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

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

FORM 10-K

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
Or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-21872

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

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

14145 Danielson Street, Suite B, Poway, CA, 92064
(Address of principal executive offices)

858-513-1801
Registrant'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 registered
None	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

ALDILA, INC.

Report on Form 10-K
For the Fiscal Year Ended December 31, 2009

INDEX

Part I
	Item 1.	Business	3
	Item 1A.	Risk Factors	10
	Item 2.	Properties	13
	Item 3.	Legal Proceedings	13
	Item 4.	(Removed and Reserved)	13
Part II
	Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 8.	Financial Statements and Supplementary Data	26
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	26
	Item 9A.	Controls and Procedures	26
	Item 9B.	Other Information	27
Part III
	Item 10.	Directors and Executive Officers and Corporate Governance	28
	Item 11.	Executive Compensation	32
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	41
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	43
	Item 14.	Principal and Accounting Fees and Services	44
Part IV
	Item 15.	Exhibits, Financial Statement Schedules	45
Signatures			69
Exhibit 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			2008
Ping		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.

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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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PART II

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

COMMON STOCK PERFORMANCE

	2009						2008
	Dividends Declared		High		Low		Dividends Declared		High		Low
First Quarter	$	0.00	$	5.92	$	2.27	$	5.15	$	11.79	$	9.49
Second Quarter	$	0.00	$	5.67	$	2.52	$	0.15	$	11.25	$	5.76
Third Quarter	$	0.00	$	4.56	$	2.57	$	0.00	$	5.58	$	3.66
Fourth 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		—		86,664
Equity compensation plans approved by security holders—2009 Equity Incentive Plan						42,680		817,320
Total		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

14

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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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

16

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			Lowest
Gross inventory as of 12/31/09	$	10,279		$	10.279		$	10,279
Reserve rate		9.7	%		8.7	%		7.7	%
Estimated reserve		999			895			793
Recorded Reserve as of 12/31/09		999			999			999
Impact 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

17

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:

Branded Shaft Offerings

•

Aldila NV® and NV® Line extensions

•

Introduced in 2003, featuring the Company's exclusive Micro Laminate Technology®.

•

Has had numerous Tour victories.

•

The Company introduced NV® line extensions in 2004, including the NVS™, NV ProtoPype®, Pink NV®, NV® Irons and NV® Hybrid shafts.

•

The Aldila NV® can be considered one of the most successful shaft introductions ever.

•

VS Proto^TM and the VS Proto^TM Hybrid

•

Introduced and began shipping in 2006.

•

High performance shaft featuring carbon nanotubes as well as aerospace carbon fibers and the Company's exclusive high performance resin systems.

•

Used by the winner of the 2006 U.S. Open.

•

DVS® and DVS® Hybrid

•

Introduced late in the fourth quarter 2007.

•

Features carbon nanotubes and an innovative tip design for extra kick at impact—with optimum launch.

•

Used by former Aldila advisory staff member, Paula Creamer, for 4 LPGA victories in 2008.

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•

VooDoo®

•

Initially introduced on Tour only during the first quarter of 2008.

•

One of the most popular shafts on the PGA Tour.

•

Used to win 8 events in 2008 and 10 events in 2009.

•

En Fuego^TM

•

3 different shafts—Wasabi™, Habanero™ and Serrano™, each promotes a different ball launch.

•

Introduced on Tour during 2009.

        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.

Tour Play

•

2007 Tour Play

•

Tour professionals using Aldila shafts won 19 events on the PGA Tour and nearly fifty percent of all the events on the Nationwide Tour.

•

Aldila shafts were also the most popular shafts for woods and hybrid clubs at every major championship on the PGA Tour.

•

Aldila shafts were used by the winner of The Masters and the U.S. Open as well as the winner of the World Golf Championship-Accenture Match Play Championship.

•

Former Aldila advisory staff member, Paula Creamer, won the SBS Open and led the U.S. Women's team to victory in the Solheim Cup playing her Pink NV® woods.

•

Aldila was also the shaft of choice for the majority of players in both woods and hybrids at the 2007 PGA Club Professional Championship.

•

At the 2007 U.S. Men's Amateur, Aldila was the leading shaft choice for hybrids.

•

During the U.S. Public Links Championship, Aldila was the most popular wood and hybrid shaft.

•

Aldila was also the leading shaft at the NCAA Division 1 Men's Championship in both woods and hybrids and the leading driver shaft at the NCAA Women's Championship.

•

Aldila shafts were included on the Golf Digest Hot List and won Golf Tips Magazine's Technology Award.

•

2008 Tour Play

•

Aldila enjoyed a great 2008 Tour season.

•

On the PGA Tour, players using Aldila shafts won 13, events including the World Golf Championship-CA Championship and the Verizon Heritage by former Aldila advisory staff member, Boo Weekley.

•

Players using Aldila shafts won 13 events on the Nationwide Tour and 15 events on the Champions Tour.

•

On the LPGA Tour we won 20 events, and Paula Creamer, a former Aldila advisory staff member, has won four events.

•

2009 Tour Play

•

Aldila enjoyed a great 2009 Tour season.

•

On the PGA Tour, players using Aldila shafts won 15 events including the Mercedes-Benz Championship, WGC-Accenture Match Play Championship and The Masters.

•

Players using Aldila shafts won 16 events on the Nationwide Tour.

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•

Aldila was the most popular wood and hybrid shaft at The Masters, U.S. Open, The PGA Championship, The Open Championship and every World Golf Championship. For the second year in a row, Aldila was also the most popular shaft at every FedEx Cup event.

•

Aldila was the most popular wood and hybrid shaft at the majority of all other PGA and Nationwide Tour events.

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

Competition

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

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

        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

21

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			% Chg
Composite 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.

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Gross Profit

		2009		2008		Chg		% Chg
Composite 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			% Chg
Gross profit		$	10,680		$	9,566		$	1,114			12	%
Selling, General & Administrative ("SG&A) Expense
Composite 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

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			% Chg
Operating 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			% Chg
Loss 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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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 to The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, which replaces The Hierarchy of Generally Accepted Accounting Principles and 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

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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        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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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. BRAND has 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. MATHEWSON has 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. RILEY has 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. LEITCH was 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

28

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. SHELDON has 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.

        The EXECUTIVE COMMITTEE of 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.

        The AUDIT COMMITTEE was 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 COMMITTEE was 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.

        The NOMINATING COMMITTEE was 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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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. CIERZAN has 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. ROSSI has 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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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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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

32

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 Agreements below. Concurrently, but not in connection with COMPENSIA's engagement, the Board approved new indemnification agreements for the directors and officers.

COMPENSATION OF EXECUTIVE OFFICERS

Summary Compensation Table

        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)		353,806
		2008		294,921		—		15,457		—		—		60,812	(6)		371,190
Robert J. Cierzan		2009		227,347		—		5,460		—		—		14,279	(7)		247,086
		2008		218,657		—		5,655		—		—		30,502	(8)		254,814
Michael J. Rossi		2009		213,115		—		14,560		—		—		20,550	(9)		248,225
		2008		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.

Executive Bonus Plan

        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.

Other Benefits

        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.

Outstanding Equity Awards at Fiscal Year-End

        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 Awards
Name(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		12/16/2013
		13,500		—		—		7.94		8/24/2014
		10,125		—		—		21.25		8/17/2015
Robert J. Cierzan		5,000		—		—		2.28		12/16/2013		3,275	(7)		11,364		—		—
		3,100		—		—		7.94		8/24/2014
		6,975		—		—		21.25		8/17/2015
Michael 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.

Change of Control Agreements

Severance Protection Agreements—through March, 2009

        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

36

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.

Change of Control Retention Agreements—2009

        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."

A.

Change of Control Retention Agreement—CEO

        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

37

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.

B.

Other Officer Change of Control Retention Agreements

        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

38

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		41,894
Andrew M. Leitch		37,500		6,801	(4)		200		44,501
Bryant R. Riley		28,000		6,801	(5)		—		34,801
Michael 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

39

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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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 Owners
Lloyd 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 Officers
Peter 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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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.

43

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

PART IV

Item 15.    Exhibits, Financial Statement Schedules

(a)

Documents included as part of this report:

1.

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

Consolidated Balance Sheets at December 31, 2009 and 2008;	46
Consolidated Statements of Operations for the years ended December 31, 2009 and 2008;	47
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2009 and 2008;	48
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008;	49
Notes to Consolidated Financial Statements	50
Report of Independent Registered Public Accounting Firm	67

2.

Schedule II Valuation and Qualifying Accounts for the years ended December 31, 2009 and 2008.



All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes thereto.

3.

