Use these links to rapidly review the documentALDILA, INC. Report on Form 10-K For the Fiscal Year Ended December 31, 2009 INDEX FINANCIAL TABLE OF CONTENTS

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, 2009Oro

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, CA, 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 registeredNone

None


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

(Title of Class)Common Stock, par value $0.01 per share


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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes o    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, 2009 was$14.1 million.

Common
shares outstanding as of March 26, 2010 was5,202,156



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ALDILA, INC.        Report on Form 10-K  For the Fiscal Year Ended December 31, 2009        INDEX



Part IItem 1.

Business

3Item 1A.

Risk Factors

10Item 2.

Properties

13Item 3.

Legal Proceedings

13Item 4.

(Removed and Reserved)

13Part IIItem 5.

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

14Item 7.

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

16Item 8.

Financial Statements and Supplementary Data

26Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure

26Item 9A.

Controls and Procedures

26Item 9B.

Other Information

27Part IIIItem 10.

Directors and Executive Officers and Corporate Governance

28Item 11.

Executive Compensation

32Item 12.

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

41Item 13.

Certain Relationships and Related Transactions, and Director
Independence

43Item 14.

Principal and Accounting Fees and Services

44Part IVItem 15.

Exhibits, Financial Statement Schedules

45Signatures

69Exhibit Index

70


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PART I

This Form 10-K contains forward-looking statements within the meaning of the federal
securities laws. These forward-looking statements are necessarily based on certain assumptions and are subject to significant risks and uncertainties. These forward-looking statements are based on
management's expectations as of the date hereof, and the Company does not undertake any responsibility to update any of these statements in the future. Actual future performance and results could
differ from that contained in or suggested by these forward-looking statements as a result of factors set forth in this Form 10-K (including those sections hereof incorporated by
reference from other filings with the Securities and Exchange Commission), in particular as set forth in "Business Risks" under Item 1 and set forth in the "Management's Discussion and Analysis
of Financial Condition and Results of Operations" under Item 7.

Item 1.    Business

General

Aldila, Inc. ("Aldila" or the "Company") is a leading designer and manufacturer of high-quality innovative graphite
(carbon fiber-based composite) golf shafts in the United States 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.

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Most
golf clubs being sold today have shafts constructed from steel or graphite, although limited numbers are also manufactured from other materials. Graphite shafts were introduced in
the early 1970's as the first major improvement in golf shaft technology since steel replaced wood in the 1930's. The first graphite shafts had significant torque (twisting force) and appealed
primarily to weaker-swinging players desiring greater distance. Graphite shaft technology has subsequently improved so that shafts can now be designed for golfers at all skill levels.

Unlike
steel shafts, 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 2009 U.S. National Consumer Survey ("2009 Survey"), conducted by The Darrell Survey Company, graphite continues to dominate the professional and consumer
wood club market. The 2009 Survey found that over 99% of new drivers purchased contained graphite shafts. In hybrid clubs, (also known as utility clubs and driving irons), 98% of the new clubs
purchased had graphite shafts, up from 87% the previous year. The acceptance of graphite shafts in irons has not achieved the same success as in metal woods and hybrids. The 2009 Survey found that
irons with graphite shafts accounted for 23% 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 85% of net sales in the year ended December 31, 2009, 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 $5 to $300.

The
Company introduced the NV Prototype at the January 2003 PGA Merchandise Show and subsequently renamed 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

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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 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 Micro Laminate Technology® 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 by approximately 80% greater than conventional graphite shafts, and up to 60% 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 with 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 2009. The Company expanded its prepreg operations beginning in 2005 and now has six, twenty four inch 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 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

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approximately
$2.7 million and $2.9 million for the years ended December 31, 2009 and 2008, 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 companies 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 features 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, graphite tubing and other molded parts on a special order basis.

Composite Materials

Composite material products are developed and manufactured 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

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parts:
the grip, the clubhead and the Aldila shaft. The Company's partnership relationship with all 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 it's 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 2009, the Company had 621 golf shaft customers and 115 composite materials customers. The golf shaft customers included 104 golf club manufacturers and 199 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 56% and 59% of net sales in 2009 and 2008, 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

2009

2008Ping


20
%

21
%Acushnet Company


10
%

16
%Callaway Golf


11
%

15
%


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 serves on the Company's advisory staff and assist in its marketing efforts. Aldila's marketing and promotion expenditures were
approximately $1.9 million and $4.0 million in 2009 and 2008, respectively. The Company does not currently incur significant marketing expenses for its products other than golf shafts.

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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, 2009 as compared to 80% for the previous year.

Composite
materials sales, which represented 14% of the Company's 2009 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 46% and 39% of net sales for the years ended December 31, 2009 and 2008, respectively. The Company's international sales have increased from 18% in
2004 to 46% in 2009. 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 two golf shaft manufacturing facilities and one prepreg manufacturing
facility. During its 37 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 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

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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 of 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 and a recognized brand name with PGA Tour acceptance is required to compete in this market. The largest and most
competitive segment of the graphite golf shaft market is the OEM shaft market for OEM stock shafts. To compete in this market a Company must meet strict shaft specifications, have a large production
capacity able to 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 to produce the shafts and compete on its ability to meet tight lead times and deliver quality product. Presently, the industry has
substantial excess graphite shaft manufacturing capacity both in the United States and in other countries.

The
Company also competes for sales of prepreg 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, 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 utilizing 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 trademark reflects the consistency and quality associated with the Company's products and intends to

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continue
to protect them to the fullest extent practicable. As of December 31, 2009, the Company had approximately 24 domestic trademarks.

Employees

As of December 31, 2009, Aldila employed 1,186 persons on a full-time basis, including 10 in sales and marketing, 22
in research, development and engineering and 981 in production. The balance of employees are administrative and support staff. The number of full-time employees includes 695 persons who
are employed in the Company's China facility, 311 persons who are employed in the Company's Vietnam facility and 180 persons who are employed in the Company's Poway, California locations in prepreg
manufacturing and headquarters' facilities. As of December 31, 2009, the Company also employed 178 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, 2009, the Company had a sales backlog of approximately $10.6 million compared to approximately
$8.6 million as of December 31, 2008. 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.
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 has just come out of the worst recession in years, coupled with the collapse of the world's financial industry and the U.S. housing markets. Consumers
drastically reduced their spending in the back half of 2008 and throughout 2009. 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. The golf industry has historically been a recession proof industry, in which equipment sales ranging plus or minus one to two percent. 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.

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Customer Concentration

The Company's sales have been, and very likely will continue to be, concentrated among a small number of customers. In 2009, sales to
the Company's top five customers represented approximately 56% 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 2009, Ping accounted for 20% of net sales, Acushnet Company accounted for 11% of net sales and Callaway Golf accounted for 10% 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
41% of the Company's net sales in 2009, 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 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.

11

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Table of Contents

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 Zhuhai, People's Republic of China and Ho Chi Minh City, Vietnam. The Company pays
certain expenses of these facilities in Chinese renminbis and Vietnam dong, respectively, which are subject to fluctuations in currency value and exchange rates. The Company 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 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 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 2010 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.

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

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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 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 two separate facilities; one in the Zhuhai economic development zone of the People's Republic of 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 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.

Item 3.    Legal Proceedings

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

Item 4.    (Removed and Reserved)

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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

2009

2008Dividends
Declared

High

Low

Dividends
Declared

High

LowFirst Quarter

$
0.00

$
5.92

$
2.27

$
5.15

$
11.79

$
9.49Second Quarter

$
0.00

$
5.67

$
2.52

$
0.15

$
11.25

$
5.76Third Quarter

$
0.00

$
4.56

$
2.57

$
0.00

$
5.58

$
3.66Fourth Quarter

$
0.00

$
4.29

$
2.83

$
0.00

$
7.99

$
2.21


On
March 26, 2010, the closing common stock price was $5.11. There were 232 common stockholders of record. The company believes a significant number of beneficial owners also own
Aldila stock in "street name".

Aldila, Inc.
common stock was traded on The NASDAQ Stock Market, LLC under the symbol, ALDA, until February 8, 2010 when the Company moved the listing to the OTCQX
Premier.

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.

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, 2009:

Plan Category

Number of
securities to be
issued upon
exercise of
outstanding
options

Weighted-
average exercise
price of
outstanding
options

Number of
securities to
be issued
upon
vesting
of restricted
stock

Number of securities
remaining available for
future issuance under
equity compensation
plans(2)Equity compensation plans approved by security holders1994 Stock Incentive Plan(1)


154,085

$
10.78


28,163


Equity compensation plans approved by security holders2009 Outside Director Equity Plan


13,336

$
3.79





86,664Equity compensation plans approved by security holders2009 Equity Incentive Plan








42,680


817,320Total


167,421





70,843


903,984


(1)On
October 7, 2008, the Compensation Committee ("Committee") of Aldila Inc.'s Board of Directors modified all outstanding stock options issued
prior to May 30, 2008 under the Aldila Inc. 1994 Stock Incentive Plan. The modifications adjusted the exercise price to reflect the


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aforementioned
$5.00 special cash dividend paid during the first quarter of 2008. The modifications were made by the Committee, acting as Administrator of the Plan, pursuant to Section 12 of
the Plan which governs "Changes upon Recapitalization." The modifications are intended to comply with applicable IRS regulations regarding modifications to incentive stock options. The weighted
average share prices reflect the impact of the modification. (2)The
1994 Stock Incentive Plan was terminated for future issuances when the 2009 plans were adopted.


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Table of Contents

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,
2009 or 2008. 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, and other composite products. Composite Materials is
comprised of external sales of prepreg products in the forms of uni-tapes, fabrics and film adhesives.

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 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 0.50% (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, 2009 is 0.27%. The Company's breakage return rate has declined over the past years. The highest four-year average over the past ten years has
been 0.47%. If the Company were to use 0.47% in estimating its liability as of December 31, 2009, it would have the effect of increasing the liability by approximately $238,000, 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

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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 ability to collect 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, 2009, the Company estimated this amount to be approximately $36,000. If the Company were to reserve for the total amount greater than 60 days past due, it would increase
the allowance by approximately $69,000, which would be recorded in selling, general and administrative expense.

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, 2009 is
10%. 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 12/31/09

$
10,279

$
10.279

$
10,279Reserve rate


9.7
%

8.7
%

7.7
%Estimated reserve


999


895


793Recorded Reserve as of 12/31/09


999


999


999Impact to costs of goods sold

$


$
(104
)
$
(206
)


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

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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

The Company 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. For the period ended December 31, 2009, the Company recorded a net unrecognized tax benefit of $392,000 including interest.
The Company attempts to identify these positions at the end of each year based upon the more than likely or not threshold. The Company files its income taxes for the previous year in October 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 has $1.8 million and $1.6 million in unrecognized tax benefits and interest as
of December 31, 2009 and 2008, respectively.

OverviewBusiness Conditions

Composite Products

The Composite Products segment is mainly comprised of graphite golf shafts. 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:



18

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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.



19

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



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 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 2009, net sales to Ping, Acushnet Company and Callaway Golf, represented 20%, 11% and 10% 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 2010.

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

20

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selling
price decreased in 2009 by 2% as compared to 2008. See the graph of the Company's average selling price changes below.

Average Selling Price Change from 1998

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 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 closed its Mexico facility during 2009 and shifted that production to Asia.

Composite Materials

The Composite Materials segment is comprised of external sales of prepreg, film adhesives, fabrics and other materials. 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. Sales of prepreg, as a percentage of
net sales, were 14% for the periods ended December 31, 2009 and 2008. 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 supports the Company's wide tape line and

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provide
backup film capacity as the Company had previously only one resin filmer. In addition, the wide tape line allows 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.

