. The Company announced on August 21, 2008, that its Board of Directors decided to suspend its quarterly
cash dividend. The Company declared and paid four quarterly dividends in the amount of $0.15 per share to holders of its common stock during 2007, which resulted in dividend payments totaling
$3.3 million.

The
Company announced on August 24, 2007 that it commenced a Dutch Auction Tender Offer ("Offer") in which it would have spent up to $7.5 million to repurchase a maximum of
496,688 shares of its common stock. The Offer expired on Friday, September 28, 2007. The Company was able to acquire 370,845 shares at an average purchase price of $16.85, which cost
approximately $6.2 million. Along with this announcement, the Company announced the termination of its existing stock buyback plan. The Company repurchased 32,661 shares against this plan in
2007 at an average purchase price of $14.98 per share.

8. ACCOUNTING FOR STOCK BASED COMPENSATION

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards ("SFAS") No.123R (Revised 2004), "Share Based Payment," ("SFAS 123R"), using the
modified prospective method. In accordance with the modified prospective method, the Company's Consolidated Financial Statements for prior periods have not been restated to reflect, and do not
include, the impact of SFAS No. 123R. In accordance with SFAS No. 123R, the Company measures the cost of employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the awardthe
requisite service period. The Company determines the grant-date fair value of employee share options using the Black-Scholes option-pricing model.

In
May of 1994, the stockholders adopted the 1994 Stock Incentive Plan ("Plan") for employees, directors and consultants of the Company. The Company has reserved 1,366,667 shares for
issuance under this Plan. Equity incentive programs covered under the Plan include incentive stock options, non-qualified stock options and restricted stock awards. Stock options and
restricted stock awards are granted at the fair market value of the shares at the date of grant, generally become fully vested over three years after grant, and expire ten years from the date of
grant.

Stock Based Compensation Expense

There were no capitalized stock-based compensation costs at December 31, 2008. The Company granted 10,002
non-qualified stock options on May 30, 2008 to its Board of Directors in accordance with the Company's stock option plan. The Company issued 28,980 shares of restricted stock awards
to employees during the period ending December 31, 2008. On October 7, 2008, the Compensation Committee of the Company's Board of Directors modified all outstanding stock options issued
prior to May 30, 2008, subject to the Internal Revenue Service Code regulations for the incentive stock options that were modified. The modification resulted in additional compensation expense
of approximately $100,000, which the Company recorded during the fourth quarter of 2008. The Company recognizes stock-based compensation expense using the straight line attribution method. The
remaining unrecognized compensation cost related to unvested awards at December 31, 2008 is approximately $577,000; such expense will be recognized over a weighted average period of
1.6 years. This amount

42

---



Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. ACCOUNTING FOR STOCK BASED COMPENSATION (Continued)

does
not include the cost of any additional options or restricted stock awards that may be awarded in future periods nor any changes in the Company's forfeiture rate.

The
following table summarizes compensation costs related to the Company's stock-based compensation plans for the twelve month periods ended December 31, 2008 and 2007 (in
thousands):

2008

2007Cost of sales

$


$
Selling, general and administrative


302


323Pre-tax stock-based compensation expense


302


323Income tax benefit


109


120Net stock-based compensation expense

$
193

$
203


SFAS
No.123R requires the Company to reflect income tax benefits resulting from tax deductions in excess of expense as a financing cash flow in its Consolidated Statement of Cash Flow
rather than as an operating cash flow as in prior periods. Cash proceeds, tax benefits and intrinsic value of related total stock options exercised during the twelve month periods ended
December 31, 2008 and 2007 are as follows (in thousands):

2008

2007Proceeds from stock options exercised

$
18

$
134Tax benefit related to stock options exercised

$


$
73Intrinsic value of stock options exercised

$
2

$
206


Stock Option Activity

The fair value of stock options at date of grant was estimated using the Black-Scholes model. The Company had utilized the short cut
method of determining the expected life of stock options in the past, in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 107 ("SAB 107"). SAB 107
only allowed the short cut method to be used for stock option grants through December 31, 2007. As such, in 2008 the Company has estimated the expected life of its grants in 2008 based upon
historical exercise data. The risk free interest rate is based on the U.S. Treasury constant maturity for the expected life of the stock option. Expected volatility is based on the historical
volatilities of the Company's common stock. The Company determined in August 2008 to suspend dividend payments so going forward expected dividend yield will be nil, however the 2008 grants were
granted before the Company suspended its dividend payments. Below is the information for the grants issued for 2008 and 2007.