See the Index to Exhibits on page 45 of this Form 10-K. Financial statements of subsidiaries not consolidated and fifty percent or less owned persons, management contracts or compensatory plans or arrangements required to be filed as exhibits to this report are identified on the Index to Exhibits.

(b)

Exhibits required by Item 601 of Regulation S-K.

See item (a) 3 above.

(c)

Financial statements required by Regulation S-X, which are excluded from the annual report to shareholders by Rule 14a-3, which include separate financial statements of subsidiaries not consolidated and fifty percent or less owned persons.

See item (a) 3 above.

45

ALDILA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

			December 31, 2009			December 31, 2008
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	7,104		$	6,157
	Accounts receivable, net			7,535			6,407
	Income taxes receivable			—			2,272
	Inventories			9,280			11,583
	Deferred tax assets			562			809
	Prepaid expenses and other current assets			679			484
		Total current assets		25,160			27,712
PROPERTY, PLANT AND EQUIPMENT, NET				11,649			12,789
DEFERRED TAXES				1,528			1,187
OTHER NON-CURRENT ASSETS				235			244
TOTAL ASSETS			$	38,572		$	41,932
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
	Accounts payable		$	4,141		$	3,420
	Income taxes payable			158			—
	Accrued expenses			2,438			2,307
	Short term debt			1,300			5,000
	Other current liability			509			117
		Total current liabilities		8,546			10,844
LONG-TERM LIABILITIES:
	Deferred rent			111			153
	Long term debt			2,167			3,167
	Other long-term liabilities			1,332			1,508
		Total liabilities		12,156			15,672
COMMITMENTS 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			52
	Additional paid-in capital			44,618			44,121
	Accumulated deficit			(18,254	)		(17,913	)
		Total stockholders' equity		26,416			26,260
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY			$	38,572		$	41,932

See notes to consolidated financial statements.

46

ALDILA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

		Year ended December 31,
		2009			2008
NET SALES		$	49,774		$	53,606
COST OF SALES			39,094			44,040
	Gross profit		10,680			9,566
SELLING, GENERAL AND ADMINISTRATIVE			10,291			13,173
PLANT CONSOLIDATION			266			—
	Operating income (loss)		123			(3,607	)
OTHER INCOME (EXPENSE):
	Interest income		17			308
	Interest expense		(191	)		(284	)
	Other, net		(71	)		179
LOSS 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			5,162
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES			5,184			5,162

See notes to consolidated financial statements.

47

ALDILA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)

	Common Stock
					Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)
	Shares		Amount							Total
Balance at January 1, 2008		5,154	$	51	$	43,702	$	12,013		$	55,766
Stock-based compensation		19		—		402		(100	)		302
Common stock issued upon stock option exercises		1		1		17		—			18
Dividend payments		—		—		—		(27,323	)		(27,323	)
Net loss		—		—		—		(2,503	)		(2,503	)
Balance at December 31, 2008		5,174		52		44,121		(17,913	)		26,260
Stock-based compensation		28		—		497		(98	)		399
Net loss		—		—		—		(243	)		(243	)
Balance at December 31, 2009		5,202	$	52	$	44,618	$	(18,254	)	$	26,416

See notes to consolidated financial statements.

48

ALDILA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

					Year ended December 31,
					2009			2008
CASH 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			1,866
		Stock-based compensation				399			302
		Loss on disposal of fixed assets				128			9
		Changes in assets and liabilities:
			Accounts receivable, net			(1,128	)		2,277
			Inventories			2,303			2,278
			Deferred tax assets			(94	)		275
			Prepaid expenses and other assets			(202	)		89
			Accounts 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	)		663
				Net 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			19
				Net cash used for investing activities		(743	)		(1,338	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Borrowings against term loan					—			5,000
	Payments for term loan					(1,000	)		(833	)
	Borrowings against line of credit					5,100			9,500
	Payments for line of credit					(8,800	)		(5,500	)
	Proceeds from issuance of common stock					—			18
	Dividend 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			29,529
CASH AND CASH EQUIVALENTS, END OF YEAR					$	7,104		$	6,157
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
	Cash paid during the year for:
		Income taxes			$	85		$	4,805
		Interest			$	163		$	273

See notes to consolidated financial statements.

49

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

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:

	Years
Machinery and equipment		5 - 10
Office 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

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 to Fair Value Measurements 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 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 to Accounting 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

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 to Determining 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 in Fair 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 to Recognition and Presentation of Other-Than-Temporary Impairments which 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 The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, which replaces previously issued guidance related to The Hierarchy of Generally Accepted Accounting Principles and 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			2008
Trade accounts receivable	$	7,571		$	6,470
Less: allowance for doubtful accounts		(36	)		(63	)
	$	7,535		$	6,407

53

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVENTORIES

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

		2009		2008
Raw materials		$	7,193	$	7,970
Work-in-process			525		424
Finished goods			1,562		3,189
	Net inventories	$	9,280	$	11,583
Inventory 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			2008
Machinery and equipment	$	19,271		$	20,233
Office furniture and equipment		1,738			1,938
Leasehold improvements		8,397			10,692
Building and land		2,962			2,870
Property and equipment not in service		448			487
Total gross fixed assets		32,816			36,220
Less: 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		2008
Payroll and employee benefits		$	1,521	$	1,811
Warranty reserve(1)			138		110
Other			779		386
	Accrued expenses	$	2,438	$	2,307

(1)

Warranty Reserve

	2009			2008
Beginning Balance	$	110		$	135
Settlement of Warranty		(85	)		(105	)
Adjustments to Warranty		113			80
Ending Balance	$	138		$	110

54

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:

•

Amount available to borrow against the Revolver is reduced to $5.0 million;

•

The Revolver will become due February 8, 2011;

•

The interest rates were modified from the Base Rate to the Derived Base Rate, which is the Base Rate plus 2.75%; and the Eurodollar Rate is modified to be LIBOR rate plus 4.50%;

•

The Fixed Charge Coverage Ratio covenant is suspended from December 31, 2008 through and including December 31, 2009 and the Leverage ratio covenant is suspended from December 31, 2008 through and including September 30, 2009.

        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.

Short term debt

	December 31, 2009		December 31, 2008
Revolving line of credit	$	300	$	4,000
Current portion of long term debt		1,000		1,000
Short term debt	$	1,300	$	5,000

55

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. DEBT (Continued)

Long term debt

	December 31, 2009			December 31, 2008
Term Loan	$	3,167		$	4,167
Less: current portion of long term debt		(1,000	)		(1,000	)
Long term debt		2,167			3,167
Total 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.

Debt Principal Payment Schedule

	Amount		Year
Revolver borrowing $300,000 at 6.00%	$	300		2010
Term Loan		1,000		2010
Term Loan		1,000		2011
Term Loan		1,000		2012
Term Loan		167		2013
Total 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.

56

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		2008
Cost of sales	$	—	$	—
Selling, general and administrative		399		302
Pre-tax stock-based compensation expense		399		302
Income tax benefit		174		109
Net 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

57

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		2008
Proceeds from stock options exercised	$	—	$	18
Tax 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			2008
Expected life (years)		3.7			3.7
Risk-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 Value
Options outstanding 1/1/2009		155,202		$	10.72
Options granted		13,336			3.79
Options exercised		—			—
Options terminated		(1,117	)	$	2.87
Options outstanding 12/31/2009		167,421		$	10.22		5.3	$	6.34
Options 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

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 Value
Nonvested at 1/1/2009		25,849		$	7.56
Granted		13,336		$	2.04
Vested		(12,926	)	$	9.66
Forfeited		—			—
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, 2009
	Shares			Weighted average exercise price
Restricted stock outstanding 1/1/2009		57,651		$	10.10
Restricted stock awarded		43,030		$	3.64
Restricted stock vested		(27,973	)	$	12.09
Restricted stock terminated		(1,865	)	$	7.53
Restricted 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

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, 2009
	Increases		Decreases			Net Change
Beginning period total unrecognized tax benefits						$	1,625
Changes to unrecognized tax positions from a prior period	$	—	$	—			—
Tax positions taken during the current period(1)		336		—			336
Lapse of statute of limitations		—		(146	)		(146	)
Additional interest recognized		56		(30	)		26
Ending period total unrecognized tax benefits	$	392	$	(176	)	$	1,841

	December 31, 2008
	Increases		Decreases			Net Change
Beginning period total unrecognized tax benefits						$	964
Changes to unrecognized tax positions from a prior period(2)	$	242	$	(153	)		89
Tax positions taken during the current period(3)		634		—			634
Lapse of statute of limitations		—		(114	)		(114	)
Additional interest recognized		87		(35	)		52
Ending 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