2009 Compared to 2008

Net Sales

2009

2008

Chg

% ChgComposite Products

$
42,618

$
46,023

$
(3,405
)

(7
)%Composite Materials


7,156


7,583


(427
)

(6
)%Total Net Sales

$
49,774

$
53,606

$
(3,832
)

(7
)%


Composite Products

Composite Products net sales decreased by $3.4 million for 2009 as compared to 2008. The Company's average selling price of golf
shafts decreased by 2% and overall units declined by 6% for 2009 as compared to 2008. The decrease in units is mainly attributed to the overall state of the golf industry, which suffered through the
recession as did 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.
Although the fourth quarter of 2008 and almost all of 2009 was weak for the golf industry it appears that the golf industry is ready to rebound. The Company believes that it is positioned well with
its customers when the economic conditions improve and has seen improvement during the fourth quarter of 2009. The Company had a 21% increase in
sales for the fourth quarter ended December 31, 2009 as compared to December 31, 2008. The decrease in Composite Products sales were attributed to a decrease in OEM shaft sales, which
were partially offset by increases in sales of branded and co-branded shafts. Branded golf shaft sales increased by 8% and co-branded golf shaft sales increased by 22%. Branded
and co-branded golf shaft sales increased to 39% of Composite Products sales in 2009 from 32% in 2008. The Company has seen increased competition in this segment of the golf shaft market.

Composite Materials

Composite Materials net sales decreased by $427,000 for 2009 as compared to 2008 and represent approximately 14% of the Company's
consolidated net revenues. 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 impacted the Composite Products segment at the end of 2008 and throughout 2009. The Composite Materials sales also had a strong fourth quarter of 2009 with sales up 76% as compared to
the fourth quarter of 2008, which hopefully signals a return to some normal pre-recession ordering patterns. The Company has added capacity in this segment over the past several 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. The Company sales are highly
concentrated in the recreational products industry.

22

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Table of Contents

Gross Profit

2009

2008

Chg

% ChgComposite Products

$
8,678

$
7,771

$
907


12
%Composite Materials


2,002


1,795


207


12
%Total Gross Profit

$
10,680

$
9,566

$
1,114


12
%


Composite Products

Composite Products gross profit increased by approximately $907,000 or 12% in 2009 as compared to 2008. The increase in Composite
Products gross profit was attributed to lower manufacturing cost during the year. The Company maintained strict cost controls and was able to reduce its raw material costs and cost to manufacture
during the year. During the fourth quarter of 2008, the Company began to shift more of its manufacturing from Mexico to Asia, which led to the eventual closing of the Mexico manufacturing facility
during 2009. The Company manufactured 27% of its product in Mexico during 2008 as compared to only 9% in 2009. Composite Products gross margin increased to 20% for 2009 as compared to 17% for 2008.
The Company's gross profit was negatively affected by additional inventory reserves of $568,000 in 2009 as compared to $619,000 in 2008. The
increase in reserves in 2009 and 2008 were offset by the sales of product that was fully reserved for of $185,000 in 2009 and $128,000 in 2008. The net effect of the inventory reserve adjustments was
a decrease in gross profit of $383,000 in 2009 and a decrease in gross profit of $491,000 in 2008.

Composite Materials

The Composite Materials gross profit increased by approximately $207,000, or 12%, in 2009 as compared to 2008. The increase was mainly
attributed to lower raw material costs and a better mix of product being sold.

Operating Income (Loss)

2009

2008

Chg

% ChgGross profit

$
10,680

$
9,566

$
1,114


12
%Selling, General & Administrative ("SG&A) ExpenseComposite Products


9,584


12,182


(2,598
)

(21
)%Composite Materials


973


991


(18
)

(2
)%Total SG&A


10,557


13,173


(2,616
)

(20
)%Operating Income (Loss)Composite Products


(906
)

(4,411
)

3,505


79
%Composite Materials


1,029


804


225


28
%Operating Income (Loss)

$
123

$
(3,607
)
$
3,730


103
%Operating Margin


0
%

(7
)%

7
%


Operating
income increased by approximately $3.7 million, or 103%, in 2009 as compared to 2008. The increase was attributed to an increase in gross profit and a decrease in SG&A.
The Company's SG&A expenses decreased by approximately $2.6 million in 2009 as compared to 2008. SG&A decreased as a percentage of revenues to 21% in 2009 as compared to 25% for 2008. The
decrease was primarily attributed to a 54% decrease in advertising and promotion spending and an 8% decrease in other SG&A. SG&A in 2008 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 2006

23

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financial
statements in 2008 and the payment of a $5.00 special dividend. The Company did not incur these expenses in 2009. The Company's stock based compensation expense was $399,000 in 2009 versus
$302,000 in 2008. The Company anticipates that stock based compensation expense will continue to increase due to potential future grants of equity awards.

Other (Expense) Income

2009

2008

Chg

% ChgOperating income (loss)

$
123

$
(3,607
)
$
3,730


103
%Interest income


17


308


(291
)

(94
)%Interest expense


(191
)

(284
)

(93
)

33
%Other, net


(71
)

179


(250
)

(140
)%Total other (expense) income


(245
)

203


(448
)

(221
)%Loss before income taxes

$
(122
)
$
(3,404
)
$
3,282


96
%


Other
income decreased by approximately $448,000 for 2009, or 221%, as compared to 2008. The majority of the decrease was attributed to a loss of interest income.

Loss before taxes

2009

2008

Chg

% ChgLoss before income taxes

$
(122
)
$
(3,404
)
$
3,282


96
%Provision (benefit) for income taxes


121


(901
)

1,022


113
%Net income

$
(243
)
$
(2,503
)
$
2,260


90
%Effective tax rate


(99
)%

26
%

(125
)%Profit margin


(0
)%

(5
)%

5
%


The
Company recorded a provision for income taxes in the amount of $121,000 in 2009 as compared to a benefit for income taxes of $901,000 for 2008. Included in the provision for income
taxes in 2009 was
an income tax charge of $744,000 associated with the closure of the Company's Mexico facility during the year. The income tax charge is attributed to the repatriation of earnings from Mexico that the
Company had not previously paid income taxes on, which was slightly offset by the foreign tax credit received on income taxes paid in Mexico. Also included in the provision for income taxes was a
benefit from the expiration of the statute of limitations of approximately $176,000 attributed to the Company's unrecognized tax positions taken in 2005. 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 $216,000 and $661,000 for the periods ended
December 31, 2009 and 2008, respectively. 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 and is in the final stages of settlement. The Company is also under audit by the FTB for the years 2005 and 2006 and by the Internal Revenue Service for 2007.

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Table of Contents

Liquidity and Capital Resources

Cash and cash equivalents ("cash") increased by $947,000 for 2009 as compared to 2008. The increase in cash was attributed to cash
provided by operating activities of $6.4 million, which enabled the Company to reduce its debt by $4.7 million.

The
Company used $831,000 for capital expenditures during 2009 as compared to $1.4 million during 2008. The majority of the capital expenditures in 2009 were attributed to
investment in the Composite Products segment. The Company spent $714,000 in support of Composite Products and $117,000 for Composite Materials. Management anticipates that capital expenditures will be
between $1.0 and $1.5 million for 2010.

The
Company declared and paid a special $5.00 cash dividend to shareholders during 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 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 established a credit facility with Key Bank in 2008. The facility is comprised of a term loan and a revolving line of credit. The Company borrowed $5.0 million against
the term loan in 2008, 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 2008 and paid back $5.5 million during 2008. The Company borrowed $5.1 million in 2009
against its line of credit and paid $8.8 million during 2009. 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 principal payments against its term loan of $1.0 million in 2009 and $833,000 in 2008.

The
Company believes 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

Effective January 1, 2008, we adopted authoritative guidance issued by the Financial Accounting Standards Board ("FASB") for all
financial instruments and non-financial instruments accounted for at fair value on a recurring basis. Effective January 1, 2009, all other non-financial assets and
liabilities measured at fair values in the financial statements on a nonrecurring basis were subject to the authoritative guidance. Non-financial, nonrecurring assets and liabilities
included on our consolidated balance sheets include long lived assets that are measured at fair value to test for and measure an impairment charge, when necessary. No such non-financial
assets or liabilities were subject to the impairment test for the twelve months ended December 31, 2009.

In
June 2009, the FASB issued new guidance related toThe FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, which replacesThe Hierarchy of Generally Accepted Accounting Principlesand establishes the FASB Accounting
Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity
with Generally

25

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Table of Contents

Accepted
Accounting Principles. The new guidance is effective for interim and annual periods ending after September 15, 2009 and did not have a material impact on the Company's consolidated
financial statements.

"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

There were no changes or disagreements with our accountants during the periods covered by this Form 10-K.

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 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,
2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in its report entitled Internal ControlIntegrated
Framework.Based on the assessment, management believes that, as of December 31, 2009, the Company's
internal control over financial reporting is effective based on those criteria.

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Table of Contents

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. Subsequent to December 31, 2009, the composition of the Company's Board of Directors changed significantly with the resignation of three board members and the suspension of
the Company's Audit Committee, Compensation Committee and Nominating Committee. The Company's remaining Board members will assume the responsibilities of the suspended committees.

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.

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Table of Contents

PART III

Item 10.    Directors and Executive Officers and Corporate Governance

1.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:

THE BOARD OF DIRECTORS

The Board of Directors of the Company directs the management of the business and affairs of the Company, as provided by Delaware law,
and conducts its business through meetings of the full Board of Directors and four standing committees: Executive, Audit, Compensation and Nominating. In addition, from time to time special committees
may be established under the direction of the Board when necessary to address specific issues. The following individuals served as members of the Board of Directors during 2009, and all were reelected
at the annual meeting of the Company's shareholders on May 13, 2009. The Company announced on February 25, 2010 that Bryant R. Riley, Andrew M. Leitch and Michael J. Sheldon tendered
their resignation as board members of the Company. As such, the Company has suspended its committees concurrently with their resignation.

THOMAS A. BRANDhas been a director of the Company since November 1997. Since January 1994, Mr. Brand has been a consultant to the
composite materials industry. From 2000 to 2006 he was a director of Reinhold Industries, Inc., a manufacturer of advanced custom composite components and sheet molding compounds for a variety
of applications in the United States and Europe. From 1983 to 1992, he was Senior Vice President/General Manager of Fiberite Advanced Materials, a business unit of ICI-PLC. From 1964 to
1983, Mr. Brand served as Vice President/General Manager, Fiberite West Coast Corp., which is a division of Fiberite Corporation. Neither Reinhold Industries nor Fiberite are affiliated with
the Company. He was selected to serve as a director of the Company due to his extensive experience in the composite industry and his prior experience as a board member of a public company. Age: 76.

PETER R. MATHEWSONhas been a director of the Company since January 1997 and has been President, Chief Executive Officer and Chairman of
the Board of the Company since January 2000. From 1990 until December 31, 1999, he served as Vice President of the Company (or its predecessors). Since January 1997, Mr. Mathewson has
also served as President and Chief Operating Officer of Aldila Golf Corp., the Company's operating subsidiary that conducts its core golf operations. Mr. Mathewson has been with the Company (or
its predecessors) since September 1973 and has held various positions, including: plant manager, production manager, shipping and receiving supervisor, and purchasing agent. He was selected to serve
as a director of the Company due to his great familiarity with the Company, including its strategies, operations, supply sources and markets, his acute business judgment, his extensive knowledge of
the golf club and composite industries, and his position with the Company. Age: 59.

BRYANT R. RILEYhas been a director of the Company since May 2003. He is the founder and Chairman of B.
Riley & Co., LLC since January 1997. B. Riley & Co., a member of FINRA, provides research and trading ideas primarily to institutional investors. Mr. Riley
has also been the General Partner of Riley Investment Management, LLC since 2001. In addition, he is Chairman of Alliance Semiconductor Corp. and on the board of DDI Corp., LLC
International, Silicon Storage Technology, TransWorld Entertainment, privately-held Country Coach, and Great American Corp. None of these entities are affiliated with the Company. He was
selected to serve as a director of the
Company due to his extensive experience in the investment community and as a board member of public companies. Age: 43.

ANDREW M. LEITCHwas a director of the Company from June 2003. He is a certified public accountant, a chartered accountant, and a private
businessman. He currently serves as chairman of the board and member of the audit committee of Blackbaud, Inc., (NASDAQ) and audit committee chair of Cardium Therapeutics Inc. (AMEX),
and director of STR Holdings Inc (NYSE) and on the board

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Table of Contents

of
various private companies. From April 2005 through May 2006 he served on the Board of Directors of Wireless Facilities, Inc. where he was a member of the Audit Committee. From March 2006
through April 2007 he served on the Board of Directors of Open Energy, Inc., where he was chair of the Audit Committee. In March 2000 he retired after 22 years as a partner of
Deloitte & Touche LLP. He worked primarily in Japan, Singapore and Hong Kong, where he led the opening and subsequently successfully managed that firm's China practice throughout the
1980's. He has previously served on the Board of Directors of other private as well as public entities. None of these entities are affiliated with the Company. He was selected to serve as a director
of the Company due to his extensive experience in public accounting and as a board member of public companies. Age 66.