2008

2007Expected life (years)


3.7


6Risk-free interest rate


2.9
%

4.9
%Expected volatility


64.3
%

83.0
%Expected dividend yield


7.6
%

3.9
%Weighted average fair value of options granted

$
2.51

$
8.59


43

---



Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. ACCOUNTING FOR STOCK BASED COMPENSATION (Continued)

The
following table summarizes the stock option transactions during the twelve month period ended December 31, 2008:

Shares

Weighted
average
exercise
price

Weighted
average
remaining
contractual
life (in years)

Aggregate
Intrinsic
ValueOptions outstanding 1/1/2008


146,312

$
14.27Options granted


10,002


7.93Options exercised


(1,112
)

15.75Options terminated





Options outstanding 12/31/2008


155,202

$
10.72


6.2

$
6.68Options exercisable 12/31/2008


129,353

$
10.54


5.6

$
6.51


The
weighted average exercise price of options outstanding and exercisable as of 12/31/2008 reflect the option modification that was done during the fourth quarter of 2008 as noted
above. The total intrinsic value of options exercised during the twelve month periods ended December 31, 2008 and 2007 was approximately $2,000 and $206,000, respectively. The total fair value
of shares vested during the period ended December 31, 2008 was approximately $152,000. A summary of the status of the Company's nonvested shares as of December 31, 2008 and changes
during the twelve month period ended December 31, 2008 are presented below.

Nonvested Options

Shares

Weighted
Average
Grant-Date
Fair ValueNonvested at 1/1/2008


28,779

$
11.19Granted


10,002

$
2.51Vested


(12,932
)
$
11.74Forfeited





Nonvested Options at 12/31/2008


25,849

$
7.56


Restricted Stock Activity

Restricted stock awards were issued to employees under the Company's Plan. Restricted stock awards vest over three years and are
subject to the employees' continuing service to the Company. The cost of restricted stock awards is determined using the fair value of the Company's common stock on the date of the grant. The
compensation expense is recognized ratably over the vesting period. A

44

---



Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. ACCOUNTING FOR STOCK BASED COMPENSATION (Continued)

summary
of the status of and changes in restricted stock units granted under the Company's Plan as of and during the twelve months ended December 31, 2008 is presented below:

December 31, 2008Shares

Weighted
average
exercise
priceRestricted stock outstanding 1/1/2008


48,990

$
16.43Restricted stock awarded


28,980

$
3.77Restricted stock vested


(18,836
)
$
16.31Restricted stock terminated


(1,483
)
$
16.41Restricted stock outstanding 12/31/2008


57,651

$
10.10


9. INCOME TAXES

On July 13, 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement
No. 109("FIN 48"), which clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with SFAS
No. 109,Accounting for Income Taxes, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax
positions taken or expected to be taken on a tax return. The Company adopted the provisions of FIN 48 on January 1, 2007, and has analyzed filing positions in all of the federal, state,
and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. As of the date of adoption, the Company had approximately $754,000 of
unrecognized tax benefits including interest. For the period ended December 31, 2008, the Company recorded an additional net unrecognized tax benefit of $661,000 including interest. If the
Company were to recognize these tax benefits, it would favorably affect the annual effective income tax rate. As such, the Company has recorded an other current liability of $117,000 and an other long
term liability of $1.5 million as of December 31, 2008. As of December 31,

45

---



Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. INCOME TAXES (Continued)

2007,
such amounts were $137,000 and $827,000, respectively. The changes to Company's unrecognized tax benefits during the periods ended December 31, 2008 and 2007 are as follows:

December 31, 2008Increases

Decreases

Net ChangeBeginning period total unrecognized tax benefits







$
964Changes to unrecognized tax positions from a prior period(1)

$
242

$
(153
)

89Tax positions taken during the current period(2)


634





634Lapse of statute of limitations





(114
)

(114
)Additional interest recognized


87


(35
)