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 Audit
U.S. Federal	2005 and before
California	2004 and before
Texas	2006 and before
Tennessee	2005 and before
Utah	2005 and before
China	2004 and before
Mexico	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			2008
Current:
	Federal	$	244		$	(1,048	)
	State		(115	)		(275	)
	Foreign		85			147
	Total		214			(1,176	)
Deferred:
	Federal	$	(119	)	$	(593	)
	State		212			318
	Total		93			(275	)
Provision for income taxes		$	121		$	(901	)

61

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			2008
Statutory 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			2008
Inventories		$	510		$	679
Accrued expenses			400			376
Allowance for doubtful accounts			16			27
Deferred expenses (capital losses)			47			64
State income taxes			(338	)		(265	)
Other			(73	)		(72	)
	Deferred tax assets—current	$	562		$	809

Deferred tax assets—net, long-term		2009		2008
Property and equipment		$	376	$	343
FAS 123R Expense			526		350
Tax Credits			212		141
State NOL			396		334
Other			18		19
	Deferred tax assets—long term	$	1,528	$	1,187

Reconciliation of deferred tax assets	2009		2008
Deferred tax assets—current	$	562	$	809
Deferred tax assets—long term		1,528		1,187
Total 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

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	$	1,322
2011		1,339
2012		880
2013		626
Thereafter		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

ALDILA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. SEGMENT INFORMATION (Continued)

Segment Operating Results

	Twelve months ended December 31, 2009
	Composite Products			Composite Materials		Total
Revenues from external customers	$	42,618		$	7,156	$	49,774
Operating (loss) income	$	(906	)	$	1,029	$	123
(Loss) income before income taxes	$	(1,116	)	$	994	$	(122	)

	Twelve months ended December 31, 2008
	Composite Products			Composite Materials		Total
Revenues from external customers	$	46,023		$	7,583	$	53,606
Operating income	$	(4,411	)	$	804	$	(3,607	)
Income before income taxes	$	(4,163	)	$	759	$	(3,404	)

Segment Long-Lived Assets

	As of December 31,
	2009		2008
Property, Plant and Equipment
Composite Products	$	6,781	$	7,276
Composite Materials(1)	$	4,868	$	5,513
Total 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

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)	Sales
2009
United States	$	26,947	$	6,489
England		5,192		—
China		14,973		1,390
Canada		106		—
Australia		418		—
Vietnam		878		3,770
Other Foreign Countries		1,260		—
Total	$	49,774	$	11,649

2008	Sales		Long-Lived Assets
United States	$	32,858	$	7,367
England		5,502		—
China		13,089		1,278
Canada		173		—
Australia		438		—
Mexico		—		466
Vietnam		830		3,678
Other 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			2008
Ping		21	%		21	%
Acushnet Company		11	%		16	%
Callaway Golf		10	%		15	%

65

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 Ended
	March 31,			June 30,			September 30,			December 31,
2009:
Net sales	$	13,803		$	10,574		$	10,671		$	14,726
Gross profit		2,862			1,383			2,518			3,917
Net income		(48	)		(627	)		(571	)		1,003
Net income per common share—basic	$	(0.01	)	$	(0.12	)	$	(0.11	)	$	0.19
Net income per common share—diluted	$	(0.01	)	$	(0.12	)	$	(0.11	)	$	0.19
2008:
Net sales	$	16,663		$	13,644		$	11,764		$	11,535
Gross profit		4,559			2,617			1,069			1,321
Net 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.

66

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

67

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 year
Year ended December 31, 2008
Allowance for uncollectible accounts	$	41,000	$	112,000	$	(90,000	)	$	63,000
Inventory Reserves	$	1,182,000	$	619,000	$	(634,000	)	$	1,167,000
Warranty reserve	$	135,000	$	80,000	$	(105,000	)	$	110,000
Year ended December 31, 2009
Allowance for uncollectible accounts	$	63,000	$	—	$	(27,000	)	$	36,000
Inventory Reserves	$	1,167,000	$	568,000	$	(736,000	)	$	999,000
Warranty reserve	$	110,000	$	113,000	$	(85,000	)	$	138,000

68

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

69

EXHIBIT INDEX

Exhibit Number		Exhibit
	2.1	Agreement of Purchase and Sale, dated as of December 14, 1991, by and among Aldila Acquisition Corp., Aldila, Inc. and all of the Shareholders of Aldila, Inc., as amended by the First Amendment dated January 9, 1992 by and among Aldila Acquisition Corp., Aldila, Inc. and all the Shareholders of Aldila, Inc. (Filed as Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-61560) and incorporated herein by reference).
	3.1	Restated Certificate of Incorporation. (Filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-70010) and incorporated herein by reference).
	3.2	Restated By-Laws of the Company. (Filed as Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 33-61560) and incorporated herein by reference).
	4.1	Specimen form of Company's Common Stock Certificate. (Filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-61560) and incorporated herein by reference).
	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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Exhibit Number		Exhibit
	10.9	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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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 Company
	31.1	Certification of Chief Executive Officer
	31.2	Certification of Chief Financial Officer
	32.1	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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EX-10.1

Exhibit 10.1

  AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION

STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE — NET

(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)

1.Basic Provisions (“Basic Provisions”).

1.1Parties: This Lease (“Lease”), dated for reference purposes only, June 18, 2004, is made by and between T.M. Cobb Company, a California corporation (“Lessor”) and Aldila Golf Corporation, a Delaware corporation (“Lessee”), (collectively the “Parties,” or individually a “Party”).

1.2Premises: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known as 13450 Stowe Drive, Poway, located in the County of San Diego, State of California., and generally described as (describe briefly the nature of the property and, if applicable, the “Project”, if the property is located within a Project) an approximately 73,000 square foot building. See legal description attached hereto as Exhibit “A”. See floor plan attached hereto as Exhibit “B”. (“Premises”). (See also Paragraph 2)

1.3Term: 5 years and 0 months (“Original Term”) commencing December 1, 2004 (“Commencement Date”) and ending November 30, 2009 (“Expiration Date”). (See also Paragraph 3)

1.4Early-Possession:                                                      (“Early Possession Date”). (See also Paragraph 3.2 and 3.3)

1.5Base Rent: $40,150.00 per month (“Base Rent”), payable on the first day of each month commencing December 1, 2004. Increases will occur as set forth in addendum attached hereto. (See also Paragraph 4)

o If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted.

1.6Base Rent and Other Monies Paid Upon Execution:

(a)Base Rent: $40,150.00 for the period December 1, 2004 through December 31, 2004.

(b)Security Deposit: $29,475.00 (“Security Deposit”). (See also Paragraph 5)

(c)Association Fees: $                            for the period

(d)Other: $                                       for

(e)Total Due Upon Execution of this Lease: $40,150.00. The deposit funds already in the possession of Lessor from the previous leases between Lessor and Lessee for the Premises, totalling $29,475.00, shall be maintained by Lessor as the deposit under this Lease.

1.7Agreed Use: Manufacturing, storing and office purposes (See also Paragraph 6)

1.8Insuring Party: Lessor is the “Insuring Party” unless otherwise stated herein. (See also Paragraph 8)

1.9Real Estate Brokers: (See also Paragraph 15)

(a)           Representation: The following real estate brokers (the “Brokers”) and brokerage relationships exist in this transaction (check applicable boxes):

o                                                                                 represents Lessor exclusively (“Lessor’s Broker”):

o                                                                            represents Lessee exclusively (“Lessee’s Broker”); or o                                                                                 represents both Lessor and Lossee (“Dual Agency”):

(b)           Payment to Brokers: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Broker the fee agreed to in their separate written agreement (or if there is no such agreement, the sum of                or                % of the total Base Rent) for the brokerage services rendered by the Brokers.

1.10Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by                                                  (“Guarantor”).  (See also Paragraph 37)

1.11Attachments. Attached hereto are the following, all of which constitute a part of this Lease:

xan Addendum consisting of Paragraphs 51 through 55;

oa plot plan depicting the Premises;

oa current set of the Rules and Regulations;

oa Work Letter;

xother (specify): Exhibit “A” - Exhibit “B”.

2.Premises.

2.1Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating Rent, is an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less. Note: Lessee is advised to verify the actual size prior to executing this Lease.

2.2Condition.  Lessor shall deliver the Premises to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs (“Start Date”), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee and in effect within thirty days following the Start Date, warrants that the existing electrical, plumbing, fir sprinkler, lighting, heating, ventilating and air conditioning systems (“HVAC”), loading doors, sump pumps, if any, and all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date and that the structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the “Building”) shall be free of material defects. if a non-compliance with said warranty exists as of the Start Date, or if one of such systems or elements

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should malfunction or fail within the appropriate warranty period, Lessor shall, as Lessor’s sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, malfunction or failure, rectify same at Lessor’s expense. The warranty periods shall be as follows: (i) 6 months as to the HVAC systems, and (ii) 30 days as to the remaining systems and other elements of the Building. If Lessee does not give Lessor the required notice within the appropriate warranty period, correction of any such non-compliance, malfunction or failure shall be the obligation of Lessee at Lessee’s sole cost and expense.