MICHAEL J. SHELDONhas been a director of the Company since June 2007. He is a marketing executive. Since 1997 he has been President of
Deutsch Los Angeles, the second largest advertising agency in Southern California and the West Coast's only fully integrated agency offering state of the art capabilities in traditional and new media,
media planning and buying, direct marketing, customer relationship management and graphic design. He has also held other industry and charitable positions. He was selected to serve as a director of
the Company due to his marketing experience. Age 50.

2.     COMMITTEES OF THE BOARD OF DIRECTORS

The following committees were in place and met during the year ended December 31, 2009. As noted above, such committees were suspended on
February 23, 2010.

TheEXECUTIVE COMMITTEEof the Board has the authority, between meetings of the Board of Directors, to exercise all powers and authority
of the Board in the management of the business and affairs of the Company that may be lawfully delegated to it under Delaware law. The Committee was chaired by Peter R. Mathewson and its other members
were Thomas A. Brand, and Bryant R. Riley. The Executive Committee held no meetings in calendar year 2009.

TheAUDIT COMMITTEEwas composed of Andrew M. Leitch, as chairman and "financial expert," Bryant R. Riley, and Thomas A. Brand. The Audit
Committee held 4 meetings in calendar year 2009. See "AUDIT COMMITTEE" below for a description of the responsibilities and activities of the Audit Committee and the independence of its membership.

The COMPENSATION COMMITTEEwas composed of Thomas A. Brand, who was the chairman, Bryant R. Riley, Andrew M. Leitch, and Michael J.
Sheldon, who joined the Compensation Committee in May 2008. The Compensation Committee held 5 meetings in calendar year 2009. See "COMPENSATION COMMITTEE" below for a description of the
responsibilities and activities of the Compensation Committee and the independence of its membership.

TheNOMINATING COMMITTEEwas composed of Thomas A. Brand, as chairman, Andrew M. Leitch, Bryant R. Riley, and Michael J. Sheldon. Each
member of the Nominating Committee was determined, in the opinion of the Board of Directors, to be independent in accordance with NASDAQ rules. The Nominating Committee had one meeting during 2009, to
prepare for the 2009 Annual Meeting. It met on March 11, 2009 to prepare for the 2009 Annual Meeting of Stockholders and recommended to the Board of Directors, which has adopted its
recommendation, that the nominees for Director named in this proxy be submitted to the stockholders for approval. With the suspension of the Company's committee structure in February 2010, security
holders may recommend nominees for the Company's board of directors, in writing, to Mr. Brand, addressed c/o the Company. The Company will forward all such correspondence to Mr. Brand.

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Table of Contents

3.     EXECUTIVE OFFICERS OF THE COMPANY

Set forth below is certain information regarding each of the current executive officers of the Company. Information about Mr. Mathewson is presented above.
Officers are appointed by and serve at the discretion of the Board. Except as otherwise indicated, the positions listed are with Aldila, Inc.

The
principal occupations and positions for the past five years of the executive officers of the Company who are not directors, are as follows:

ROBERT J. CIERZANhas been Secretary since January 1991 and Sr. Vice PresidentComposite Materials since May 15, 2008.
He was Treasurer of Aldila (or its predecessors) from January 1991 through May 15, 2008, and Vice PresidentFinance from
March 1989 through May 15, 2008. From September 1988 to February 1989, Mr. Cierzan held the position of Executive Vice PresidentFinance at Illinois Coil Spring Company, a
diversified manufacturer of springs, automotive push-pull controls and rubber products. Age 63.

MICHAEL J. ROSSIhas been the Vice PresidentSales and Marketing of Aldila Golf Corp., the Company's operating subsidiary that
conducts its core golf operations, since March 24, 1997. Prior to that, from August 1994 to March 1997, Mr. Rossi was the Vice President and General Manager of Fujikura Composite
America, which manufactures graphite golf shafts and is a wholly owned subsidiary of Fujikura Rubber Limited, a Japanese publicly held company. From November 1989 to August 1994, he was Vice
PresidentSales and Marketing for True Temper Sports, a division of the Black & Decker Corporation, which manufactures steel golf shafts. Age 56.

4.     CODE OF ETHICS

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. A copy of the Code of Ethics is available at the Company's website, www.aldila.com., on the "Corporate Statistics" page.

5.     LEGAL PROCEEDINGS AND ADVERSE INTERESTS

The Company is not aware of any material legal proceedings to which a director, officer or affiliate of the Company, any owner of record or beneficially of more
than five percent of any class of voting security of the Company, or any associate of any such director, officer, affiliate of the Company, or security holder is now a party adverse to the Company or
any of its subsidiaries, or has a material interest adverse to the Company or any of its subsidiaries. The Company is not aware of any legal proceeding during the last ten years material to the
evaluation of the ability or integrity of any director or executive officer of the Company.

6.     SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires the Company's directors and executive officers and holders of more than 10% of the Company's Common Stock to
file with the Securities and Exchange Commission (the "SEC") reports of ownership and changes in ownership of Common Stock and other equity securities of the Company on Forms 3, 4 and 5.

Based
on a review of such forms and written representations of reporting persons, the Company believes that during the calendar year ended December 31, 2009, its officers and
directors and holders of more than 10% of the Company's Common Stock complied with all applicable Section 16(a) filing requirements.

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Table of Contents

7.     AUDIT COMMITTEE

AUDIT COMMITTEE CHARTER

The Audit Committee Charter was approved by the Board of Directors on December 31, 2002 and attached to the proxy statement for
the Company's 2003 Annual Meeting of Stockholders. The current version of the Audit Committee's Charter is available on the Company's website
(www.aldila.com). The Company has suspended its Audit Committee meetings as of February 23, 2010 in connection with the resignation of certain
directors and the Company's move to delist from NASDAQ and move to OTCQX Premier.

INDEPENDENCE OF AUDIT COMMITTEE MEMBERS

During 2009, as a Company listed on a "national stock exchange", the NASDAQ and SEC rules required that members of the Audit Committee
must be "independent" and may not be "affiliates" of the Company, although there is a 10% stock ownership safe-harbor for determining whether a director is an "affiliate" for this purpose.
In addition, these rules require that Audit Committee members must not have participated in the preparation of the Company's financial statements during the previous three years, they must be able to
read and understand financial statements at the time they assume office, and that the minimum required size of the Audit Committee is at least three members.

Mr. Leitch,
Mr. Riley and Mr. Brand were elected by the Board of Directors to be members of the Audit Committee for 2009. The Board of Directors has determined that
(a) each will be "independent" as that term is defined in the NASDAQ Rules and SEC Rule 10A-3(b)(1); (b) each has not participated in the preparation of the financial
statements of the Company or any of its subsidiaries at any time during the past three years; and (c) each is able to read and understand fundamental financial statements, including the
Company's balance sheet, income statement, and cash flow statement.

AUDIT COMMITTEE FINANCIAL EXPERT

The SEC and NASDAQ rules applicable to the Company during 2009 required that at least one member of the Audit Committee must be an
"audit committee financial expert" as that term is defined in the SEC Rules, and is "financially sophisticated" as that term is defined for NASDAQ listed companies. The Board of Directors has
determined that Mr. Leitch is an "audit committee financial expert" and is "financially sophisticated," as those terms are defined in the respective rules. Mr. Leitch resigned from the
Board on February 23, 2010.

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Table of Contents

Item 11.    Executive Compensation

1.     COMPENSATION COMMITTEE

COMPENSATION COMMITTEE CHARTER

The Company has not adopted a formal "charter" for the Compensation Committee. The Compensation Committee is charged with the
responsibility of supervising and administering the Company's compensation policies, management awards, reviewing salaries, approving significant changes in salaried employee benefits, and
recommending to the Board such other forms of remuneration as it deems appropriate.

The
Compensation Committee also determines individuals to whom stock options or restricted stock will be granted under the Company's 1994 Stock Incentive Plan, the 2009 Equity Incentive
Plan and the 2009 Outside Director Equity Plan, the terms on which such options or stock will be granted, and to administer the various Plans.

MEMBERSHIP AND INDEPENDENCE OF COMPENSATION COMMITTEE MEMBERS

During the fiscal year ended December 31, 2009, the Compensation Committee consisted of Mr. Brand (Chairman),
Mr. Riley, Mr. Leitch and Mr. Sheldon. The Company suspended meetings of the Compensation Committee as of February 23, 2010.

2.     PROCESSES AND PROCEDURES FOR EXECUTIVE AND DIRECTOR COMPENSATION

Compensation of the Company's Executive Officers is established by action of the Company's Board of Directors. The Board receives and either approves or modifies
recommendations from the Compensation Committee. In the case of grants under either the Company's 1994 Stock Incentive Plan, the 2009 Equity Incentive Plan and the 2009 Outside Director Equity Plan,
the Board delegated to the Compensation Committee the final authority to make grants, including grants to the Company's Executive Officers. The Compensation Committee typically receive initial
recommendations for compensation decisions from the Company's management. The Compensation Committee does not have the authority to further delegate compensation decisions for Executive Officers, but
compensation for non-executive employees may be set by the Company's Executive Officers.

In
preparation for the 2009 Annual Meeting, the Compensation Committee engaged COMPENSIA, Inc. in mid-2008 to assist the Compensation Committee in reviewing executive
and director
compensation, including modifying the list of "peer companies" for a benchmarking survey of both monetary and other forms of compensation. The decision to engage COMPENSIA was made by the Compensation
Committee after interviewing them, evaluating an example of their recommendations and work product, and based upon the personal observation of the Compensation Committee members who had worked with
them in other engagements. The initial engagement of COMPENSIA was to assist the Compensation Committee in evaluating executive compensation including the Company's executive bonus plan and director
compensation. This was subsequently expanded to include an evaluation of the Company's equity incentive plan for employees and executives. Ultimately this included a separate equity plan for the
directors, and the evaluation and preparation of new change of control retention agreements for the executive officers.

As
a result of this review, the Compensation Committee recommended, and the Board approved, modifications to the compensation paid to the Company's directors. See "DIRECTOR COMPENSATION"
below. The Compensation Committee also approved raises to the senior executive officers.

Also
as part of this review, the Compensation Committee recommended and in March 2009 the Board approved new compensation plans, including the 2009 Aldila, Inc. Equity Incentive
Plan and the

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2009
Aldila, Inc. Outside Director Equity Plan, which were approved by shareholders at the 2009 Annual Meeting. Also adopted at the same time were the 2009 Aldila, Inc. Executive Bonus
Plan and 2009 Change of Control Retention Agreements for the CEO and for the other officers. See COMPENSATION COMMITTEECOMPENSATION OF EXECUTIVE
OFFICERSChange of Control Agreementsbelow. Concurrently, but not in connection with COMPENSIA's engagement, the Board approved new
indemnification agreements for the directors and officers.

COMPENSATION OF EXECUTIVE OFFICERS



The following table summarizes the compensation paid during the years ended December 31, 2009 and 2008 to the Company's
Principal Executive Officer and the two most highly compensated executive officers during 2009.