52Ending period total unrecognized tax benefits

$
963

$
(302
)
$
1,625




December 31, 2007Increases

Decreases

Net ChangeBeginning period total unrecognized tax benefits







$
754Changes to unrecognized tax positions from a prior period

$


$



Tax positions taken during the current period


167





167Lapse of statute of limitations








Additional interest recognized


43





43Ending period total unrecognized tax benefits

$
210

$


$
964


---

Notes

The
Company does not anticipate material changes to the Company's unrecognized tax positions that it has taken during the period. However, as noted above, the Company is in the appeal
process with the FTB. If the Company has a positive outcome during the appeal process, it may be able to recognize the tax position related to the FTB audit. The Company's practice is to recognize
interest related to income tax matters in income tax expense. During the twelve month period ended December 31, 2008, the Company recognized approximately $87,000 of additional interest, which
was offset by a decrease of interest expense associated with the decreases in unrecognized tax positions during the period, which resulted in a net increase of interest expense of $52,000. As of
December 31,

46

---



Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. INCOME TAXES (Continued)

2008
and December 31, 2007, the Company had approximately $113,000 and $73,000, respectively, accrued for interest.

The
Company or one of its subsidiaries files income tax returns in the US federal jurisdiction and various states and foreign jurisdictions. The Company is generally no longer subject to
income tax examinations by tax authorities in its major jurisdictions as follows:

Tax Jurisdiction

Years No Longer Subject to AuditU.S. Federal

2004 and beforeCalifornia

2003 and beforeTexas

2005 and beforeTennessee

2004 and beforeUtah

2004 and beforeMexico

2003 and beforeChina

2003 and before


The
Company's tax years for 2001 and forward are subject to examination by the U.S. and California tax authorities due to the carry-forward of unutilized research and development
credits.

Income
tax provision for the years ended Decembers 31, is as follows (in thousands):

2008

2007Current:Federal

$
(1,048
)
$
7,512State


(275
)

1,621Foreign


147


48Total


(1,176
)

9,181Deferred:Federal

$
(593
)
$
(277
)State


318


45Total


(275
)

(232
)Provision for income taxes

$
(901
)
$
9,413


Rate
reconciliations for the years ended December 31, are as follows:

2008

2007Statutory rate


(34.0
)%

35.0
%State income taxes, net of Federal tax benefit


(11.5
)%

4.0
%R&D tax credits


(1.1
)%

(0.1
)%Foreign earnings taxed at different rates


(11.1
)%

(3.4
)%FIN 48


19.4
%

Repatriation of Foreign earnings


14.8
%

Other items


(3.0
)%

1.4
%Effective rate


(26.5
)%

36.9
%


47

---



Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. INCOME TAXES (Continued)

Net
deferred income taxes included in current and long-term assets in the balance sheet at December 31 2008 and 2007, consist of the tax effects of temporary
differences related to the following:

Deferred tax assetsnet, current

2008

2007Inventories

$
679

$
728Accrued expenses


376


405Allowance for doubtful accounts


27


18Deferred expenses (capital losses)


64


73State income taxes


(265
)

370Other


(72
)

(73
)Deferred tax assetscurrent

$
809

$
1,521




Deferred tax assetsnet, long-term

2008

2007Property and equipment

$
343

$
510FAS 123R Expense


350


217Tax Credits


141


State NOL


334


Other


19


23Deferred tax assetslong term

$
1,187

$
750




Reconciliation of deferred tax assets

2008

2007Deferred tax assetscurrent

$
809

$
1,521Deferred tax assetslong term

$
1,187


750Total deferred tax asset

$
1,996

$
2,271


The
Company has adopted the position under APB 23 that earnings of its foreign subsidiaries will be permanently reinvested outside of the United States. Although, the Company
repatriated funds in 2008 to assist with working capital needs, it does not routinely do so nor does it intend to do so in the future. As such, United States deferred taxes have not been provided for
on these earnings.

10. EMPLOYEE BENEFIT PLAN

In 1994, the Company adopted the Aldila, Inc. 401(k) Savings Plan (the "Plan") for employees of the Company and its subsidiaries. This defined contribution plan allows employees
who satisfy the age and service requirements of the Plan to contribute up to 19% of pre-tax wages, limited to
the maximum amount permitted under federal law. The Company matches the first 4% of wages contributed by employees at a rate of $0.50 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 $157,000 and $152,000 in 2008 and 2007, respectively.