2.3Compliance. Lessor warrants that the improvements on the Premises comply with the building codes, applicable laws, covenants or restrictions of record, regulations, and ordinances (“Applicable Requirements”) that were in effect at the time that each improvement, or portion thereof, was constructed. Said warranty does not apply to the use to which Lessee will put the Premises, modifications which may be required by the Americans with Disabilities Act or any similar laws as a result of Lessee’s use (see Paragraph 50), or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the Applicable Requirements, and especially the zoning, are appropriate for Lessee’s intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor’s expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within 6 months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee’s sole cost and expense. If the Applicable Requirements are hereafter changed so as to require during the term of this Lease the construction of an addition to or an alteration of the Premises and/or Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Unit, Premises and/or Building (“Capital Expenditure”), Lessor and Lessee shall allocate the cost of such work as follows:

(a)           Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last 2 years of this Lease and the cost thereof exceeds 6 months’ Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within 10 days after receipt of Lessee’s termination notice that Lessor has elected to pay the difference between the actual cost thereof and an amount equal to 6 months’ Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least 90 days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure.

(b)           If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for such costs pursuant to the provisions of Paragraph 7.1(d); provided, however, that if such Capital Expenditure is required during the last 2 years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon 90 days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within 10 days after receipt of Lessor’s termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with interest, from Rent until Lessor’s share of such costs have been fully paid. If Lessee is unable to finance Lessor’s share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon 30 days written notice to Lessor.

(c)           Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall either: (i) immediately cease such changed use or intensity of use and/or take such other steps as may be necessary to eliminate the requirement for such Capital Expenditure, or (ii) complete such Capital Expenditure at its own expense. Lessee shall not, however, have any right to terminate this Lease.

2.4Acknowledgements. Lessee acknowledges that: (a) It has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements and the Americans with Disabilities Act), and their suitability for Lessee’s intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Lessor, Lessor’s agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (i) Brokers have made no representations, promises or warranties concerning Lessee’s ability to honor the Lease or suitability to occupy the Premises, and (ii) it is Lessor’s sole responsibility to investigate the financial capability and/or suitability of all proposed tenants.

2.5Lessee as Prior Owner/Occupant. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work. Lessee agrees to accept the premises “as is” due to their previous occupancy of the Premises.

3.Term.

3.1Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3.

3.2Early Possession. If Lessee totally or partially occupies the Promises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date. Lessee currently occupies the entirety of the Premises under two separate leases with Lessor. The terms of these aforementioned leases shall control any matters occuring prior to the Commencement Date.

3.3Delay in Possession. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession by such date, Lessor shall not be subject to any liability therefor, nor shell such failure affect the validity of this Lease, Lessee shall not, however, be obligated to pay Rent or perform its other obligations until Lessor delivers possession of the Premises and any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession is not delivered within 60 days after the Commencement Date, Lessee may, at its option, by notice in writing within 10 days after the end of such 60 day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said 10 day period. Lessee’s right to cancel shall terminate. If possession of the Premises is not delivered within 120 days after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing. Lessee is currently in possession of the Premises.

3.4Lessee Compliance. Lessor shall not be required to deliver possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor’s election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied.

4.Rent.

4.1.Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent (“Rent”).

4.2Payment. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States on or before the day on which it is due, without offset or deduction (except as specifically permitted in this Lease). Rent for any period during the term hereof which is for less than one full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor’s rights to the balance of such Rent, regardless of Lessor’s endorsement of any check so stating. In the event that any check, draft, or other instrument of payment given by Lessee to Lessor is dishonored for any reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any Late Charge and Lessor, at its option, may require all future payments to be made by Lessee to be by cashier’s check. Payments will be applied first to accrued late charges and attorney’s fees, second to accrued interest, then to Base Rent and Operating Expense Increase, and any remaining amount to any other outstanding charges or costs.

4.3Association Fees. In addition to the Base Rent, Lessee shall pay to Lessor each month an amount equal to any owner’s association or condominium fees levied or assessed against the Premises. Said monies shall be paid at the same time and in the same manner as the Base Rent.

5.Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee’s faithful performance of its obligations under this Lease. If Lessee fails lo pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor far any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within 10 days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent Increases during the term of this Lease. Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit here to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee. Lessor shall have the right to increase the Security Deposit to the extent necessary. In Lessor’s reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a

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result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor’s reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on such change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within 14 days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within 30 days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease.

6.Use.

6.1Use. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of or causes damage to neighboring premises or properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, and/or is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within 7 days after such request give written notification of same, which notice shall include an explanation of Lessor’s objections to the change in the Agreed Use.

6.2Hazardous Substances.

(a)Reportable Uses Require Consent. The term “Hazardous Substance” as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises. (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee’s expense) with all Applicable Requirements. “Reportable Use” shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, ordinary office supplies (copier toner, liquid paper, glue, etc.) and common household cleaning materials, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. Lessor acknowledges that Lessee is currently storing Hazardous Substances used in connection with Lessee’s agreed use on the Premises, and that Lessee may continue to store such Hazardous Substances so long as Lessee complies with all applicable laws and provisions of this Lease. Lessee represents that it has not stored any Hazardous Substance in violation of any applicable law or provision of this Lease.

(b)Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance.

(c)Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee’s expense, comply with all Applicable Requirements and take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party.

(d)Lessee Indemnification. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys’ and consultants’ fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties not caused or contributed to by Lessee). Lessee’s obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement.

(e)Lessor Indemnification. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which result from Hazardous Substances which existed on the Premises prior to Lessee’s occupancy or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor’s obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease.

(f)Investigations and Remediations. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to Lessee’s occupancy, unless such remediation measure is required as a result of Lessee’s use (including “Alterations”, as defined in paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor’s agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor’s investigative and remedial responsibilities.

(g)Lessor Termination Option. If a Hazardous Substance Condition (see Paragraph 9.1(e)) occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the Investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor’s rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor’s option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor’s expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds 12 times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within 30 days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor’s desire to terminate this Lease as of the date 60 days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within 10 days thereafter, give written notice to Lessor of Lessee’s commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to 12 times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor’s notice of termination.

6.3Lessee’s Compliance with Applicable Requirements. Except as otherwise provided in this Lease, Lessee shall, at Lessee’s sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate in any manner to the such Requirements, without regard to whether such Requirements are now in effect or become effective after the Start Date. Lessee shall, within 10 days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements.

6.4Inspection; Compliance. Lessor and Lessor's “Lander” (as defined in Paragraph 30) and consultants shall have the right to enter into Premises at any time. In the case of an emergency, and otherwise at reasonable times after reasonable notice, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a Hazardous Substance Condition (see paragraph 9.1) is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspection, so long as such inspection is reasonably related to the violation or contamination. In addition, Lessee shall provide copies of all relevant material safety data sheets (MSDS) to Lessor within 10 days of the receipt of a written request therefor.

7.Maintenance; Repairs, Utility Installations; Trade Fixtures and Alterations.

7.1Lessee’s Obligations.

(a)  In General. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee’s Compliance with Applicable

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Requirements), 7.2 (Lessor’s Obligations), 9 (Damage or Destruction), and 14 (Condemnation), and except for damage caused by any negligent or intentional act or omission of Lessor, Lessor’s employees, suppliers, shippers, or invitees (in which event Lessor shall repair the damage), Lessee shall, at Lessee’s sole expense, keep the Premises, Utility Installations (intended for Lessee’s exclusive use, no matter where located), and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee’s use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, HVAC equipment, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior and exterior), foundations, ceilings, roofs, roof drainage systems, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee’s obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition (including, e.g. graffiti removal) consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repainting of the Building.

(b)           Service Contracts. Lessee shall, at Lessee’s sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drains, (vi) clarifiers (vii) basic utility feed to the perimeter of the Building, and (viii) any other equipment, if reasonably required by Lessor. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain any or all of such service contracts, and if Lessor so elects, Lessee shall reimburse Lessor, upon demand, for the cost thereof.

(c)Failure to Perform. If Lessee fails to perform Lessee’s obligations under this Paragraph 7.1, Lessor may enter upon the Premises after 10 days’ prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee’s behalf, and put the Premises in good order, condition and repair, and Lessee shall promptly pay to Lessor a sum equal to 115% of the cost thereof.

(d)           Replacement. Subject to Lessee’s indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee’s failure to exercise and perform good maintenance practices, if an item described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such item, then such item shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is 144 (ie. 1/144th of the cost per month). Lessee shall pay interest on the unamortized balance at a rate that is commercially reasonable in the judgment of Lessor’s accountants. Lessee may, however, prepay its obligation at any time.