Name(1)

Year

Base
Salary
($)(2)

Bonus

Restricted
Stock
Awards
($)(3)

Option
Award
($)

Non-Equity
Incentive
Plan Comp.
($)(4)

All Other
Comp.
($)

Total
($)Peter R. Mathewson


2009


303,080





29,120








21,606
(5)

353,8062008


294,921





15,457








60,812
(6)

371,190Robert J. Cierzan


2009


227,347





5,460








14,279
(7)

247,0862008


218,657





5,655








30,502
(8)

254,814Michael J. Rossi


2009


213,115





14,560








20,550
(9)

248,2252008


204,969





5,655








27,624
(10)

238,249


(1)Positions
held are indicated in EXECUTIVE OFFICERS OF THE COMPANY above.(2)Includes
amounts deferred pursuant to the Company's 401k plan. We allow no deferral of compensation at the option of any Executive Officer, except under our
401k plan generally available to our employees including Executive Officers. We do not offer a pension plan.(3)Restricted
Stock grants are valued using the aggregate grant date fair value as of the date of grant computed in accordance with FASB ASC Topic 718.
Information regarding the assumptions we use in determining the "fair value" of the grants is contained in Note 8 to the financial statements in this Form 10-K. Awards vest
in three equal, annual installments, contingent upon continued employment with the Company.(4)We
pay no bonuses to Executive Officers except under our Bonus Incentive Plan. No Executive Officer was eligible for Bonus Incentive Plan payments relating
to the Company's performance during 2007 or 2008 (payable in 2008 and 2009, respectively). Bonus amounts under that plan were last paid in early 2006 for performance during 2005.(5)Includes
$8,072 in auto lease payments, $7,728 value of auto usage, $1,166 imputed income on life insurance, and $4,640 in 401k plan match, and does not
include earnings upon vesting of restricted stock in 2009.(6)Includes
$12,075 in auto lease payments, $6,320 value of auto usage, $1,289 imputed income on life insurance, $36,528 dividend income on restricted stock,
and $4,600 in 401k plan match, and does not include earnings upon vesting of restricted stock in 2008.(7)Includes
$8,499 in auto lease payments, $227 value of auto usage, $1,006 imputed income on life insurance, and $4,547 in 401k plan match, and does not
include earnings upon vesting of restricted stock in 2009.


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(8)Includes
$8,400 in auto lease payments, $456 value of auto usage, $1,108 imputed income on life insurance, $20,538 dividend income on restricted stock, and
$4,493 in 401k plan match, and does not include earnings upon vesting of restricted stock in 2008.(9)Includes
$15,431 in auto lease payments, $0 value of auto usage, $936 imputed income on life insurance, and $4,183 in 401k plan match, and does not include
earnings upon vesting of restricted stock in 2009.(10)Includes
$16,122 in auto lease payments, $0 value of auto usage, $1,031 imputed income on life insurance, $20,538 dividend income on restricted stock, and
$4,510 in 401k plan match, and does not include earnings upon vesting of restricted stock in 2008.


The
2008 "All Other Compensation" amounts include a special dividend of $5.00 per share of common stock which was paid on all outstanding common stock including unvested restricted
stock.

Each
of the Executive Officers serve at the pleasure of the board of directors of the Company, subject to the terms of the Severance Protection Agreements, and now Change of Control
Retention Agreements, discussed below. Except for these agreements, no Executive Officer has a written employment agreement.



In March 2009, as part of the review of the officer and director compensation described above, the Compensation Committee recommended,
and the Board approved, a new 2009 Executive Bonus Plan. This new bonus plan replaces the Company's 1994 Aldila Inc. Executive Bonus Plan.

The
new plan provides for bonuses to participating key employees, which may include Named Executive Officers.

The
Compensation Committee annually establishes a minimum Corporate Gate level of Operating Income, after consideration of the projected levels of Operating Income, free cash flow and
the terms and conditions of any debt covenants. The minimum Corporate Gate amount must be met before any bonus award is paid under the plan. The Compensation Committee annually establishes Threshold,
Target and Stretch Financial Performance Objectives. Objectives are based on Operating Income and Revenue, as determined for the applicable plan year according to generally accepted accounting
principles. A Threshold Award is equal to 20% of the Base Salary of the CEO and 12.5% of the Base Salary of all other participants; a Target Award is equal to 40% of the CEO's Base Salary and 25% of
the Base Salary for all other participants; and Stretch Award is equal to 120% of the CEO's Base Salary and 75% of the Base Salary of all other participants. Base Salary is the actual, regular salary
for the plan year, pro rated if an employee becomes a participant part way through the plan year. The Corporate Gate and Objectives have not yet been established for 2010.

Awards
are paid if the Company achieves the Corporate Gate and either the Operating Income or Revenue Objectives. Each participant is eligible to receive an award equal to 37.5% of the
Threshold Award if the Operating Income Threshold Objective is met, and 37.5% of the Threshold Award if the Revenue Threshold Objective is met. Similarly, each participant is eligible to receive an
award equal to 37.5% of the Target Award for each of the Target Operating Income and Target Revenue Objectives, and each participant may receive 37.5% of the Stretch Award for each of the Stretch
Operating Income and Stretch Revenue Objectives. This results in a potential 75% award based on these objectives. Results between the Threshold, Target and Stretch Objectives are
pro-rated.

The
remaining 25% of the potential award amount is a discretionary award made by the Compensation Committee. The Compensation Committee will consult with the CEO for discretionary awards
to participants other than the CEO.

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Awards
are calculated on or about completion of the Company's annual audit and paid in conformity with Internal Revenue Code section 409A requirements. If a participant's
employment is terminated part way through a plan year, the Committee may adjust the amount of any award payable to such participant under the plan.



The Company does not provide its Executive Officers with deferred compensation opportunities, except in connection with participation
in the Company's 401k plan. The Company matches 50% of the first 4% of contributions of all participants. Executive Officers may participate in the 401k plan on the same terms as other
full-time employees.

The
Company provides group life and health insurance to all full-time employees. Executive Officers receive group life and health insurance coverage on the same terms as
other full-time employees.

The
Company provides senior employees, including the Executive Officers, with leased vehicles. The Executive Officers reimburse the Company for any amount of the monthly cost plus
capital recapture value to the extent that it exceeds $700 per month.



The following table shows the outstanding stock options and restricted stock awards to our named executive officers as of
December 31, 2009.

Option Awards

Stock AwardsName(1)

Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
(2)

Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable

Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Options
(#)

Option
Exercise
Price
($)(5)

Option
Expiration
Date

Number of
Shares or
Units of
Stock
That Have
Not Vested
(#)(3)

Market
Value of
Shares or
Units of
Stock
That Have
Not Vested
($)(4)

Equity
Incentive
Plan Awards:
Number of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested

Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares,
Unites or
Other Rights
That Have
Not Vested
(#)Peter R. Mathewson


9,000








1.12


12/31/2012


12,280
(6)

42,612





25,000








2.28


12/16/201313,500








7.94


8/24/201410,125








21.25


8/17/2015Robert J. Cierzan


5,000








2.28


12/16/2013


3,275
(7)

11,364





3,100








7.94


8/24/20146,975








21.25


8/17/2015Michael J. Rossi

















5,775
(8)

20,039








(1)Positions
held are indicated in EXECUTIVE OFFICERS OF THE COMPANY above.(2)All
options are issued under the Company's 1994 Stock Incentive Plan.(3)All
restricted stock is issued under the Company's 1994 Stock Incentive Plan or the 2009 Equity Incentive Plan and each award of restricted stock vests in
three equal, annual installments commencing on the first anniversary of the date of award of restricted stock.(4)Market
value is calculated using a price of $3.47 per share, which was the closing price on December 31, 2009.(5)Original
exercise prices were all adjusted for $5.00 per share special dividend paid March 10, 2008.(6)Represents
1,547 unvested shares granted August 26, 2007, vesting on August 26, 2010 and 2,733 granted on August 25, 2008 with 1,366
shares vesting on August 25, 2010 and 1,367 shares vesting on August 25, 2011 and 8,000 shares granted on August 25, 2009 and vesting in three equal, annual installments
commencing August 25, 2010.


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(7)Represents
775 unvested shares granted August 27, 2007, vesting on August 27, 2010; 1,000 unvested shares granted August 25, 2008,
vesting 500 shares on each of August 25, 2010 and 2011; and 1,500 unvested shares granted August 25, 2009, and vesting in three equal, annual installments commencing August 25,
2010.(8)Represents
775 unvested shares granted August 27, 2007, vesting on August 27, 2010; 1,000 unvested shares granted August 25, 2008,
vesting 500 shares on each of August 25, 2010 and 2011; and 4,000 unvested shares granted August 25, 2009, and vesting in three equal, annual installments commencing August 25,
2010.


Grants of restricted stock (and previously stock options) under the Company's 1994 Stock Incentive Plan and 2009 Equity Incentive Plan have
historically been granted to Executive Officers at the meeting of the Compensation Committee held in August of each year, with the effective date of the grant being the fourth Monday of August of each
year. This may or may not be at a time when the Company is in possession of material non-public information. Such grants are made at the discretion of the Compensation Committee, vesting
in three equal, annual installments. Before August 2006 the Company granted stock options; since that time it has granted restricted stock awards to employees, including Executive Officers.



Beginning in November 2003, each Executive Officer entered into a Severance Protection Agreement ("Severance Agreement") with the
Company. Each Severance Agreement continued for one year, and automatically renewed for one year on each January 1, unless either party gave ninety days advance notice of
non-renewal or if the Severance Agreement was terminated, however, in the event of a Change of Control (defined below) the term of the Severance Agreement was twenty-four
months from such event. Pursuant to the Severance Agreement, in the case of termination of employment within thirty-six months after a Change in Control as a result of death, by the
Company for Cause or Disability (as defined in the Severance Agreement), or by the Executive Officer other than for Good Reason (also defined in the Severance Agreement), the Executive Officer was
entitled to his Accrued Compensation. In the case of termination within thirty-six months of a Change of Control for any other reason, the Executive was entitled to the following:
(i) Accrued Compensation and a Pro Rata Bonus for the year of termination (typically computed based on the average bonus paid for the prior two years), (ii) a lump sum payment equal to
the sum of the Executive's then annual base salary and his average bonus for the prior two years, (iii) continued provision of insurance (including life, disability and medical) for one year,
"grossed up" to cover any excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, and (iv) a lump sum equal to the present value of one years' automobile allowance (or
the length of the automobile lease, if longer, in the case of automobiles leased by the Company for the Executive's use), discounted at an interest rate equal to 120% of the applicable
mid-term federal rate. These payments would be in lieu of any other severance benefit
to which the Executive would otherwise have been entitled. Upon a Change-in-Control, regardless of whether the Executive's employment was terminated, the Company was required
to contribute to a grantor trust an amount sufficient to fund the payments under clauses (i), (ii), and (iv) above.

"Change-in-Control"
was defined as (1) an acquisition of 40% of the Company's Common Stock, (2) the failure of the individuals who, as of
November 19, 2003 were members of the Board of Directors (the "Incumbent Board") to constitute at least two-thirds of the members of the Board, unless the election of any new
director is approved by a vote of at least two-thirds of the Incumbent Board, subject to certain other qualifications, (3) the completion of a merger where the existing stockholders
and Board of Directors do not retain control of the surviving company, or (4) the liquidation or sale of substantially all the assets of the Company.

Except
as provided above and except for the provisions of the 1994 Stock Incentive Plan and related agreements thereto, there were no compensatory plans or arrangements in place during
2008 with respect to any of the executive officers (including each of the Named Executive Officers) which

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are
triggered by, or result from, the resignation, retirement or any other termination of such executive officer's employment, a change-in-control of the Company or a change in
such executive officer's responsibilities following a change-in-control.

The
Severance Agreement was intended to provide security to the Executive Officers and allow them to focus on the Company's performance without being concerned their employment may be
terminated in the event of a Change of Control. The Compensation Committee believes this kind of agreement is important to allow the Executive Officers to concentrate on the Company's business without
distraction at least during a transition period following a Change of Control.



During March 2009, in connection with the review of the director and officer compensation described above in "COMPENSATION
COMMITTEEPROCESSES AND PROCEDURES FOR EXECUTIVE AND DIRECTOR COMPENSATION" above, the Compensation Committee recommended, and the Board approved, new Change of Control Retention
Agreements for the executive officers of the Company. These replace the prior Severance Protection Agreements. There are two forms of the Change of Control Retention Agreementsone for the
Chief Executive Officer and one for the
other officers of the Company. The new agreements provide that employment is "at-will."



Upon
termination of employment our CEO, Mr. Mathewson, will be paid his accrued and unpaid base salary through the date of termination, unreimbursed business expenses and be
entitled to all benefits under benefit plans applicable to the CEO.

If
his employment is terminated by the Company without cause or by him for "good reason" not in connection with a change of control, he will also receive (i) 12 months of
base salary paid in a lump sum within 30 days; and (ii) reimbursement for insurance premiums paid for medical, dental and vision benefits for him and his eligible dependants for
12 months following termination, paid when such premiums are due, or at the Company's discretion in a single lump sum.