48

---



Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. 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 $1.5 million and $1.5 million for 2008 and 2007, respectively. As of December 31, 2008, future minimum lease payments for all operating
leases are as follows (in thousands):

2009

$
1,4582010


1,2832011


1,2762012


8252013


612Thereafter


576$
6,030


The
Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.

12. SEGMENT INFORMATION

The Company classifies its business into two segments based on products offered; Composite Products and Composite Materials. The Composite Products segment is primarily comprised of
sales of graphite golf shafts and hockey sticks. The Composite Materials segment is comprised of external sales of prepreg uni-tapes, fabrics, film adhesives and the Company's 50% interest
in CFT. The Company evaluates performance based on profit or loss from operations. The Company does not evaluate inter-segment sales and has never tracked such sales. The Composite Materials segment
produces the majority of its materials for the Composite Products segment. Certain SG&A costs and other shared support costs are recorded initially in the Composite Products segment and allocated for
segment reporting.

Segment
Operating Results

Twelve months ended
December 31, 2008Composite Products

Composite Materials

TotalRevenues from external customers

$
46,023

$
7,583

$
53,606Operating (loss) income

$
(4,411
)

804

$
(3,607
)(Loss) income before income taxes

$
(4,163
)

759

$
(3,404
)


49

---



Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. SEGMENT INFORMATION (Continued)



Twelve months ended
December 31, 2007Composite Products

Composite Materials

TotalRevenues from external customers

$
59,097

$
10,049

$
69,146Operating income

$
4,184

$
3,525

$
7,709Income before income taxes

$
4,666

$
20,700

$
25,366


Segment Long-Lived Assets

As of December 31,2008

2007Property, Plant and EquipmentComposite Products

$
7,276

$
7,424Composite Materials(1)

$
5,513

$
5,884Total Property, Plant and Equipment

$
12,789

$
13,308Note(1)

These assets also support the Composite Products segment as the Composite Materials segment manufactures the majority of the materials consumed by the Composite Products segment.


Information about Geographic Areas

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. Although sales to China have increased over the years, the majority of those shafts being sold in China are being assembled and sent either back to the
United States or to Europe. The majority of the international sales are attributed to the Composite Products segment. Composite Materials international sales are immaterial.

(in thousands)
2008

Sales

Long-Lived
AssetsUnited States

$
32,858

$
7,367England


5,502


China


13,089


1,278Canada


173


Australia


438


Mexico


0


466Vietnam


830


3,678Other Foreign Countries


716


Total

$
53,606

$
12,789


50

---



Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. SEGMENT INFORMATION (Continued)



2007

Sales

Long-Lived
AssetsUnited States

$
45,739

$
8,000England


7,809


China


11,626


1,396Canada


2,065


Australia


798


Mexico


1


387Vietnam


354


3,525Other Foreign Countries


754


Total

$
69,146

$
13,308


Information about Major Customers

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 largest customers have been Acushnet Company, Callaway Golf, and
Ping.

Major Customers

2008

2007

2006Ping


21
%

18
%

18
%Acushnet Company


16
%

21
%

17
%Callaway Golf


15
%

13
%

15
%


51

---



Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. 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, 2008 (in thousands, except per share data):

Quarter EndedMarch 31,

June 30,

September 30,

December 31,2008:Net sales

$
16,663

$
13,644

$
11,764

$
11,559Gross profit


4,559


2,617


1,069


1,321Net income


458


(523
)

(1,094
)

(1,132
)Net income per common sharebasic

$
0.09

$
(0.10
)
$
(0.21
)
$
(0.22
)Net income per common sharediluted

$
0.09

$
(0.10
)
$
(0.21
)
$
(0.22
)2007:Net sales

$
20,662

$
17,615

$
13,201

$
17,668Gross profit


7,190


5,932


3,405


3,438Net income


2,695


1,661


687


10,910Net income per common sharebasic

$
0.49

$
0.30

$
0.12

$
2.11Net income per common sharediluted

$
0.48

$
0.30

$
0.12

$
2.09


Earnings
per share are computed independently for each of the quarters presented and therefore may not sum to the annual amount for the year. The Company benefited from a
$16.3 million gain on the sale of its 50% owned joint venture, CFT, during the fourth quarter of 2007.