7.2Lessor’s Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease.

7.3Utility Installations; Trade Fixtures; Alterations.

(a)           Definitions. The term “Utility Installations” refers to all floor and window coverings, air and/or vacuum lines, power panels, electrical distribution, security and fire protection systems, communication cabling, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term “Trade Fixtures” shall mean Lessee’s machinery and equipment that can be removed without doing material damage to the Premises. The term “Alterations” shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. “Lessee Owned Alterations and/or Utility Installations” are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).

(b)           Consent. Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor’s prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, will not affect the electrical, plumbing, HVAC, and/or life safety systems, and the cumulative cost thereof during this Lease as extended does not exceed a sum equal to 3 month’s Base Rent in the aggregate or a sum equal to one month’s Base Rent in any one year. Notwithstanding the foregoing, Lessee shall not make or permit any roof penetrations and/or install anything on the roof without the prior written approval of Lessor. Lessor may, as a precondition to granting such approval, require Lessee to utilize a contractor chosen and/or approved by Lessor. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. If Lessor does not respond in writing to the request for consent within twenty (20) days after receipt of a written request for consent from Lessee, Lessor shall be deemed to have consented. Consent shall be deemed conditioned upon Lessee’s: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount in excess of one month’s Base Rent, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to 150% of the estimated cost of such Alteration or Utility Installation and/or upon Lessee’s posting an additional Security Deposit with Lessor.

(c)           Liens; Bonds. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic’s or materialmen’s lien against the Premises or any interest therein. Lessee shall give Lessor not less than 10 days notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to 150% of the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor’s attorneys’ fees and costs.

7.4Ownership; Removal; Surrender; and Restoration.

(a)           Ownership. Subject to Lessor’s right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises.

(b)           Removal. By delivery to Lessee of written notice from Lessor not earlier than 90 and not later than 30 days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility installations made without the required consent. Notwithstanding anything to the contrary contained in this Lease, within ninety (90) days after Lessor’s receipt of proposed plans for Alterations by Lessee, Lessor shall inform Lessee of the Alterations described in such proposed plans which must be removed at the expiration of the Term or any option period of the Lease. If Lessor fails to so inform Lessee within such ninety (90) day period, Lessor will be deemed to have not required removal of any such Alteration at the expiration of the Term. Further, In no event will Lessee be required to remove any Utility Installations or other Alterations existing on the Premises as of the Commecement Date of this Lease at the expiration date or earlier termination of this Lease.

(c)           Surrender; Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, ports and surfaces thereof broom clean and free of debris, and in good operating order, condition and stale of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Notwithstanding the foregoing, if this Lease is for 12 months or less, then Lessee shall surrender the Premises in the same condition as delivered to Lessee on the Start Date with NO allowance for ordinary wear and tear. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures. Lessee owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee. Lessee shall completely remove from the Premises any and all Hazardous Substances brought onto the Premises by or for Lessee, or any third party (except Hazardous Substances which were deposited via underground migration from areas outside of the Premises, or if applicable, the Project) even if such removal would require Lessee to perform or pay for work that exceeds statutory requirements. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. Any personal property of Lessee not removed on or before the Expiration Date or any earlier termination date shall be deemed to have been abandoned by Lessee and may be disposed of or retained by Lessor as Lessor may desire. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below.

8.Insurance; Indemnity.

8.1Payment For Insurance. Lessee shall pay for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within 10 days following

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receipt of an invoice.

8.2Liability Insurance.

(a)           Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability policy of insurance protecting Lessee and Lessor as an additional insured against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an annual aggregate of not less than $2,000,000, an “Additional Insured-Managers or Lessors of Premises Endorsement” and contain the “Amendment of the Pollution Exclusion Endorsement” for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an “insured contract” for the performance of Lessee’s indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only.

(b)           Carried by Lessor. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein.

8.3Property Insurance - Building, Improvements and Rental Value.

(a)           Building and Improvements. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor, any ground-lessor, and to any Lender insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lender, but in no event more than the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee’s personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against special causes of loss all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss.

(b)           Rental Value. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one year with an extended period of indemnity for an additional 180 days (“Rental Value Insurance”). Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next 12 month period. Lessee shall be liable for any deductible amount in the event of such loss.

(c)           Adjacent Premises. If the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee’s acts, omissions, use or occupancy of the Premises.

8.4Lessee’s Property; Business Interruption Insurance.

(a)           Property Damage. Lessee shall obtain and maintain insurance coverage on all of Lessee’s personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property. Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force.

(b)           Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils.

(c)           No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee’s property, business operations or obligations under this Lease.

8.5Insurance Policies. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a “General Policyholders Rating” of at least B+, V, as set forth in the most current issue of “Best’s Insurance Guide”, or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after 30 days prior written notice to Lessor. Lessee shall, at least 30 days prior to the expiration of such policies, furnish Lessor with evidence of renewals or “insurance binders” evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same. Lessor or Lessee may each maintain the Insurance coverage required of either of them hereunder pursuant to “blanket” policies which cover other properties In which either Lessor or Lessee has interest, so long as the coverage of the other properties under any such “blanket” policy does not diminish the coverage required herein.

8.6Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby.

8.7Indemnity. Except for Lessor’s gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor’s master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys’ and consultants’ fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee’s expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified.

8.8Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee’s employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor nor from the failure of Lessor to enforce the provisions of any other lease in the Project. Notwithstanding Lessor’s negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee’s business or for any loss of income or profit therefrom.

8.9Failure to Provide Insurance. Lessee acknowledges that any failure on its part to obtain or maintain the insurance required herein will expose Lessor to risks and potentially cause Lessor to incur costs not contemplated by this Lease, the extent of which will be extremely difficult to ascertain. Accordingly, for any month or portion thereof that Lessee does not maintain the required insurance and/or does not provide Lessor with the required binders or certificates evidencing the existence of the required insurance, the Base Rent shall be automatically increased, without any requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater. The parties agree that such increase in Base Rent represents fair and reasonable compensation for the additional risk/ costs that Lessor will incur by reason of Lessee’s failure to maintain the required insurance. Such increase in Base Rent shall in no event constitute a waiver of Lessee’s Default or Breach with respect to the failure to maintain such insurance, prevent the exercise of any of the other rights and remedies granted hereunder, nor relieve Lessee of its obligation to maintain the insurance specified in this Lease.

9.Damage or Destruction.

9.1Definitions.

(a)           “Premises Partial Damage” shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in 6 months or less from the date of the damage or destruction. Lessor shell notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

(b)           “Premises Total Destruction” shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in 6 months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

(c)           “Insured Loss” shall mean damage or destruction to Improvement on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved.

(d)           “Replacement Cost” shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation.

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(e)           “Hazardous Substance Condition” shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises which requires repair, remediation, or restoration.

9.2Partial Damage - Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor’s expense, repair such damage (but not Lessee’s Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor’s election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee’s responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within 10 days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said 10 day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within 10 days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or (ii) have this Lease terminate 30 days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party.

9.3Partial Damage - Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee’s expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor’s expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective 60 days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within 10 days after receipt of the termination notice to give written notice to Lessor of Lessee’s commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice.

9.4Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate 60 days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor’s damages from Lessee, except as provided in Paragraph 8.6.

9.5Damage Near End of Term. If at any time during the last 6 months of this Lease there is damage for which the cost to repair exceeds one month’s Base Rent, whether or not an Insured Loss, Lessor or Lessee may terminate this Lease effective 60 days following the date of occurrence of such damage by giving a written termination notice to Lessee or Lessor within 30 days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is 10 days after Lessee’s receipt of Lessor’s written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor’s commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee’s option shall be extinguished.

9.6Abatement of Rent; Lessee’s Remedies.

(a)           Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee’s use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value Insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein.

(b)           Remedies. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within 90 days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee’s election to terminate this Lease on a date not less than 60 days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within 30 days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within such 30 days, this Lease shall continue in full force and effect. “Commence” shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs.

9.7Termination; Advance Payments. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee’s Security Deposit as has not been, or is not then required to be, used by Lessor.

9.8Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith.

10.Real Property Taxes.

10.1Definition. As used herein, the term “Real Property Taxes” shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises or the Project, Lessor’s right to other income therefrom, and/or Lessor’s business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Building address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. Real Property Taxes shall also include any tax, fee, levy, assessment or charge, or any increase therein: (i) imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Premises, and (ii) levied or assessed on machinery or equipment provided by Lessor to Lessee pursuant to this Lease.