If
his employment is terminated by the Company without cause or by him for "good reason" in connection with a change of control, he will also receive (i) 18 months of base
salary paid in a lump sum within 30 days of termination; (ii) 150% of the average of his two most recent actual cash bonuses under the Company's executive bonus plan for the 2 fiscal
years prior to the year in which the termination occurs payable in a lump sum within 30 days of termination; (iii) a pro rata bonus payment under the Company's executive bonus plan for
the year in which the termination occurs payable in a lump sum within 30 days of termination; (iv) reimbursement for insurance premiums paid for medical, dental and vision benefits for
him and his eligible dependants for 18 months following termination, paid when such premiums are due, or at the Company's discretion in a single lump sum; and (v) full accelerated
vesting on all outstanding, unvested equity awards.

If
he voluntarily terminates his employment without good reason, is terminated "for cause" by the Company or as the result of his death or disability, then all vesting of his equity
awards will cease immediately and he will be eligible for severance benefits only in accordance with the Company's established policies and procedures.

"Change
of control" is defined as (i) the consummation of a merger or consolidation of the Company with another corporation, other than a merger or consolidation in which the
Company's voting securities outstanding immediately prior thereto continue to represent more than 50% of the total voting power of the Company or the surviving entity immediately after such
transaction; (ii) the consummation of a sale of substantially all of the Company's assets; (iii) any person (or group of persons) becoming the beneficial owner of more than 50% of the
total voting power of the Company's

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outstanding
securities; (iv) a change in the board of directors of the Company such that less than a majority of the Board are "Incumbent Directors" (defined as directors in office at the time
the agreement is entered into, or elected or nominated for election with the affirmative votes of less than a majority of the directors whose election or nomination was not in connection with any
transactions described in (i), (ii) or (iii) or in connection with an actual or threatened proxy contest relating to the election of directors of the Company).

"Good
Reason" is defined as (i) a material reduction in his title, authority, status or responsibilities; (ii) a reduction in his base salary or target annual cash
incentive compensation (other than a reduction applicable to executives generally); (iii) the failure of the Company to obtain the assumption of the agreement by a successor; or (iv) the
Company requiring him to relocate his principal place of business or the Company's headquarters more than 35 miles from the current location, provided, however, he only has good reason if he gives the
Board written notice of any of the foregoing events within 90 days of the occurrence and it is not cured within 30 days of such notice.

"Cause"
is defined as (i) his willful and continued failure to perform the duties and responsibilities of his position that is not corrected within a thirty (30) day
correction period that begins upon delivery to him of a written demand for performance from the Board that describes the basis for the Board's belief that he has not substantially performed his
duties; (ii) any act of personal dishonesty taken him in connection with his responsibilities as an employee of the Company with the intention or reasonable expectation that such may result in
his substantial personal enrichment; (iii) a material violation him of a federal or state law or regulation applicable to the business of the Company; (iv) his failure to cooperate with
the Company in connection with any actions, suits, claims, disputes, investigations, or grievances against the Company or any of its officers, directors, employees, shareholders, affiliates,
divisions, subsidiaries, predecessor and successor corporations, and assigns, whether or not such cooperation would be adverse to his own interest; (v) his conviction of, or plea of nolo
contendre to, a felony that the Board reasonably believes has had or will have a material detrimental effect on the Company's reputation or business, or (vi) his materially breaching
(A) his Confidential Information Agreement, or (B) any Company policies generally applicable to Company employees, including, without limitation, Company's Code of Conduct or insider
trading policies, as each may be amended from time to time, and which breach is (if capable of cure) not cured within thirty (30) days after the Company delivers written notice to him of the
breach.



The
other senior officers, including other Named Executive Officers, have also entered into new Change of Control Retention Agreements which also provide that upon termination of
employment the officer will be paid accrued and unpaid base salary through the date of termination, unreimbursed business expenses and be entitled to all benefits under benefit plans applicable to the
officer.

If
the officer's employment is terminated by the Company without cause not in connection with a change of control, the officer will also receive (i) 6 months of base salary
paid in a lump sum within 30 days; and (ii) reimbursement for insurance premiums paid for medical, dental and vision benefits for the officer and his eligible dependants for
6 months following termination, paid when such premiums are due, or at the Company's discretion in a single lump sum. This payment is for an amount calculated on a period one-half
of the time for the amount payable to our CEO. The other officers are also not eligible for such payments if the officer terminates employment for "good reason" not in connection with a change of
control.

If
the officer's employment is terminated by the Company without cause or by the officer for "good reason" in connection with a change of control, the officer will be eligible for the
same benefits as our CEO, provided, however, the base salary amount will be for only 12 months of base salary paid; (ii) the pro rata bonus payment will be equal to 100% of the average
of the two most recent actual cash bonuses under the Company's executive bonus plan for the 2 fiscal years prior to the year in

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which
the termination occurs payable in a lump sum within 30 days of termination; and (iii) the reimbursement for insurance premiums paid for medical, dental and vision benefits for the
officer and eligible dependants will be for only 12 months following termination, paid when such premiums are due, or at the Company's discretion in a single lump sum.

"Good
reason" for an officer is defined as being the same as for our CEO, however, a material reduction in the title, authority, status or responsibilities is not a "good reason" if the
officer is provided with a comparable position, provided, however, a reduction in duties, position or responsibilities which occurs solely by virtue of the Company being acquired and made a part of a
larger entity does not constitute "good reason."

COMPENSATION OF DIRECTORS

Name

Fees Earned
or Paid in
Cash
($)

Option
Awards
($)(1)

All Other
Compensation
($)(2)

Total
($)Thomas A. Brand


33,500


6,801
(3)

1,593


41,894Andrew M. Leitch


37,500


6,801
(4)

200


44,501Bryant R. Riley


28,000


6,801
(5)




34,801Michael J. Sheldon


28,000


6,801
(6)




34,801


(1)Option
awards are valued at $2.04 per share, aggregate grant date fair value computed in accordance with FASB ASC Topic 718.(2)We
pay the out-of-pocket expenses of our Directors which they incur in connection with attending meetings. We have made no stock
awards, no non-equity incentive plan awards, provide no pension or deferred compensation to our Directors and make no charitable contributions on behalf or at the direction of our
Directors.(3)Includes
options to purchase 3,334 shares of stock, made as an automatic, non-discretionary grant pursuant to the Company's 2009 Outside
Director Equity Plan on day of the 2009 Annual Meeting to members of the Board serving for more than 12 months at the date of grant. As of December 31, 2009, the aggregate number of
options outstanding for Mr. Brand was 15,559.(4)Includes
options to purchase 3,334 shares of stock, made as an automatic, non-discretionary grant pursuant to the Company's 2009 Outside
Director Equity Plan on day of the 2009 Annual Meeting to members of the Board serving for more than 12 months at the date of grant. As of December 31, 2009, the aggregate number of
options outstanding for Mr. Leitch was 16,670.(5)Includes
options to purchase 3,334 shares of stock, made as an automatic, non-discretionary grant pursuant to the Company's 2009 Outside
Director Equity Plan on day of the 2009 Annual Meeting to members of the Board serving for more than 12 months at the date of grant. As of December 31, 2009, the aggregate number of
options outstanding for Mr. Riley was 20,004.(6)Includes
options to purchase 3,334 shares of stock, made as an automatic, non-discretionary grant pursuant to the Company's 2009 Outside
Director Equity Plan on day of the 2009 Annual Meeting to members of the Board serving for more than 12 months at the date of grant. As of December 31, 2009, the aggregate number of
options outstanding for Mr. Sheldon was 12,106.


Compensation
of the Company's Directors is established by action of the Company's Board of Directors, after consideration by the Compensation Committee As part of the review of director
and executive compensation generally the Board of Directors changed the compensation structure for non-employee directors and committee chairs effective January 1, 2009. The new
director compensation program eliminates per-meeting fees. Non-employee directors now receive a quarterly fee of $7,000; the

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Audit
Committee Chair is paid $9,500 per year; the Compensation Committee Chair is paid $3,500 per year; and the Nominating Committee Chair is paid $2,000 per year.

Under
the Company's 1994 Stock Incentive Plan, non-employee directors received an automatic grant of options to purchase 8,772 shares of the Company's Common Stock upon
taking office as a Director, and an additional automatic grant of options to purchase 3,334 shares of the Company's Common Stock on the last trading day in the month of May each year thereafter,
provided the director has completed one year of service on such date. Such stock options were granted with an exercise price equal to the average of the high and low price reported for the date they
are granted, vesting in three equal, annual installments. The Company made such automatic, non-discretionary stock option grants in May 2008. The Company has not granted any restricted
stock or other equity awards, excepting the aforementioned stock options, to its non-employee directors.

Under
the 2009 Aldila Inc. Outside Director Equity Plan, non-employee directors receive an automatic grant of options to purchase 8,772 shares of the Company's Common
Stock upon taking office as a Director, and an additional automatic grant of options to purchase 3,334 shares of the Company's Common Stock on the day of the Company's annual stockholders meeting each
year after taking office, provided the director has completed six months of service on such date. Such stock options will be granted with an exercise price equal to the closing sales price on the date
they are granted, vesting in three equal, annual installments. The 2009 Aldila Inc. Outside Director Equity Plan also provides that the Company may elect to grant restricted stock or restricted
stock units to non-employee directors as an automatic, non-discretionary grant. The Company has not made such an election but may do so in the future. The
non-employee directors received automatic, non-discretionary stock option grants under the 2009 Aldila, Inc. Outside Director Equity Plan at the conclusion of the 2009
Annual Meeting and will receive
automatic, non-discretionary stock option grants at the conclusion of the 2010 Annual Meeting. The Company is no longer making awards under the 1994 Stock Incentive Plan.

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Table of Contents

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

1.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

BENEFICIAL OWNERSHIP

The following table sets forth certain information regarding the shares of Common Stock beneficially owned as of March 26, 2010
by (a) each person or entity who, insofar as the Company has been able to ascertain, beneficially owned more than 5% of the Company's Common Stock as of such date, (b) each of the
directors of the Company, (c) the Company's Chief Executive Officer and the two other most highly compensated executive officers of the Company for the fiscal year ended December 31,
2009 (the "Named Executive Officers") and (d) all current directors and executive officers of the Company, as a group (seven persons). Except as otherwise indicated, the business address for
each person is c/o Aldila, Inc., 14145 Danielson Street, Suite B, Poway, California 92064.

Common Stock Beneficially Owned

Name

Beneficial
Ownership

Percent(1)Certain Beneficial OwnersLloyd I. Miller III(2)


1,375,993


26.5
%The PNC Financial Services Group, Inc.(5)


606,057


11.7
%Dimensional Fund Advisors LP(3)


435,878


8.4
%Renaissance Technologies LLC(4)


324,300


6.2
%Directors and OfficersPeter R. Mathewson(6)


95,987


1.8
%Thomas A. Brand(7)


16,504


*Bryant R. Riley(8)


81,872


1.6
%Andrew M. Leitch(9)


15,875


*Michael J. Sheldon(10)


5,848


*Robert J. Cierzan(11)


45,883


*Michael J. Rossi(14)


6,540


*Total All Directors and Officers


268,509


5.2
%


*Percentage
of shares beneficially owned as of March 26, 2010, or vesting within 60 days of March 13, 2009 does not exceed one percent.(1)Based
on a total of 5,202,156 outstanding Common Shares as of March 26, 2010, plus any options or other rights to acquire shares vesting within
60 days of that date.(2)Based
on a Schedule 13D/A, dated March 9, 2010 filed by Lloyd I. Miller III showing aggregate beneficial ownership with shared voting and
dispositive power over of 612,758 shares, and sole voting and dispositive power over 763,235 shares. Mr. Miller reports that his sole voting and dispositive power is exercised as
(i) manager of a limited liability company, (ii) manager of a limited liability company which is the general partner of certain limited partnerships, (iii) custodian of accounts
under the Florida Uniform Gifts to Minors Act, (iv) trustee of certain generation skipping trusts, (v) trustee of certain trusts, and (iv) an individual. His shared voting and
dispositive power is exercised as (i) investment advisor to the trustee of certain trusts, (ii) investment advisor to his ex-wife, (iii) an authorized person with
respect to a custody account held by his sister. His address is 4550 Gordon Drive, Naples, FL 34102.