52

---





Table of Contents

Report of Independent Registered Public Accounting Firm

The
Board of Directors
Aldila, Inc.

We
have audited the accompanying consolidated balance sheets of Aldila, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. Our audits also included the schedule II valuation and qualifying accounts for the years ended December 31, 2008 and 2007,
included at Item 15(a)(2). These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. For the year ended December 31, 2008, the Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. Our audit for the year ended December 31, 2008, included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aldila, Inc. as of December 31,
2008 and 2007, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the related schedule II valuation and qualifying accounts for the years ended December 31, 2008 and 2007, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Aldila, Inc.'s internal control over financial reporting
as of December 31, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 28, 2008 expressed an unqualified opinion thereon.

/s/ MAYER HOFFMAN MCCANN P.C.

San
Diego, California
March 16, 2009

53

---





Table of Contents

ALDILA INC. AND SUBSIDIARIES (NEED TO UPDATE)

SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS  For the years ended December 31, 2008 and 2007

Balance at
beginning
of year

Charged
to costs and
expenses

Deductions

Balance at
end of yearYear ended December 31, 2007Allowance for uncollectible accounts

$
36,000

$
32,000

$
(27,000
)
$
41,000Inventory Reserves

$
1,370,000

$
640,000

$
(828,000
)
$
1,182,000Warranty reserve

$
157,000

$
129,000

$
(151,000
)
$
135,000Year ended December 31, 2008Allowance for uncollectible accounts

$
41,000

$
112,000

$
(90,000
)
$
63,000Inventory Reserves

$
1,182,000

$
619,000

$
(634,000
)
$
1,167,000Warranty reserve

$
135,000

$
80,000

$
(105,000
)
$
110,000


54

---





Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.

ALDILA, INC.By:

/s/ PETER R. MATHEWSON Peter R. Mathewson Chairman of the Board,
Chief Executive Officer




Signature

Title

Date/s/ PETER R. MATHEWSON Peter R. Mathewson

Chief Executive Officer and Director (Principal Executive Officer)

March 16, 2009/s/ SCOTT M. BIER Scott M. Bier

Vice President, Chief Financial Officer and Principal Accounting Officer)

March 16, 2009/s/ MICHAEL J. SHELDON Michael J. Sheldon

Director

March 16, 2009/s/ THOMAS A. BRAND Thomas A. Brand

Director

March 16, 2009/s/ ANDREW M. LEITCH Andrew M. Leitch

Director

March 16, 2009/s/ BRYANT R. RILEY Bryant R. Riley

Director

March 16, 2009


55

---





Table of Contents

EXHIBIT INDEX

Exhibit
Number

Exhibit2.1

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).* 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).10.4

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

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).10.6

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

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).10.8

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).10.9

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).10.10

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).


56

---



Table of Contents

Exhibit
Number

Exhibit10.11

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, including as Exhibit B
the Amended and Restated Limited Liability Company Agreement of Carbon Fiber Technology LLC, dated October 29, 1999. (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).10.12

1994 Stock Incentive 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).10.13

Aldila, Inc. Audit Committee Charter included as Exhibit A in the Company's 2001 Proxy dated April 4, 2001 and incorporated herein by reference.10.14

Aldila, Inc.'s Code of Business Conduct and Ethics adopted on December 31, 2002 (Filed as Exhibit 14.0 in the Company's Report on Form 10-K for the year ended December 31, 2003)10.15

Lease Agreement dated October 19, 2006 between the Company and The Auerbach Family Trust of 1987 (filed as Exhibit 10.0 to the Company's Report on Form 10-Q for the quarterly period ended March 31,
2007 and incorporated herein by reference)10.16

Membership Interest Purchase Agreement by and among SGL Carbon Fibers and Composites, Inc. a Nevada corporation, Aldila Material Technology Corp., a Delaware corporation, and Carbon Fiber Technology LLC, a
Delaware limited liability company, dated as of November 27, 2007 (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed December 6, 2007 and incorporated herein by reference)10.17