10.2Payment of Taxes. In addition to Base Rent, Lessee shall pay to Lessor an amount equal to the Real Property Tax installment due at least 20 days prior to the applicable delinquency date. If any such installment shall cover any period of time prior to or after the expiration or termination of this Lease, Lessee’s share of such installment shall be prorated. In the event Lessee incurs a late charge on any Rent payment, Lessor may estimate the current Real Property Taxes, and require that such taxes be paid in advance to Lessor by Lessee monthly in advance with the payment of the Base Rent. Such monthly payments shall be an amount equal to the amount of the estimated installment of taxes divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sum as is necessary. Advance payments may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of its obligations under this Lease, then any such advance payments may be treated by Lessor as an additional Security Deposit.

10.3Joint Assessment. If the Premises are not separately assessed, Lessee’s liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor’s work sheets or such other information as may be reasonably available.

10.4Personal Property Taxes. Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause its Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment end all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee’s said property shall be assessed with Lessor’s real property, Lessee shall pay Lessor the taxes attributable to Lessee’s property within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee’s property.

11.Utilities and Services. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Promises, together with any taxes thereon. If any such services are not separately metered or billed to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered or billed. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor’s reasonable control or in cooperation with governmental request or directions.

12.Assignment and Subletting.

12.1Lessor’s Consent Required.

(a)           Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, “assign or assignment”) or sublet all or any part of Lessee’s Interest in this Lease or in the Premises without Lessor’s prior written consent.

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(b)           Unless Lessee is a corporation and its stock is publicly traded on a national stock exchange, a change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of 25% or more of the voting control of Lessee shall constitute a change in control for this purpose.

(c)           The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee’s assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than 25% of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent. “Net Worth of Lessee” shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles.

(d)           An assignment or subletting without consent shall, at Lessor’s option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30 days written notice, increase the monthly Base Rent to 110% of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to 110% of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to 110% of the scheduled adjusted rent.

(e)           Lessee’s remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief.

12.2        Terms and Conditions Applicable to Assignment and Subletting.

(a)           Regardless of Lessor’s consent, no assignment or subletting shall: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee.

(b)           Lessor may accept Rent or performance of Lessee’s obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor’s right to exercise its remedies for Lessee’s Default or Breach.

(c)           Lessor’s consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting.

(d)           In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee’s obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor’s remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor.

(e)           Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor’s determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $500 as consideration for Lessor’s considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (See also Paragraph 36)

(f)            Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing.

(g)           Lessor’s consent to any assignment or subletting shall not transfer to the assignee or sublessee any Option granted to the original Lessee by this Lease unless such transfer is specifically consented to by Lessor in writing. (See Paragraph 39.2)

12.3      Additional Terms and Conditions Applicable to Subletting.   The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein:

(a)           Lessee hereby assigns and transfers to Lessor all of Lessee’s interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee’s obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee’s obligations, Lessee may collect said Rent. In the event that the amount collected by Lessor exceeds Lessee’s obligations any such excess shall be refunded to Lessee. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee’s obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee’s obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary.

(b)           In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor.

(c)           Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor.

(d)           No sublessee shall further assign or sublet all or any part of the Premises without Lessor’s prior written consent.

(e)           Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee.

13.          Default; Breach; Remedies.

13.1        Default; Breach.  A “Default” is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or Rules and Regulations under this Lease. A “Breach” is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period:

(a)           The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism.

(b)           The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of five (5) 3 business days following written notice to Lessee.

(c)           The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) an Estoppel Certificate, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42, (viii) material safety data sheets (MSDS), or (ix) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of 10 days following written notice to Lessee.

(d)           A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of 30 days after written notice; provided, however, that if the nature of Lessee’s Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said 30 day period and thereafter diligently prosecutes such cure to completion.

(e)           The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a “debtor” as defined in 11 U.S.C. §101 or any successor statute thereto (unless, in the case of a petition, filed against Lessee, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this Lease, where possession is not restored to Lessee within 30 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this lease, where such seizure is not discharged within 30 days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions.

(f)            The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false.

(g)           If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within 60 days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease.

13.2        Remedies. If Lessee fails to perform any of its affirmative duties or obligations, within 10 days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds. Insurance policies, or governmental licenses, permits or approvals. Lessee shall pay to Lessor an amount equal to 115% of the costs and expenses incurred by Lessor in such performance upon receipt of an invoice therefor. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach;

(a)           Terminete Lessee’s right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned

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at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys’ fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee’s Breach of this Lease shall not waive Lessor’s right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute.

(b)           Continue the Lease and Lessee’s right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor’s interests, shall not constitute a termination of the Lessee’s right to possession.

(c)Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee’s right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee’s occupancy of the Premises.

13.3        Inducement Recapture. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee’s entering into this Lease, all of which concessions are hereinafter referred to as “Inducement Provisions,” shall be deemed conditioned upon Lessee’s full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance.

13.4        Late Charges. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within 5 days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall immediately pay to Lessor a one-time late charge equal to 640% of each such overdue amount or $100, whichever is greater. The Parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee’s Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for 3 consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor’s option, become due and payable quarterly in advance.

13.5        Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within 30 days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the 31st day after it was due as to non-scheduled payments. The interest (“Interest”) charged shall be computed at the rate of 610% per annum but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4.

13.6        Breach by Lessor.

(a)           Notice of Breach. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than 30 days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor’s obligation is such that more than 30 days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such 30 day period and thereafter diligently pursued to completion.

(b)           Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures said breach within 30 days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee’s expense and offset from Rent the actual and reasonable cost to perform such cure, provided however, that such offset shall not exceed an amount equal to the greater of one month’s Base Rent or the Security Deposit, reserving Lessee’s right to seek reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor.

14.          Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively “Condemnation”), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the Building, or more than 25% of that portion of the Pramises not occupied by any building, is taken by Condemnation, Lessee may, at Lessee’s option, to be exercised in writing within thirty (30) 10 days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within thirty (30) 10 days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee’s relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation.

15.          Brokerage Fees.

15.1        Additional Commission. In addition to the payments owed pursuant to Paragraph 1.0 above, and unless Lessor-and the Brokers otherwise agree in writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee acquires any rights to the Premises or other premises owned by Lessor and located within the same Project, if any, within which the Premises is located, (c) if Lessee remains in possession of tho Promises, with the concent of Lessor, after the expiration of this Lease, or (d) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then, Lecsor shall pay Brokers a fee in accordance with the schedule of tho Brokers in effect at the time of the execution of this Lease.

15.2        Assumption of Obligations. Any buyer or transferee of Lessor’s interest in this Lease shall be deemed to have assumed Lessor’s obligation hereunder. Brokers shall be third party beneficiaries of the provisions of Paragraphs 1,9, 15, 22 and 31. If Lessor fails to pay to Brokers any amounts due as and for brokerage fees pertaining to this Lease when due, then such amounts shall accrue Interest. In addition, if Lessor fails to pay any amounts to Lessee’s Broker when due. Lessee’s Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within 10 days after said notice, Lessee shall pay said monios to its Broker and offect such amounts against Rent. In addition Lessee’s Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor’s Broker for the limited purpose of collecting any brokerage fee owed,

15.3        Representations and Indemnities of Broker Relationships.  Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) In connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder’s fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the Indemnifying Party. Including any costs, expenses, attorneys’ fees reasonably incurred with respect thereto.

16.     Estoppel Certificates.

(a)           Each Party (as “Responding Party”) shall within 10 20 days after written notice from the other Party (the “Requesting Party”) execute, acknowledge and deliver to the Requesting Party a statement In writing in form similar to the then most current “Estoppel Certificate” form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party.

(b)           If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such 10 20 day period, the Requesting Party may execute an Estoppel Certificate stating that: (I) the Lease is in full force and effect without modification except as may be represented by the Requesting

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Party, (ii) there are no uncured defaults in the Requesting Party’s performance, and (iii) if Lessor is the Requesting Party, not more than one month’s rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party’s Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate.

(c)     If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee’s financial statements for the past 3 years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth.

17.          Definition of Lessor.  The term “Lessor” as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee’s interest in the prior lease. In the event of a transfer of Lessor’s title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined.

18.          Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof.

19.          Days. Unless otherwise specifically indicated to the contrary, the word “days” as used in this Lease shall mean and refer to calendar days.

20.          Limitation on Liability.  The obligations of Lessor under this Lease shall not constitute personal obligations of Lessor or its partners, members, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against Lessor’s partners, members, directors, officers or shareholders, or any of their personal assets for such satisfaction.

21.          Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease.

22.          No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the use, nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. The liability (including court costs and attorneys’ fees), of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker’s liability shall not be applicable to any gross negligence or willful misconduct of such Broker.