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(3)Based
on a Schedule 13G, dated December 31, 2009, filed by Dimensional Fund Advisors LP showing aggregate beneficial ownership of
435,878 shares, of which 0 are subject to shared voting and shared dispositive power, and 429,880 are subject to sole voting power and 435,878 are subject to sole dispositive power. Dimensional
Fund Advisors LP describes itself as an investment advisor to four investment companies registered under the Investment Company Act of 1940, and disclaims beneficial ownership of these shares.
Its address is Palisades West, Bldg. One, 6300 Bee Cave Road, Austin, TX 78746.(4)Based
on a Schedule 13G, dated Feb 12, 2010, filed by Renaissance Technologies, LLC and James R. Simons showing aggregate beneficial ownership
of 324,30000 shares, of which 0 are subject to shared voting and shared dispositive power, and all are subject to sole voting and sole dispositive power. The address is 800 Third Ave., New
York, NY 10022.(5)Based
on a Schedule 13G, dated February 10, 2010, filed by The PNC Financial Services Group, Inc., PNC Bancorp, Inc. and PNC
Bank, National Association, showing aggregate beneficial ownership of 606,057 shares of which they each exercised sole voting and dispositive power over 0 shares, and shared voting and
dispositive power over all shares. The address for The PNC Financial Services Group, Inc. and PNC Bank NA is 249 Fifth Avenue, Pittsburgh, PA 15222, and for PNC Bancorp is 300 Delaware Avenue,
Ste. 304 Wilmington DE 19801.(6)Mr. Mathewson
is the beneficial owner of 95,987 shares, which includes 26,082 shares held directly, 12,280 restricted shares not vested
within 60 days of March 26, 2010, and options to acquire 57,625 shares all of which are vested as of March 26, 2010. Mr. Mathewson's holdings include
26,082 shares which are held by Peter R. Mathewson and Penny E. Mathewson, Trustees of the Mathewson Family Trust dated 01/20/1998.(7)Mr. Brand
is the beneficial owner of 16,504 shares, which includes 5,946 shares held by Mr. Brand as trustee of The Brand Family
Survivor Trust (a revocable trust), 1,666 shares held by Mr. Brand as trustee of The Brand Family Bypass Trust (an irrevocable trust), and options to acquire 8,892 shares vested
within 60 days of March 26, 2010. Mr. Brand also holds options to acquire 6,667 shares which do not vest within 60 days of March 26, 2010.(8)Mr. Riley
is the sole equity holder of B. Riley and Co. LLC, which is the beneficial owner of, or holds indirectly in one or more
affiliated accounts, 30,232 shares. Mr. Riley is also the sole equity owner of Riley Investment Management LLC, which is the investment advisor to managed accounts indirectly
affiliated with Mr. Riley or Riley Investment Partners Master Fund LP, which directly or indirectly holds 34,370 shares. Mr. Riley directly owns 3,933 shares, and
options to acquire 13,337 shares up to May 24, 2010. If not exercised by May 24, 2010, such shares will terminate in accordance with Mr. Riley's resignation from the Board.(9)Mr. Leitch
is the beneficial owner of 15,875 shares, which includes 5,872 shares held directly, and options to acquire
10,003 shares up to May 24, 2010. If not exercised by May 24, 2010, such shares will terminate in accordance with Mr. Leitch's resignation from the Board.(10)Mr. Sheldon
is the beneficial owner of 5,848 shares, which includes 0 shares held directly and options to acquire 5,848 shares
up to May 24, 2010. If not exercised by May 24, 2010, such shares will terminate in accordance with Mr. Sheldon's resignation from the Board.(11)Mr. Cierzan
is the beneficial owner of 45,883 shares, which includes 27,533 shares held directly, 3,275 restricted shares not vested
within 60 days of March 26, 2010, and options to acquire 15,075 shares vested within 60 days of March 26, 2010.(12)Mr. Rossi
is the beneficial owner of 4,951 shares, which includes 0 shares held directly, 1,126 formerly restricted shares vested
within 60 days of March 26, 2010, 3,825 restricted shares not vested within 60 days of March 26, 2010, and options to acquire 0 shares vested within 60 days
of March 26, 2010.


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Table of Contents

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

1.     RELATED PARTY TRANSACTIONS

Pursuant to the Audit Committee's Charter, the Audit Committee is charged with reviewing all proposed transactions between the Company and its directors and
officers, and any immediate family member or affiliate of any of its directors and officers, or any other affiliate of the Company that is not a subsidiary of the Company (not including compensation
issues). During calendar year 2009 the Company had no such transactions

2.     ATTENDANCE AT BOARD, COMMITTEE AND STOCKHOLDER MEETINGS

The Board of Directors of the Company held 4 regularly scheduled meetings and 2 special meetings in calendar year 2009. There were 4 Audit Committee meetings and
5 Compensation Committee meetings during the year ended 2009. Each director attended 75% or more of the aggregate of (i) meetings of the Board held during the period for which he served as a
director and (ii) meetings of all committees held during the period for which he served on those committees. The Company encourages all directors to attend the Annual Meeting of Stockholders.
At the Annual Meeting of Stockholders held May 13, 2009 all directors were in attendance, either in person or by telephone.

3.     INDEPENDENCE OF MAJORITY OF DIRECTORS

The Board of Directors has determined that Messrs. Brand, Riley, Leitch and Sheldon constitute a majority of the Board of Directors, that during 2009 each
was independent under the rules applicable to NASDAQ listed companies, and none of them are believed to have any relationships that, in the opinion of the Board of Directors, would interfere with the
exercise of independent judgment in carrying out the responsibilities of a Director. Mr. Mathewson is not considered independent because he currently serves as an executive officer of the
Company. The Company moved its stock listing from the NASDAQ to the OTCQX Premier effective February 8, 2010 and no longer is required to meet the NASDAQ requirements for director independence.
Messrs. Riley, Leitch and Sheldon resigned as directors effective February 23, 2010.

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Item 14.    Principal Accounting Fees and Services

1.     AUDIT FEES

The Company was billed $188,537 for 2009 and $239,670 for 2008 by Mayer Hoffman McCann P.C. for professional services for the audit of the Company's annual
financial statements and services normally provided by a principal public accountant in connection with statutory and regulatory filings.

2.     AUDIT-RELATED FEES

The Company was billed $72,072 for 2009 by Squar, Milner, Peterson, Miranda & Williamson, LLP for audit related fees to prepare the Company's
quarterly and annual tax provisions and other administrative fees. The Company was billed $75,365 for 2009 and $104,500 for 2008 by Mayer Hoffman McCann P.C. for professional services rendered by its
principal accountant reasonably related to the performance of the review of the Company's financial statements in addition to the Audit Fees reported above. Such professional services also consist of
an audit of the employee benefit plan.

3.     TAX FEES

The Company was billed $49,947 for 2009 and $78,175 for 2008 by Squar, Milner, Peterson, Miranda & Williamson, LLP for professional services
rendered for tax compliance, tax advice and tax planning. Such professional services consisted of tax planning and consultations and tax return preparation.

4.     ALL OTHER FEES

The Company did not incur any fees for other professional services rendered by Squar, Milner, Peterson, Miranda & Williamson, LLP, nor Mayer Hoffman
McCann P.C. in 2009 or 2008.

5.     PRE-APPROVAL POLICIES

Consistent with the requirements of the SEC and NASDAQ listed companies, the Audit Committee considers, on a case-by-case basis, and
approves in advance, if appropriate, all audit and permissible non-audit services to be provided by the Company's principal accountants. None of the services provided in 2009 or 2008 fell
within the exemptions to the required Audit Committee pre-approval procedures. All of the professional services provided by Squar, Milner, Peterson, Miranda & Williamson, LLP
and all of the professional services provide by Mayer Hoffman McCann P.C. in 2009 and 2008 were pre-approved by the Company's Audit Committee.

44

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Table of Contents

PART IV

Item 15.    Exhibits, Financial Statement Schedules

Consolidated Balance Sheets at December 31, 2009 and 2008;

46Consolidated Statements of Operations for the years ended December 31, 2009 and 2008;

47Consolidated Statements of Stockholders' Equity for the years ended December 31, 2009 and 2008;

48Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008;

49Notes to Consolidated Financial Statements

50Report of Independent Registered Public Accounting Firm

67




See
item (a) 3 above.

See
item (a) 3 above.

45

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Table of Contents



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

December 31,
2009

December 31,
2008ASSETSCURRENT ASSETS:Cash and cash equivalents

$
7,104

$
6,157Accounts receivable, net


7,535


6,407Income taxes receivable





2,272Inventories


9,280


11,583Deferred tax assets


562


809Prepaid expenses and other current assets


679


484Total current assets


25,160


27,712PROPERTY, PLANT AND EQUIPMENT, NET


11,649


12,789DEFERRED TAXES


1,528


1,187OTHER NON-CURRENT ASSETS


235


244TOTAL ASSETS

$
38,572

$
41,932LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES:Accounts payable

$
4,141

$
3,420Income taxes payable


158


Accrued expenses


2,438


2,307Short term debt


1,300


5,000Other current liability


509


117Total current liabilities


8,546


10,844LONG-TERM LIABILITIES:Deferred rent


111


153Long term debt


2,167


3,167Other long-term liabilities


1,332


1,508Total liabilities


12,156


15,672COMMITMENTS 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 5,202,156 shares as of December 31, 2009 and 5,174,183 shares as of
December 31, 2008


52


52Additional paid-in capital


44,618


44,121Accumulated deficit


(18,254
)

(17,913
)Total stockholders' equity


26,416


26,260TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
38,572

$
41,932


See
notes to consolidated financial statements.

46

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Table of Contents



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

Year ended
December 31,2009

2008NET SALES

$
49,774

$
53,606COST OF SALES


39,094


44,040Gross profit


10,680


9,566SELLING, GENERAL AND ADMINISTRATIVE


10,291


13,173PLANT CONSOLIDATION


266


Operating income (loss)


123


(3,607
)OTHER INCOME (EXPENSE):Interest income


17


308Interest expense


(191
)

(284
)Other, net


(71
)

179LOSS BEFORE INCOME TAXES


(122
)

(3,404
)PROVISION (BENEFIT) FOR INCOME TAXES


121


(901
)NET LOSS

$
(243
)
$
(2,503
)NET LOSS PER COMMON SHAREBASIC

$
(0.05
)
$
(0.48
)NET LOSS PER COMMON SHARE, ASSUMING DILUTION

$
(0.05
)
$
(0.48
)WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING


5,184


5,162WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES


5,184


5,162


See
notes to consolidated financial statements.

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Table of Contents



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

Common StockAdditional
Paid-in
Capital

Retained Earnings
(Accumulated Deficit)Shares

Amount

TotalBalance at January 1, 2008


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
)

26,260Stock-based compensation


28





497


(98
)

399Net loss











(243
)

(243
)Balance at December 31, 2009


5,202

$
52

$
44,618

$
(18,254
)
$
26,416


See
notes to consolidated financial statements.

48

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Table of Contents



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

Year ended December 31,2009

2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(243
)
$
(2,503
)Adjustments to reconcile net loss to net cash provided by (used for) operating activities:Depreciation and amortization


1,771


1,866Stock-based compensation


399


302Loss on disposal of fixed assets


128


9Changes in assets and liabilities:Accounts receivable, net


(1,128
)

2,277Inventories


2,303


2,278Deferred tax assets


(94
)

275Prepaid expenses and other assets


(202
)

89Accounts payable


721


(1,338
)Accrued expenses


131


(257
)Income taxes receivable/payable


2,430


(6,537
)Other current liability


392


(20
)Deferred rent and other long-term liabilities


(218
)

663Net cash provided by (used for) operating activities


6,390


(2,896
)CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment


(831
)

(1,357
)Proceeds from sales of property, plant and equipment


88


19Net cash used for investing activities


(743
)

(1,338
)CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings against term loan





5,000Payments for term loan


(1,000
)

(833
)Borrowings against line of credit


5,100


9,500Payments for line of credit


(8,800
)

(5,500
)Proceeds from issuance of common stock





18Dividend payments





(27,323
)Net cash used for financing activities


(4,700
)

(19,138
)NET INCREASE (DECREASE) CASH AND CASH EQUIVALENTS


947


(23,372
)CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR


6,157


29,529CASH AND CASH EQUIVALENTS, END OF YEAR

$
7,104

$
6,157SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the year for:Income taxes

$
85

$
4,805Interest

$
163

$
273


See
notes to consolidated financial statements.

