Washington, D.C.  20549

FORM 10-K

(Mark One)

ALDILA, INC.

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K.  ý

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).   Yes o  No ý

The aggregate market value of the Company’s voting stock held by non-affiliates of the Company as of June 30, 2003 was approximately $6.0 million.

As of March 23, 2004, there were 4,849,149 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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

Part III, Items 10, 11, 12, 13 and 14.  The Registrant’s definitive Proxy Statement for the 2003 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the close of the fiscal year.

ALDILA, INC.

Report on Form 10-K

For the Fiscal Year Ended December 31, 2003

INDEX

2

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 and has maintained this position for over a decade.  Aldila conducts its operations through its subsidiaries, Aldila Golf Corp. (“Aldila Golf”) and Aldila Materials Technology Corp. Aldila enjoys strong relationships with most major domestic and many foreign golf club manufacturers including Callaway, TaylorMade-addidas 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 products designed for 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 shafts, graphite prepreg, which consists of sheets of carbon fibers combined with epoxy resin.  See “Manufacturing—Raw Materials.”  The Company now produces substantially all of its graphite prepreg requirements internally.

In 1998, the Company established a manufacturing facility in Evanston, Wyoming for the production of carbon fiber 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 partners.  The Company and SGL also entered into supply agreements with the new entity, Carbon Fiber Technology LLC (“CFT”), for the purchase of carbon fiber at cost plus an agreed-upon mark-up.  Profits and losses of CFT are shared equally by the partners.  On February 11, 2004, the Company announced that the Company and SGL entered into a non-binding letter of intent to sell selected assets, including property, plant, equipment and know-how to an independent third party.  If the transaction is completed, the Company and SGL would share equally in the net proceeds.

Graphite Golf Shafts

The Company was founded in San Diego, California in 1972 and was an early leader in the design and production of graphite golf shafts.  The Company believes it is well positioned to remain a leader in the market for graphite shafts due to its innovative and high quality products, strong customer relationships, design and composite expertise and significant manufacturing capabilities.

Most golf clubs being sold today have shafts constructed from steel or graphite, although limited numbers are also manufactured from other materials.  Graphite shafts were introduced in the early 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

3

with respect to weight, flex, flex location and torque to produce greater distance, increased accuracy and reduced club vibration resulting in improved “feel” to the golfer.  The improvements in the design and manufacture of graphite shafts and the growing recognition of their superior performance characteristics 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.  Graphite continues to dominate  the professional and consumer wood club market, with over 94% of new woods purchased in 2003 including graphite shafts.   The acceptance of graphite shafts in irons has not achieved the same success as woods, and acceptance in irons has declined somewhat in recent years.  In 2003, approximately 27% of new irons purchased were graphite shafted.    Since many golfers consider professionals to be “opinion leaders,” increased acceptance and use of graphite shafts in irons by professionals would help broaden the overall graphite market.

Initially, graphite shafts were primarily sold for use in premium clubs, while the value priced segment of the golf club market continued to be supplied with steel shafts.  Today, however, a large percentage of value priced clubs are being sold with graphite shafts.  As the value priced segment of the golf club market converted from steel to graphite shafts, the Company took steps to enable it to meet the needs of this market segment, including the design of shafts that can be manufactured at prices acceptable to this market and continued efforts to reduce its overall manufacturing costs.

Products

Aldila offers a broad range of innovative and high-quality graphite golf shafts designed to maximize the performance of golfers of every skill level.  The Company manufactures hundreds of unique graphite shafts featuring various combinations of performance characteristics such as weight, flex, flex point and torque.  All of the Company’s shafts are composite structures consisting principally of carbon fiber and epoxy resins.  The Company’s shafts may also include boron (added to increase shaft strength) or fiberglass.  The Company regularly evaluates new composite materials for inclusion in the Company’s shafts and new refinements on designs using current materials.

The Company’s shafts, which constituted approximately 89% of net sales in the year ended December 31, 2003, are designed in partnership with its customers (principally golf club manufacturers) to accommodate specific golf club designs.  The Company’s 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 $3 to $30.