Release by and among SGL Carbon Fibers and Composites, Inc., a Nevada corporation, Carbon Fiber Technology LLC, a Delaware limited liability company, Peter Mathewson, Robert Cierzan and Scott Bier, made and
entered into as of November 30, 2007 (filed as Exhibit 2.3 to the Company's Current Report on Form 8-K filed December 6, 2007 and incorporated herein by reference)10.18

Supply Agreement by and between Aldila Golf Company, a Delaware corporation, and Carbon Fiber Technology LLC, a Delaware limited liability company (certain confidential information has been removed pursuant to
the Company's request for confidential treatment under SEC Rules 405 and 24b-2)10.19

Form of Restricted Stock Award Agreement under the 1994 Stock Incentive Plan (as amended) (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 15, 2006 and incorporated
herein by reference).**10.20

Credit and Security Agreement between Company and Keybank National Association, dated February 8, 2008, including as Exhibit A the form of Revolving Credit Note from Company to Keybank National Association,
and as Exhibit B the form of Term Note from Company to Keybank National Association**10.21

Guaranty of Payment by Aldila Golf Corporation to Keybank National Association, dated February 8, 2008**10.22

Security Agreement by Aldila Golf Corporation to Keybank National Association, dated February 8, 2008**10.23

Pledge Agreement by Company to Keybank National Association, dated February 8, 2008**10.24

Pledge Agreement by Aldila Golf Corporation to Keybank National Association, dated February 8, 2008**10.25

Intellectual Property Security Agreement by Company to Keybank National Association, dated February 8, 2008


57

---



Table of Contents

Exhibit
Number

Exhibit**10.26

Intellectual Property Security Agreement by Aldila Golf Corporation to Keybank National Association, dated February 8, 200810.27

Carbon Fiber Technology LLC audited balance sheet as of November 30, 2007 and the related statements of income, member's equity and cash flow for the period ended November 30, 2007 (Filed as
Exhibit 99.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2007 and incorporated herein by reference)*10.28

2009 Aldila Inc. Executive Bonus Plan (Filed as Exhibit 99.2 to the Company's Current Report on Form 8-K dated March 11, 2009 and incorporated herein by reference)*10.29

2009 Aldila Inc. Equity Incentive Plan (Filed as Exhibit 99.3 to the Company's Current Report on Form 8-K dated March 11, 2009 and incorporated herein by reference)*10.30

Form of Restricted Stock Award Agreement under 2009 Aldila Inc. Equity Incentive Plan (Filed as Exhibit 99.4 to the Company's Current Report on Form 8-K dated March 11, 2009 and incorporated herein
by reference)*10.31

2009 Aldila Inc. Outside Director Equity Plan (Filed as Exhibit 99.5 to the Company's Current Report on Form 8-K dated March 11, 2009 and incorporated herein by reference)*10.32

Form of Restricted Stock Award Agreement under 2009 Aldila Inc. Outside Director Equity Plan (Filed as Exhibit 99.6 to the Company's Current Report on Form 8-K dated March 11, 2009 and incorporated
herein by reference)*10.33

2009 Change of Control Retention Agreement by and between the Company and Peter Mathewson (Filed as Exhibit 99.7 to the Company's Current Report on Form 8-K dated March 11, 2009 and incorporated herein
by reference)*10.34

Form of 2009 Officer Change of Control Retention Agreement by and between the Company and non-CEO executive officers. (Filed as Exhibit 99.8 to the Company's Current Report on Form 8-K dated March 11,
2009 and incorporated herein by reference)*10.35

Form of Director and Officer Indemnification Agreement by and between the Company and its directors and officers (Filed as Exhibit 99.9 to the Company's Current Report on Form 8-K dated March 11, 2009
and incorporated herein by reference)10.36

Loan Modification Agreement by and between the Company and Key Bank of Ohio, effective as of December 31, 2008 entered into on February 9, 2009 (Filed as Exhibit 99.10 to the Company's Current Report on
Form 8-K dated March 11, 2009 and incorporated herein by reference)11.1

Statement re: Computation of Net Income (Loss) per Common Share.21.1

Subsidiaries of the Company.23.1

Consent of Independent Registered Public Accounting FirmMayer, Hoffman, McCann P.C.31.1

Certification of Chief Executive Officer31.2

Certification of Chief Financial Officer32.1

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


---

58

---