49

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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.

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 not 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, 2009 and 2008 were $168,000 and $174,000, 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, 2009 and 2008 was $138,000 and $110,000, 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, 2009.

Fair Value of Financial Instruments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 expenses and other
short-term liabilities. The Company believes that the carrying value of its debt approximates 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

50

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Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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 2009 and 2008 were $899,000 and $1.6 million, respectively.

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

Research & Development ("R&D")The Company performs internal research and development efforts. Research and development expenses were
approximately $2.7 million and $2.9 million for 2009 and 2008, 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.

51

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Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The
functional currency of foreign subsidiaries is the US dollar. During the years ended December 31, 2009 and 2008, 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 167,421 and 155,202 shares of common stock as of December 31, 2009 and 2008, 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 2018.

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 Share Based CompensationAt December 31, 2009, the Company has two stock-based compensation plans, which are described more
fully in Note 8.

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.

Supplier Concentration RiskThe Company has relationships with vendors for its carbon fiber needs through 2010 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 PronouncementEffective January 1, 2008, we adopted new authoritative guidance issued by the Financial Accounting
Standards Board ("FASB") related toFair Value Measurementsfor all financial instruments and non-financial instruments accounted for at
fair value on a recurring basis. Effective January 1, 2009, all other non-financial assets and liabilities measured at fair values in the financial statements on a nonrecurring
basis were subject to the new guidance. Non-financial, nonrecurring assets and liabilities included on our consolidated balance sheets include long lived assets that are measured at fair
value to test for and measure an impairment charge, when necessary. No such non-financial assets or liabilities were subject to the new fair value guidance for the twelve months ended
December 31, 2009.

On
April 1, 2009, the FASB issued new guidance related toAccounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies.The new guidance requires: (i) that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair
value if fair value can be reasonably estimated and (ii) eliminate the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the

52

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ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

acquisition
date. For unrecognized contingencies, the FASB decided to require that entities include only the disclosures required by other authoritative guidance and that those disclosures be included
in the business combination footnote; and (iii) require that contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be treated as contingent
consideration of the acquirer and should be initially and subsequently measured at fair value. This new guidance is effective for assets or liabilities arising from contingencies in business
combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this did not have a
material impact on the Company's financial statements.

On
April 9, 2009, the FASB issued guidance related toDetermining Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly,which provides guidelines for making fair value measurements more consistent with the principles
presented inFair Value Measurements.This new guidance must be applied prospectively and retrospective application is not permitted and is effective
for interim and annual periods ending
after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this did not have a material impact on the Company's financial statements.

On
April 9, 2009, the FASB issued guidance related toRecognition and Presentation of Other-Than-Temporary
Impairmentswhich provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on debt securities. This
new guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this did not
have a material impact on the Company's financial statements.

In
June 2009, the FASB issued new guidance related to TheFASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, which replaces previously issued guidance related toThe Hierarchy of Generally Accepted Accounting Principlesand
establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with Generally Accepted Accounting Principles. The new guidance is effective for interim and annual periods ending after September 15, 2009 and did not have a
material impact on the Company's consolidated financial statements.

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

2. ACCOUNTS RECEIVABLE

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

2009

2008Trade accounts receivable

$
7,571

$
6,470Less: allowance for doubtful accounts


(36
)

(63
)$
7,535

$
6,407


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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):

2009

2008Raw materials

$
7,193

$
7,970Work-in-process


525


424Finished goods


1,562


3,189Net inventories

$
9,280

$
11,583Inventory reserves included in net inventories

$
999

$
1,167


4. PROPERTY, PLANT AND EQUIPMENT

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

2009

2008Machinery and equipment

$
19,271

$
20,233Office furniture and equipment


1,738


1,938Leasehold improvements


8,397


10,692Building and land


2,962


2,870Property and equipment not in service


448


487Total gross fixed assets


32,816


36,220Less: accumulated depreciation and amortization


(21,167
)

(23,431
)Fixed assets

$
11,649

$
12,789


Depreciation
and amortization expense was $1.8 million and $1.9 million for the years ended December 31, 2009, and 2008, respectively.

5. ACCRUED EXPENSES

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

2009

2008Payroll and employee benefits

$
1,521

$
1,811Warranty reserve(1)


138


110Other


779


386Accrued expenses

$
2,438

$
2,307


(1)Warranty
Reserve


2009

2008Beginning Balance

$
110

$
135Settlement of Warranty


(85
)

(105
)Adjustments to Warranty


113


80Ending Balance

$
138

$
110


54

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Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 6, 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. The modification was not deemed to be significant enough to warrant treatment as a debt
extinguishment. The loan modification fee will be capitalized and amortized over the remaining life of the Agreement. As of December 31, 2009, the Company was in compliance with the Minimum
Cash Balance covenant and the Leverage ratio.



December 31,
2009

December 31,
2008Revolving line of credit

$
300

$
4,000Current portion of long term debt


1,000


1,000Short term debt

$
1,300

$
5,000


55

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Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. DEBT (Continued)



December 31,
2009

December 31,
2008Term Loan

$
3,167

$
4,167Less: current portion of long term debt


(1,000
)

(1,000
)Long term debt


2,167


3,167Total debt

$
3,467

$
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
$300,000 against the Revolver as of December 31, 2009 at an interest rate of 6.00%. The weighted average interest rate of the Company's short term borrowings is 5.03%. The Company must pay a
..25% commitment fee for the average unused portion of the Revolver for any given period. On January 4, 2010, the Company paid off the $300,000 of the Revolver with interest of four days.

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, 2009, the interest rate was 4.73%. The Company must make monthly payments of $83,333 plus interest. The Company has paid
$1 million against the Term Loan in 2009.



Amount

YearRevolver borrowing $300,000 at 6.00%

$
300


2010Term Loan


1,000


2010Term Loan


1,000


2011Term Loan


1,000


2012Term Loan


167


2013Total debt

$
3,467


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.

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Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. ACCOUNTING FOR STOCK BASED COMPENSATION

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.

On
May 13, 2009 at the Company's Annual Meeting, the Company's shareholders ratified the 2009 Aldila, Inc. Equity Plan ("Equity Plan") and the 2009 Aldila, Inc.
Outside Director Equity Plan ("Director Plan"). There are 860,000 shares available for grant against the Equity Plan plus any outstanding options or restricted stock awards under the Company's 1994
Stock Incentive Plan ("1994 Plan") that terminate prior to being exercised or vesting, respectively, not to exceed 212,853. The Company's Board of Directors granted 43,030 shares of restricted stock
to employees on August 25, 2009. There are 100,000 shares available for grant against the Director Plan. In accordance with the Director Plan, the Company granted 13,336
non-qualified stock options to its Board of Directors on May 13, 2009. The Company recognizes share-based compensation expense using the straight line attribution method. 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.

Stock Based Compensation Expense

There were no capitalized stock-based compensation costs at December 31, 2009. 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, 2009 is approximately $355,000; such expense will be
recognized over a weighted average period of 1.9 years. This amount 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, 2009 and 2008 (in
thousands):

2009

2008Cost of sales

$


$
Selling, general and administrative


399


302Pre-tax stock-based compensation expense


399


302Income tax benefit


174


109Net stock-based compensation expense

$
225

$
193


The
Company reflects 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

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ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. ACCOUNTING FOR STOCK BASED COMPENSATION (Continued)

exercised
during the twelve month periods ended December 31, 2009 and 2008 are as follows (in thousands):

2009

2008Proceeds from stock options exercised

$


$
18Tax benefit related to stock options exercised

$


$
Intrinsic value of stock options exercised

$


$
2


Stock Option Activity

The fair value of stock options at date of grant was estimated using the Black-Scholes model. 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 2009 and 2008.

2009

2008Expected life (years)


3.7


3.7Risk-free interest rate


1.7
%

2.9
%Expected volatility


74.1
%

64.3
%Expected dividend yield


0.0
%

7.6
%Weighted average fair value of options granted

$
2.04

$
2.51


The
following table summarizes the stock option transactions during the twelve month period ended December 31, 2009:

Shares

Weighted
average
exercise
price

Weighted
average
remaining
contractual
life (in years)

Aggregate
Intrinsic
ValueOptions outstanding 1/1/2009


155,202

$
10.72Options granted


13,336


3.79Options exercised





Options terminated


(1,117
)
$
2.87Options outstanding 12/31/2009


167,421

$
10.22


5.3

$
6.34Options exercisable 12/31/2009


141,162

$
10.93


4.9

$
6.83


The
weighted average exercise price of options outstanding and exercisable as of 12/31/2009 reflect the option modification that was done during the fourth quarter of 2008 as noted
above. The total fair value of shares vested during the period ended December 31, 2009 was approximately $125,000. A

58

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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 the Company's nonvested shares as of December 31, 2009 and changes during the twelve month period ended December 31, 2009 are presented below.

Nonvested Options

Shares

Weighted
Average
Grant-Date
Fair ValueNonvested at 1/1/2009


25,849

$
7.56Granted


13,336

$
2.04Vested


(12,926
)
$
9.66Forfeited





Nonvested Options at 12/31/2009


26,259

$
3.72


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 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, 2009 is presented below:

December 31, 2009Shares

Weighted
average
exercise
priceRestricted stock outstanding 1/1/2009


57,651

$
10.10Restricted stock awarded


43,030

$
3.64Restricted stock vested


(27,973
)
$
12.09Restricted stock terminated


(1,865
)
$
7.53Restricted stock outstanding 12/31/2009


70,843

$
5.46


9. INCOME TAXES

The Company 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. During the year ended December 31, 2009, the Company recorded an income tax charge in the amount of $744,000 related to the closure of its Mexico facility. The amount is
attributed to the earnings which will be repatriated from Mexico, which the Company had not paid U.S. income tax on and will be partially offset by foreign tax credits on the income taxes paid in
Mexico.

The
Company has unrecognized tax positions of $1.8 million as of December 31, 2009 and $1.6 million as of December 31, 2008. The Company had 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, 2009, such amounts were $509,000 and $1.3 million,
respectively. The only significant change to these amounts during the period ended December 31, 2009, was the expiration of statute of limitations on 2005

59

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Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. INCOME TAXES (Continued)

unrecognized
tax positions totaling approximately $176,000, which includes related interest. The changes to Company's unrecognized tax benefits during the periods ended December 31, 2009 and
2008 are as follows:

December 31, 2009Increases

Decreases

Net ChangeBeginning period total unrecognized tax benefits







$
1,625Changes to unrecognized tax positions from a prior period

$


$



Tax positions taken during the current period(1)


336





336Lapse of statute of limitations





(146
)

(146
)Additional interest recognized


56


(30
)

26Ending period total unrecognized tax benefits

$
392

$
(176
)
$
1,841




December 31, 2008Increases

Decreases

Net ChangeBeginning period total unrecognized tax benefits







$
964Changes to unrecognized tax positions from a prior period(2)

$
242

$
(153
)

89Tax positions taken during the current period(3)


634





634Lapse of statute of limitations





(114
)

(114
)Additional interest recognized


87


(35
)

52Ending period total unrecognized tax benefits

$
963

$
(302
)
$
1,625


Notes (1)The
increase in the reserve for the year is attributed to potential transfer pricing issues related to the Company's Chinese subsidiary for taxes paid in
China and for R&D credits taken on the California tax return.(2)The
increase in the reserve is associated with R&D credits taken for California for the tax years 2001 - 2007. The Company has been under audit from the
California Franchise Tax Board ("FTB") since 2007 for the 2001 - 2004 taxable years and received the preliminary results of the audit, disallowing a portion of the credit. The Company is still
appealing the decision; however it appears more than likely than not that some of the credit will be disallowed. As such, the Company is reserving for it in the current period.(3)The
tax positions taken during the current period is attributed to finished goods that were scrapped on one of the Company's subsidiaries' books in which
the Company had risk of ownership, a change in estimate of foreign tax for one of the Companies subsidiaries and a change in estimate for the California R&D reserve for the current year and a reserve
related to interest accrued on loans to the Company's China subsidiary.