The Company introduced an innovative proprietary design, the Aldila “One” shaft during 2002.  The Company believes that this is the first shaft design to feature multiple segments, each with separate design characteristics, which allows for more precise performance optimization than the traditional graphite shaft design, which embodies only one set of design characteristics over its entire length.  The One shaft is offered through distribution to the custom club market and possibly directly to consumers. It will also be included as a custom option by certain of its golf club manufacturer customers.  In 2003, the Company introduced the NV Prototype at the 2003 PGA Merchandise Show in January 2003 and subsequently changed it to the NV^TM.   The NV^TM features the Company’s exclusive Micro Laminate Technology – patent pending.

Since 1994, the Company has manufactured prepreg material for its production of golf shafts.  In 1998, the Company began selling prepreg manufactured in its Poway, California manufacturing facility to third parties.  Revenues from the sale of prepreg were approximately 5% of net sales in 2003 and are not expected to be significant to the Company for several years.  Beginning in 1999, the Company offered for sale large bundle carbon fiber and chopped fiber from its manufacturing facility in Evanston, Wyoming.  Sales of large bundle carbon fiber continued in 1999 through October 29, 1999, the date that the Company sold a 50% interest in the carbon fiber manufacturing operation.  All subsequent outside carbon fiber revenues, if any, are attributed to the joint venture.  The Company does not anticipate outside sales of carbon fiber to be significant in 2004 and is currently seeking to sell its interest in CFT

The Company began the manufacture of composite hockey sticks in 2000, following several months of developmental work.  The manufacture of composite hockey sticks is similar to that of graphite golf shafts and uses similar raw materials.  Revenues from the sale of hockey sticks were approximately 6% of net sales in 2003 and are not expected to be significant to the Company for several years.

4

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

Product Design and Development

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

Graphite shaft designs and modifications are frequently the direct result of the combined efforts and expertise of the Company and its customers to develop an exclusive shaft for each customer’s clubs.  New golf shaft designs are developed and tested using a CAD/CAE golf shaft analysis program, 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 generate design ideas for customized shafts.  To improve and advance product designs as they relate to composite technology and shaft process manufacturing, the Company’s engineers test new and existing materials, such as boron, kevlar, fiberglass, ceramic, thermoplastic and carbon fiber.  The Company’s design research also focuses on improvements in graphite shaft aesthetics since cosmetic appearance has become increasingly important to customers.  The Company’s research and development efforts have resulted in the Aldila “One” shaft, which the Company believes to be the first shaft design featuring multiple segments, each with separate design characteristics, and which the Company recently started marketing.  In addition, to the Aldila “One” shaft, the Company introduced the Aldila NV^TM in 2003, featuring the Company’s exclusive Micro Laminate Technology.  Although the Company emphasizes these research and development activities, there can be no assurance that Aldila will continue to develop competitive products or that the Company will be able to utilize new composite material technology on a timely or competitive basis, or otherwise respond to emerging market trends.

The Company has been one of the leaders in developing the market for lower cost large bundle carbon fiber by successfully converting to this fiber type in some of its products from a more expensive carbon fiber material for the manufacture of certain of its graphite golf shafts.  The Company has had limited success in providing large bundle carbon fiber to other manufacturing applications outside of golf shafts.

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

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 it as a premier graphite shaft company.  Aldila’s golf club manufacturer customers often work together with the Company’s engineers when developing a new golf club in order to design a club that maximizes the performance features of the principal component parts:  the grip, the clubhead and the Aldila shaft.  The Company’s partnership relationship with its customers continues after the development of clubs containing Aldila’s shafts.  Following the design process, the Company continues to provide high levels of customer support and service in areas such as quality control and assurance, timely and responsive manufacturing, delivery schedules and education.  The Company believes the physical proximity of its headquarter facilities to many of its customers has facilitated a high degree of customer interaction and responsiveness to customer needs.  While the Company has had long-established relationships with most of its customers, it is not the exclusive supplier of graphite shafts to most of them and generally does not have long-term supply agreements with its customers

5

For fiscal year 2003, the Company had approximately 240 golf shaft customers, which included approximately 76 golf club manufacturers and more than 40 distributors, with the balance principally consisting of custom club assemblers, pro shops and repair shops.  However, the majority of the Company’s sales has been and may continue to be concentrated among a relatively small number of customers.  Sales to the Company’s top five customers represented approximately 68%, 75% and 73% of net sales in 2003, 2002 and 2001, 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 Callaway Golf, TaylorMade-addidas Golf, Acushnet Company and Ping.  While the Company believes its relationship with each of these major customers is suitable, 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.