23.          Notices.

23.1        Notice Requirements. All notices required or permitted by this Lease or applicable law shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party’s signature on this Lease shall be that Party’s address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee’s taking possession of the Premises, the Premises shall constitute Lessee’s address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing.

23.2        Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given 48 hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given 24 hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt (confirmation report from fax machine is sufficient), provided a copy is also delivered via delivery or mail.  If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day.

24.          Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor’s consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor’s consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment.

25.          Disclosures Regarding The Nature of a Real Estate Agency-Relationship.

(a)           When entering into a discussion with a real estate agent regarding a real estate transaction, a Lessor or Lessee should from the outset understand what type of agency relationship or representation it has with the agent or agents in the transaction. Lessor and Lessee acknowledge being advised by the Brokers in this transaction, as follows:

(i)            Lessor’s Agent. A Lessor’s agent under a listing agreement with the Lessor-acts as the agent for the Lessor only. A Lessor’s agent or subagent has the following affirmative obligations: To the Lessor: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessor. To the Lessee and the Lessor: a. Diligent exercise of reasonable skills-and care in performance of the agent’s duties. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential, information obtained from the other Party which does not involve the affirmative duties set forth above.

(ii)           Lessee’s Agent.  An agent can agree to act as agent for the Lessee only.   In these situations, the agent is not the Lessor’s agent, even if by agreement the agent may receive compensation for services rendered, either in full or in part from the Lessor. An agent acting only for a Lessee has the following affirmative obligations. To the Lessee: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessee. To the Lessee-and the Lessor: a. Diligent exercise of reasonable skills and care in performance of the agent’s duties. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known-to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which docs not involve the affirmative duties set forth above.

(iii)          Agent Representing Both Lessor and Lessee.   A real estate agent, either acting directly or through one or more associate licenses, can legally be the agent of both the Lessor and the Lessee in a transaction, but only with the knowledge and consent of both the Lessor and the Lessee. In a dual agency situation, the agent has the following affirmative obligations to both the Lessor and the Lessee: a. A fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with cither Lessor or the Lessee. b. Other duties to the Lessor and the Lessee as stated above in subparagraphs (i) or (ii). In representing both Lessor and Lessee, the agent may not without the express permission of the respective Party, disclose to the other party that the lessor will accept rent in an amount less than that indicated in the listing or that the lessee is willing to pay a higher rent than that offered. The above duties of the agent in a real estate transaction do not relieve a lessor or lessee from the responsibility to protect their own interests. lessor and lessee should carefully read all agreements to assure that they adequately express their understanding of the transaction. A real estate agent is a person qualified to advise about real estate. If legal or tax advice is desired, consult a competent professional.

(b)           Brokers have no responsibility with respect to any default or breach hereof by either Party. The liability (including court costs and attorneys’ fees), of any Broker with respect to any breach of duty, error or omission relating to this Lease shall not exceed the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker’s liability shall not be applicable to any gross negligence of willful misconduct of such Broker.

(c)           Lessor and Lessee agree to identify to Brokers as “Confidential” any communication or information given Brokers that is considered by such Party to be confidential.

26.          No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be Increased to 150% of the Base Rent applicable immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee.

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27.          Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.

28.          Covenants and Conditions; Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it.

29.          Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located.

30.          Subordination; Attornment; Non-Disturbance.

30.1        Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, “Security Device”), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as “Lender”) shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof.

30.2        Attornment. In the event that Lessor transfers title to the Premises, or the Premises are acquired by another upon the foreclosure or termination of a Security Device to which this Lease is subordinated (i) Lessee shall, subject to the non-disturbance provisions of Paragraph 30.3, attorn to such new owner, and upon request, enter into a new lease, containing all of the terms and provisions of this Lease, with such new owner for the remainder of the term hereof, or, at the election of such new owner, this Lease shall automatically become a new Lease between Lessee and such new owner, upon all of the terms and conditions hereof, for the remainder of the term hereof, and (ii) Lessor shall thereafter be relieved of any further obligations hereunder and such new owner shall assume all of Lessor’s obligations hereunder, except that such new owner shall not: (a) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (b) be subject to any offsets or defenses which Lessee might have against any prior lessor, (c) be bound by prepayment of more than one month’s rent, or (d) be liable for the return of any security deposit paid to any prior lessor.

30.3        Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee’s subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a “Non-Disturbance Agreement”) from the Lender which Non-Disturbance Agreement provides that Lessee’s possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within 60 days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee’s option, directly contact Lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement.

30.4        Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein.

31.          Attorneys’ Fees. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys’ fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, “Prevailing Party” shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys’ fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys’ fees reasonably incurred. In addition, Lessor shall be entitled to attorneys’ fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach ($200 is a reasonable minimum per occurrence for such services and consultation).

32.          Lessor’s Access; Showing Premises; Repairs. Lessor and Lessor’s agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times after reasonable prior notice for the purpose of showing the same to prospective purchasers, lenders, or tenants, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee’s use of the Premises. All such activities shall be without abatement of rent or liability to Lessee.

33.          Auctions. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor’s prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction.

34.          Signs. Lessor may place on the Premises ordinary “For Sale” signs at any time and ordinary “For Lease” signs during the last 6 months of the term hereof. Except for ordinary “for sublease” signs, Lessee shall not place any sign upon the Premises without Lessor’s prior written consent. All signs must comply with all Applicable Requirements. Lessor shall not unreasonably withhold consent for any signage requested by Lessee.

35.          Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor’s failure within 10 days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor’s election to have such event constitute the termination of such interest.

36.          Consents. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor’s actual reasonable costs and expenses (including but not limited to architects’, attorneys’, engineers’ and other consultants’ fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor’s consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor’s consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within 10 business days following such request.

37.          Guarantor.

37.1        Execution.  The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease.

37.2        Default.  It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor’s behalf to obligate Guarantor, and in case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) an Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect.

38.          Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the convents, conditions and provisions on Lessee’s part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof.

39.          Options. If Lessee is granted an Option, as defined below, then the following provisions shall apply:

39.1        Definition. “Option” shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor, (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor, (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor.

39.2        Options Personal To Original Lessee.  Any Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessar with and Lessee certifying that Lessee has no intention of thereafter assigning or subletting.

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39.3        Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised.

39.4        Effect of Default on Options.

(a)           Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given 3 or more notices of separate Default, whether or not the Defaults are cured, during the 12 month period immediately preceding the exercise of the Option.

(b)           The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee’s inability to exercise an Option because of the provisions of Paragraph 39.4(a).

(c)           An Option shall terminate and be of no further force or effect, notwithstanding Lessee’s due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term or completion of the purchase, (i) Lessee fails to pay Rent for a period of 30 days after such Rent becomes due (without any necessity of Lessor to give notice thereof), or (ii) if Lessee commits a Breach of this Lease.

40.         Multiple Buildings. If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by and conform to all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessee also agrees to pay its fair share of common expenses incurred in connection with such rules and regulations.

41.         Security Measures. Lessee hereby acknowledges that the Rent payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties.

42.         Reservations. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions.

43.         Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment “under protest” and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay.

44.         Authority; Multiple Parties; Execution.

(a)           If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each party shall, within 30 days after request, deliver to the other party satisfactory evidence of such authority.

(b)           If this Lease is executed by more than one person or entity as “Lessee”, each such person or entity shall be jointly and severally liable hereunder. It is agreed that any one of the named Lessees shall be empowered to execute any amendment to this Lease, or other document ancillary thereto and bind all of the named Lessees, and Lessor may rely on the same as if all of the named Lessees had executed such document.

(c)           This Lease may be executed by the Parties in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.

45.         Conflict. Any conflict between the printed provisions of this Lease and typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.

46.         Offer. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto.

47.         Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee’s obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises.

48.         Waiver of Jury Trial. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INVOLVING THE PROPERTY OR ARISING OUT OF THIS AGREEMENT.

49.         Mediation and Arbitration of Disputes. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease o   is x   is not attached to this Lease.

50.         Americans with Disabilities Act. Since compliance with the Americans with Disabilities Act (ADA) is dependent upon Lessee’s specific use of the Premises, Lessor makes no warranty or representation as to whether or not the Premises comply with ADA or any similar legislation. In the event that Lessee’s use of the Premises requires modifications or additions to the Premises in order to be in ADA compliance, Lessee agrees to make any such necessary modifications and/or additions at Lessee’s expense.

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LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.

ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:

1.        SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

2.        RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE’S INTENDED USE.

WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED.

The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures.