The
Company does not anticipate material changes to the Company's unrecognized tax positions that it has taken during the period. However, the Company is in the appeal process with the
FTB in regards to its ongoing audit. 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. In addition to the FTB
ongoing audit,

60

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Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. INCOME TAXES (Continued)

the
Company is also under audit by the Internal Revenue Service for the year ended 2007. The Company has been informed that this is just a random audit. Subsequent to December 31, 2009, the
Company also received an additional notification from the FTB, notifying the Company that it is under a general audit for the years ended 2005 and 2006. 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, 2009, the Company recognized approximately $56,000 of additional interest. As of
December 31, 2009 and December 31, 2008, the Company had approximately $150,000 and $96,000, respectively, accrued for interest.

The
Company or one of its subsidiaries files income tax returns in the U.S. 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

2005 and beforeCalifornia

2004 and beforeTexas

2006 and beforeTennessee

2005 and beforeUtah

2005 and beforeChina

2004 and beforeMexico

2004 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):

2009

2008Current:Federal

$
244

$
(1,048
)State


(115
)

(275
)Foreign


85


147Total


214


(1,176
)Deferred:Federal

$
(119
)
$
(593
)State


212


318Total


93


(275
)Provision for income taxes

$
121

$
(901
)


61

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Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. INCOME TAXES (Continued)

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

2009

2008Statutory rate


(34.0
)%

(34.0
)%State income taxes, net of Federal tax benefit


(214.6
)%

(11.5
)%R&D tax credits


(68.9
)%

(1.1
)%Foreign earnings taxed at different rates


(300.2
)%

(11.1
)%FIN 48


182.2
%

19.4
%Repatriation of Foreign earnings


510.8
%

14.8
%Other items


23.9
%

(3.0
)%Effective rate


99.2
%

(26.5
)%


Net
deferred income taxes included in current and long-term assets in the balance sheet at December 31 2009 and 2008, consist of the tax effects of temporary
differences related to the following:

Deferred tax assetsnet, current

2009

2008Inventories

$
510

$
679Accrued expenses


400


376Allowance for doubtful accounts


16


27Deferred expenses (capital losses)


47


64State income taxes


(338
)

(265
)Other


(73
)

(72
)Deferred tax assetscurrent

$
562

$
809




Deferred tax assetsnet, long-term

2009

2008Property and equipment

$
376

$
343FAS 123R Expense


526


350Tax Credits


212


141State NOL


396


334Other


18


19Deferred tax assetslong term

$
1,528

$
1,187




Reconciliation of deferred tax assets

2009

2008Deferred tax assetscurrent

$
562

$
809Deferred tax assetslong term


1,528


1,187Total deferred tax asset

$
2,090

$
1,996


The
Company has adopted the position 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.

62

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Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 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 $160,000 and $157,000 in 2009
and 2008, respectively.

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 $1.4 million and $1.5 million for 2009 and 2008, respectively. As of December 31, 2009, future minimum lease payments for all operating
leases are as follows (in thousands):

2010

$
1,3222011


1,3392012


8802013


626Thereafter


577$
4,744


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. The Company has employment agreements with its officers, which include change of
control provisions and other termination contingencies.

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. The Composite Materials segment is comprised of external sales of prepreg uni-tapes, fabrics and film adhesives. 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.

63

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Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. SEGMENT INFORMATION (Continued)

Segment
Operating Results

Twelve months ended
December 31, 2009Composite
Products

Composite
Materials

TotalRevenues from external customers

$
42,618

$
7,156

$
49,774Operating (loss) income

$
(906
)
$
1,029

$
123(Loss) income before income taxes

$
(1,116
)
$
994

$
(122
)




Twelve months ended
December 31, 2008Composite
Products

Composite
Materials

TotalRevenues from external customers

$
46,023

$
7,583

$
53,606Operating income

$
(4,411
)
$
804

$
(3,607
)Income before income taxes

$
(4,163
)
$
759

$
(3,404
)


Segment
Long-Lived Assets

As of December 31,2009

2008Property, Plant and EquipmentComposite Products

$
6,781

$
7,276Composite Materials(1)

$
4,868

$
5,513Total Property, Plant and Equipment

$
11,649

$
12,789


Note (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 back to either

64

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Table of Contents

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. SEGMENT INFORMATION (Continued)

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.

Long-Lived
Assets(in thousands)

Sales2009United States

$
26,947

$
6,489England


5,192


China


14,973


1,390Canada


106


Australia


418


Vietnam


878


3,770Other Foreign Countries


1,260


Total

$
49,774

$
11,649




2008

Sales

Long-Lived
AssetsUnited States

$
32,858

$
7,367England


5,502


China


13,089


1,278Canada


173


Australia


438


Mexico





466Vietnam


830


3,678Other Foreign Countries


716


Total

$
53,606

$
12,789


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

2009

2008Ping


21
%

21
%Acushnet Company


11
%

16
%Callaway Golf


10
%

15
%


65

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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, 2009 (in thousands, except per share data):

Quarter EndedMarch 31,

June 30,

September 30,

December 31,2009:Net sales

$
13,803

$
10,574

$
10,671

$
14,726Gross profit


2,862


1,383


2,518


3,917Net income


(48
)

(627
)

(571
)

1,003Net income per common sharebasic

$
(0.01
)
$
(0.12
)
$
(0.11
)
$
0.19Net income per common sharediluted

$
(0.01
)
$
(0.12
)
$
(0.11
)
$
0.192008:Net sales

$
16,663

$
13,644

$
11,764

$
11,535Gross profit


4,559


2,617


1,069


1,321Net income


458


(523
)

(1,094
)

(1,344
)Net income per common sharebasic

$
0.09

$
(0.10
)
$
(0.21
)
$
(0.26
)Net income per common sharediluted

$
0.09

$
(0.10
)
$
(0.21
)
$
(0.26
)


Earnings
per share are computed independently for each of the quarters presented and therefore may not sum to the annual amount for the year.

14. SUBSEQUENT EVENTS

On January 13, 2010, the Board of Directors unanimously approved a plan to voluntarily delist the Company's common stock from the NASDAQ Stock Market and to move its common stock
listing to the OTCQX U.S. Premier over-the-counter market, operated by Pink OTC Markets Inc.

On
February 23, 2010, Andrew Leitch, Bryant Riley and Michel Sheldon each tendered their resignations as directors of the Company. The Company entered into consulting agreements
with Mr. Leitch and Mr. Sheldon for the reminder of 2010.

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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, 2009 and 2008, 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, 2009 and 2008, included
at Item 15(a)(2). These consolidated financial statements and the financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audits.

We
conducted our audits in accordance with 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits, 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,
2009 and 2008, 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, 2009 and 2008, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Mayer Hoffman McCann P.C.San Diego, California
March 29, 2010


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Table of Contents

ALDILA INC. AND SUBSIDIARIES        SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS        For the years ended December 31, 2008 and 2009

Balance at
beginning of year

Charged to costs
and expenses

Deductions

Balance at
end of yearYear 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
)
$
110,000Year ended December 31, 2009Allowance for uncollectible accounts

$
63,000

$


$
(27,000
)
$
36,000Inventory Reserves

$
1,167,000

$
568,000

$
(736,000
)
$
999,000Warranty reserve

$
110,000

$
113,000

$
(85,000
)
$
138,000


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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 29, 2010/s/ SCOTT M. BIER Scott M. Bier

Vice President, Chief Financial Officer and Principal Accounting Officer

March 29, 2010/s/ THOMAS A. BRAND Thomas A. Brand

Director

March 29, 2010


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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

Lease Agreement dated as of June 18, 2004, between the Company and T.M. Cobb Company.10.2

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).10.3

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).10.4

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).10.5

Aldila, Inc. Audit Committee Charter included as Exhibit A in the Company's 2001 Proxy dated April 4, 2001 and incorporated herein by reference.10.6

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)10.7

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).10.8

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).


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Table of Contents

Exhibit
Number

Exhibit10.9

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).10.10

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) (Filed as Exhibit 10.22 to the Company's Report on Form 10-K for the year ended December 31, 2007 and incorporated herein by reference.)10.11

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).10.12

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 (Filed as Exhibit 10.24 to the Company's Report on Form 10-K for the year ended December, 31, 2008 and incorporated herein by reference.)10.13

Guaranty of Payment by Aldila Golf Corporation to Keybank National Association, dated February 8, 2008 (Filed as Exhibit 10.25 to the Company's Report on Form 10-K for the year ended December, 31, 20
and incorporated herein by reference.)10.14

Security Agreement by Aldila Golf Corporation to Keybank National Association, dated February 8, 2008 (Filed as Exhibit 10.26 to the Company's Report on Form 10-K for the year ended December, 31, 2008
and incorporated herein by reference.)10.15

Pledge Agreement by Company to Keybank National Association, dated February 8, 2008 (Filed as Exhibit 10.27 to the Company's Report on Form 10-K for the year ended December, 31, 2008 and incorporated
herein by reference.)10.16

Pledge Agreement by Aldila Golf Corporation to Keybank National Association, dated February 8, 2008 (Filed as Exhibit 10.28 to the Company's Report on Form 10-K for the year ended December, 31, 2008 and
incorporated herein by reference.)10.17

Intellectual Property Security Agreement by Company to Keybank National Association, dated February 8, 2008 (Filed as Exhibit 10.29 to the Company's Report on Form 10-K for the year ended December, 31,
2008 and incorporated herein by reference.)10.18

Intellectual Property Security Agreement by Aldila Golf Corporation to Keybank National Association, dated February 8, 2008 (Filed as Exhibit 10.30 to the Company's Report on Form 10-K for the year
ended December, 31, 2008 and incorporated herein by reference.)10.19

1994 Aldila, Inc. Executive Bonus Plan, as amended January 29, 2008. (Filed as Exhibit 10.31 to the Company's Report on Form 10-K for the year ended December, 31, 2008 and incorporated herein by
reference.)*10.20

2009 Aldila Inc. Executive Bonus Plan (Filed as Exhibit 99.2 to the Company's Current Report on Form 8-K dated March 12, 2009 and incorporated herein by reference.)*10.21

2009 Equity Incentive Plan (Filed as Exhibit 99.3 to the Company's Current Report on Form 8-K dated March 12, 2009 and incorporated herein by reference.)


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Table of Contents

Exhibit
Number

Exhibit*10.22

2009 Equity Incentive PlanForm of Restricted Stock Award Agreement (Filed as Exhibit 99.4 to the Company's Current Report on Form 8-K dated March 12, 2009 and incorporated herein by reference.)10.23

2009 Outside Director Equity Plan (Filed as Exhibit 99.5 to the Company's Current Report on Form 8-K dated March 12, 2009 and incorporated herein by reference.)10.24

2009 Outside Director Equity PlanForm of Restricted Stock Award Agreement (Filed as Exhibit 99.6 to the Company's Current Report on Form 8-K dated March 12, 2009 and incorporated herein by
reference.)*10.25

Change of Control Retention Agreement between the Company and Peter R. Mathewson (Filed as Exhibit 99.7 to the Company's Current Report on Form 8-K dated March 12, 2009 and incorporated herein by
reference.)*10.26

Form of Change of Control Retention Agreement between the Company and other Executives (Filed as Exhibit 99.8 to the Company's Current Report on Form 8-K dated March 12, 2009 and incorporated herein by
reference.)10.27

Form of Indemnification Agreement (Filed as Exhibit 99.9 to the Company's Current Report on Form 8-K dated March 12, 2009 and incorporated herein by reference.)10.28

Loan Modificaiton Agreement between KeyBank National Association and the Company dated February 6, 2009 (Filed as Exhibit 99.10 to the Company's Current Report on Form 8-K dated March 12, 2009 and
incorporated herein by reference.)10.29

2009 Equity Incentive PlanForm of Incentive Stock Option Agreement (Filed as Exhibit 99.1 to the Company's Current Report on Form 8-K dated May 18, 2009 and incorporated herein by reference.)10.30

2009 Outside Director Equity PlanForm of Nonqualified Stock Option Agreement (Filed as Exhibit 99.2 to the Company's Current Report on Form 8-K dated May 18, 2009 and incorporated herein by
reference.)11.1

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

Subsidiaries of the Company31.1

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.


*Indicates
management contracts or compensatory plans or arrangements required to be filed as exhibits


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