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.

Although the Company believes that its relationships with its customers are good, the loss of a significant customer or a substantial decrease in sales to a significant customer (whether as a result of diminished sales by that customer or a shaft sourced from other suppliers) could have a material adverse effect on the Company’s business or operating results.

Marketing and Promotion

The Company’s marketing strategy is designed to encourage golf club manufacturers to select and promote Aldila shafts and to increase overall market acceptance and use of graphite golf shafts.  The Company utilizes a variety of marketing and promotional channels to increase sales of Aldila brand name shafts through its network of distributors and to support Aldila’s brand name recognition and reputation among consumers for offering consistently high quality products designed for a wide range of golfers. Although the Company has very limited sales directly to the end users of its products, the Company believes that its brand name recognition contributes to the marketability of its customers’ products.  In addition,  Nick Price, Peter Kostis and Rich Beem serve on the Company’s advisory staff and assist in its marketing efforts. Aldila’s marketing and promotion expenditures were approximately $1.9 million, $1.3 million and $1.1 million in 2003, 2002 and 2001, respectively.  The Company does not currently incur significant marketing expenses for its products other than golf shafts.

Sales and Distribution

Within the golf club industry, most companies do not manufacture the three principal components of the golf club — the grip, the shaft and the clubhead — but, rather, source these components from independent suppliers that design and manufacture components to the club manufacturers’ specifications.  As a result, Aldila sells its graphite shafts primarily to golf club manufacturers and, to a lesser extent, distributors, custom club shops, pro shops and repair shops.  Distributors typically resell the Company’s products to custom club assemblers, pro and custom club shops, and individuals.  The Company uses its internal sales force in the marketing and sale of its shafts to golf club manufacturers.  Sales to golf club manufacturers accounted for approximately 81% of net sales for the year ended December 31, 2003.

Prepreg sales and carbon fiber 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.

6

International sales represented 15%, 14%, and 12% of net sales for the years ended December 31, 2003, 2002 and 2001, respectively.  See Note 15 in the Notes to Consolidated Financial Statements for further breakdown of our international sales and long-lived assets.

Manufacturing

The Company believes that its manufacturing expertise and production capacity differentiate it from many of its competitors and enable Aldila to respond quickly to its customers’ orders and provide sufficient quantities on a timely basis.  The Company today operates three golf shaft manufacturing facilities, one prepreg manufacturing facility (in conjunction with one of its shaft manufacturing facilities) and through its 50% ownership interest in CFT, one carbon fiber manufacturing facility.  During its 32 years of operation, the Company has improved its manufacturing processes and believes it has established a reputation as the industry’s leading volume manufacturer of high-performance graphite shafts.

Shaft Manufacturing Process.  The process of manufacturing a graphite shaft has several distinct phases.  Different designs of Aldila shafts require variations in both the manufacturing process and the materials used.  In traditional shaft designs, treated graphite known as “prepreg” is rolled onto metal rods known as mandrels.   The graphite is then baked at high temperatures to harden the material into a golf shaft.  At the end of the manufacturing process, the shafts are painted and stylized using a variety of colors, patterns and designs, including logos and other custom identification.  Through each phase of this process, the Company performs quality control reviews to ensure continuing high standards of quality and uniformity and to meet exacting customer specifications.  The Company’s shaft manufacturing facilities are located in Poway, California, Tijuana, Mexico, and Zhuhai, China, with an increasing percentage of its shafts being manufactured in China, in recent years.

Raw Materials.  The primary material currently used in all of the Company’s graphite shafts is carbon fiber, which is combined with epoxy resin to produce sheets of graphite prepreg.  The degree of the heating and stretching the graphite fibers determines the tensile strength and modulus (stiffness) of the fiber.  The Company manufacturers graphite prepreg at its Poway, California facility.