Executed at:	Riverside Cal		Executed at:
on:	9/29/04		on:
By LESSOR:			By LESSEE:
T.M. Cobb Company			Aldila Golf Corporation
By:	/s/ Raymond S. Cobb		By:	/s/ Robert J. Cierzan
Name Printed:	Raymond S. Cobb		Name Printed:	Robert J. Cierzan
Title:	President, T.M. Cobb Company		Title:	Vice President
By:			By:
Name Printed:			Name Printed:
Title:			Title:
Address:	500 Palmyrita Ave., Riverside, CA 92507		Address:	13450 Stowe Drive Poway, CA 92064
Telephone/Facsimile:		(909) 248-2440/(909) 248-2488	Telephone/Facsimile:		(858) 513-1801/ (858) 513-1870
Federal ID No.			Federal ID No.
BROKER:			BROKER:
Attn:			Attn:
Title:			Title:
Address:			Address:
Telephone/Facsimile:			Telephone/Facsimile:
Federal ID No.			Federal ID No.

NOTE:  These forms are often modified to meet the changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-8777. Fax No. (213) 687-8616

© Copyright 1997 - By American Industrial Real Estate Association. All rights reserved.
No part of these works may be reporduced in any form without permission in writing.

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LEGAL DESCRIPTION

Parcel 106 of Parcel Map No. 16320, in the City of Poway, County of San Diego, State of California, filed in the Office of the County Recorder of San Diego County.

EXHIBIT “A”

FLOOR PLAN

EXHIBIT “B”

ADDENDUM TO LEASE

This Addendum to the Lease dated June 18, 2004, (“Addendum”) is entered into by and between T.M. Cobb Company, a California corporation (“Lessor”), on the one hand, and Aldila Golf Corporation, a Delaware corporation (“Lessee”) on the other hand (hereinafter collectively referred to as the “Parties”). The lease dated June 18, 2004, along with this Addendum and Exhibits A through B, will hereinafter be referred to as the “Lease”. In the event of a conflict between the provisions of this Addendum and the provisions of the balance of the Lease, this Addendum shall control.

51.Increases to Base Rent. The Base Rent under the Lease shall increase periodically as follows:

Date	Base Rent
December 1, 2005-November 30, 2006	$41,355.00 per month
December 1, 2006-November 30, 2007	$42,595.00 per month
December 1, 2007-November 30, 2008	$43,873.00 per month
December 1, 2008-November 30, 2009	$45,189.00 per month

52.Option to Extend Lease. Lessee shall have the option to extend the term of the Lease for a period of five (5) years from December 1, 2009 through November 30, 2014. Such option to extend the term of the Lease may be exercised by Lessee by delivering written notice of Lessee’s intent to exercise said option to Lessor on or before May 31, 2009. If the option set forth herein is exercised, the extended term under the option shall be subject to all terms and conditions of this Lease. The Base Rent for the period of the extended Lease shall be as follows:

Date	Base Rent
December 1, 2009-November 30, 2010	$46,545.00 per month
December 1, 2010-November 30, 2011	$47,941.00 per month
December 1, 2011-November 30, 2012	$49,379.00 per month
December 1, 2012-November 30, 2013	$50,861.00 per month
December 1, 2013-November 30, 2014	$52,387.00 per month

53.Workers Compensation Insurance. Tenant shall maintain a workers compensation insurance policy for all employees employed by Lessee on the Premises in accordance with all applicable laws of the State of California. Proof of such workers compensation insurance, as required herein, shall be provided to Lessor within five (5) days upon request.

54.Installation of Additional Air Conditioning Units. Lessee shall be entitled to install additional air conditioning units prior to the Commencement Date at Lessee’s sole cost and expense. Said installation of air conditioning units, as set forth in this paragraph, and plans for such installation shall be approved by Lessor’s architect prior to the beginning of any installation of any air conditioning units. Lessor and Lessor’s architect will not unreasonably withhold approval for the installation of said air conditioning units. Said installation of air conditioning units shall also comply with all applicable laws and regulations, and Lessee is solely responsible for any permits or licenses necessary for same. Lessee shall also be required to provide notice to Lessor of any changes to plans approved by Lessor’s architect prior to proceeding forward with any changes to the plans.

55.Environmental Inspection of Premises. Prior to the Commencement Date, an environmental inspection of the Premises shall be conducted by an environmental inspector selected by Lessor. Said environmental inspection shall determine the compliance with all applicable environmental laws effecting the Premises by Lessee. The cost and expense of the environmental inspection shall be split equally between Lessor and Lessee. If any environmental conditions requiring remediation are found on the Premises, and are present as a result of the acts or omissions of Lessee and Lessee’s occupation of the Premises, Lessee shall be responsible for all such remediation, and all costs and expenses associated with said remediation.

56.Parking. Lessor hereby agrees that all of the parking spaces on the Premises shall be for Lessee’s exclusive use.

57.Approval of Assignment and Subletting. Lessor’s consent to any assignment or subletting of the Lease shall not be unreasonably withheld. Further, in the event Lessor does not respond to a proposed assignment or subletting within thirty (30) days of certified and acknowledged receipt by Lessor of the Proposed assignment or sublease, Lessor shall be deemed to have consented to such assignment or sublease.

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58.Payment for Insurance Policies. Notwithstanding anything herein to the contrary, Lessor shall be required to pay for all insurance policies and premiums obtained by Lessor under paragraph 8.2(b) of the Lease. Further Lessee shall be required to pay for all insurance policies and premiums obtained by Lessee as required under paragraph 8 of the Lease.

			T.M. Cobb Company
Dated:	9/29/04, 2004	By:	/s/ Ray Cobb
			Ray Cobb
			Aldila Golf Corporation
Dated:	Sept. 29, 2004	By:	/s/ Robert J. Cierzan

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EX-11.1

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Exhibit 11.1

ALDILA, INC. AND SUBSIDIARIES

COMPUTATION OF NET INCOME PER COMMON SHARE

(In thousands, except per share amounts)

	Twelve months ended December 31,
	2009			2008
BASIC:
Net loss	$	(243	)	$	(2,503	)
Weighted average number of common shares outstanding		5,184			5,162
Net loss per common share	$	(0.05	)	$	(0.48	)
ASSUMING DILUTION:
Net loss	$	(243	)	$	(2,503	)
Weighted average number of common shares outstanding		5,184			5,162
The number of shares resulting from the assumed exercise of stock options reduced by the number of shares which could have been purchased with the proceeds from such exercise, using the average market price during the period		—			—
Weighted average number of common and common equivalent shares		5,184			5,162
Net loss per common share, assuming dilution	$	(0.05	)	$	(0.48	)

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Exhibit 11.1

ALDILA, INC. AND SUBSIDIARIES COMPUTATION OF NET INCOME PER COMMON SHARE (In thousands, except per share amounts)

EX-21.1

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Exhibit 21.1

Subsidiary	Jurisdiction of Incorporation
Aldila Golf Corp.	Delaware, U.S.
Aldila Materials Technology Corp.	Delaware, U.S.
Aldila de Mexico, S.A. de C.V.	Mexico
Aldila Carbon Fibers Products (Zhuhai) Company Limited	People's Republic of China
Aldila Composite Products Company Limited	Vietnam

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Exhibit 21.1

EX-31.1

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Exhibit 31.1

CERTIFICATION PURSUANT TO RULES 13a-14 AND 15d-14
OF THE 1934 SECURITIES EXCHANGE ACT

I, Peter R. Mathewson, certify that:

1.

I have reviewed this report on Form 10-K of Aldila, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 29, 2010 /s/ PETER R. MATHEWSON
Peter R. Mathewson
Chief Executive Officer

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Exhibit 31.1

CERTIFICATION PURSUANT TO RULES 13a-14 AND 15d-14 OF THE 1934 SECURITIES EXCHANGE ACT

EX-31.2

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Exhibit 31.2

CERTIFICATION PURSUANT TO RULES 13a-14 AND 15d-14
OF THE 1934 SECURITIES EXCHANGE ACT

I, Scott M. Bier, certify that:

1.

I have reviewed this report on Form 10-K of Aldila, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 29, 2010 /s/ SCOTT M. BIER
Scott M. Bier
Chief Financial Officer

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Exhibit 31.2

CERTIFICATION PURSUANT TO RULES 13a-14 AND 15d-14 OF THE 1934 SECURITIES EXCHANGE ACT

EX-32.1

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Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the Annual Report of Aldila, Inc. on Form 10-K for the year ended December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of Aldila, Inc. hereby certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and



(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Aldila, Inc.

/s/ PETER R. MATHEWSON
Peter R. Mathewson
Chief Executive Officer

/s/ SCOTT M. BIER
Scott M. Bier
Chief Financial Officer

        A signed original of this written statement required by Section 906 has been provided to Aldila, Inc. and will be retained by Aldila, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

March 29, 2010

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Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002