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

The Company’s prepreg operation is dependent on certain suppliers for carbon fibers, which along with epoxy resins and release paper constitute the primary components in prepreg.  Through 1997, the Company purchased all of its carbon fibers from outside vendors.  Beginning in 1998, the Company manufactured carbon fiber at its Evanston, Wyoming facility for consumption by its golf shaft production operation.  Because several different forms of carbon fiber are required for golf shaft products, including some not manufactured at the CFT facility, the Company will continue to depend on outside suppliers for a portion of its ongoing carbon fiber needs.  In 2003, the Company obtained a large portion of its carbon fiber from CFT but also purchased carbon fiber from other carbon fiber manufacturers.  The prices paid by the Company for carbon fiber began to increase at the end of 2003 due to capacity constraints in the carbon fiber industry.  If the Company is unable to purchase carbon fiber, other than that produced at CFT, from suppliers, it could result in production delays of composite pregreg and golf shafts.

Carbon Fiber Manufacturing Process.  Carbon fiber is produced by processing acrylic fiber through a series of stretching, stabilizing and carbonizing sequences converting it into essentially a pure carbon chain fiber exhibiting stiffness and strength characteristics when made into a composite part similar to steel at significantly less weight.  These carbon fibers combined with various resins are then converted to composite structures, which have replaced metals in a number of weight critical aerospace, sporting and industrial applications.  Typically, the composite structure will weigh 25 to 50 percent less than the metal structure it has replaced.  Carbon fiber composite structures also provide toughness, resistance to corrosion, resistance to fatigue, capacity to

7

dissipate heat and electrical conductivity.  The carbon fiber industry has grown from its inception in the late 1950’s into one, which produced approximately 39 million pounds of carbon fiber in 2003.

Carbon fiber usage has grown primarily for consumption by the aerospace industry and for sporting goods and industrial applications.  Aerospace grade carbon fibers continue to be utilized for production of commercial and military aerostructures.  The higher-cost, aerospace grade carbon fibers were first used in sporting goods and industrial applications until a lower-cost, large bundle carbon fiber was developed as an alternative for use in many sporting goods and industrial applications.  Aldila was a leader in utilizing large bundle carbon fibers initially purchased from outside vendors, for the manufacture of graphite golf shafts.  As such, the Company completed construction of a 50,000 square foot carbon fiber manufacturing facility in Evanston, Wyoming, which subsequently became CFT.  The facility produces large bundle carbon fiber material from acrylic fiber through a series of stretching, stabilizing and carbonizing sequences in this facility.  This material is now a significant raw material for the Company’s prepreg manufacturing operation to support the manufacture of graphite golf shafts, although the Company still procures certain types of fibers from outside vendors for the manufacture of golf shafts.  The Company believes it can purchase the type of fiber produced by CFT from two outside sources.

CFT purchased substantially all of its raw acrylic fibers for the carbon fiber operation from Toho Carbon Fibers, Inc. for the years 2000 through 2003.  Previous to 2000, Courtaulds Fibres, Ltd. was also used as a supplier of its raw acrylic fibers.  The Company believes these two vendors will be able to provide a reliable source of supply for raw materials at the anticipated operating level of CFT.  However, CFT will continue to pursue alternate sources of supply for this material.

Environmental Matters

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

Competition

Aldila operates in a highly competitive environment in both the United States and international markets for the sale of its graphite golf club shafts.  The Company believes that it competes on the basis of its ability to provide a broad range of high quality, performance graphite shafts; its ability to deliver customized products in large quantities and on a timely basis to its customers; the acceptance of graphite in general, and Aldila shafts in particular, by professional and other golfers, whose preferences are to some extent subjective; and, finally, price.  Presently, there exists substantial excess graphite shaft manufacturing capacity both in the United States and in other countries.  This has had the effect of decreasing the selling prices of the Company’s shafts.  Management anticipates that this trend has ended.  Until recently, the United States market for graphite shafts was dominated by a relatively small number of United States based shaft manufacturers which competed predominantly for the premium shaft business. However, the Company now competes against United States and foreign-based shaft manufacturers for the premium shaft market and competes primarily against the foreign-based shaft manufacturers for the value shaft market.  This competition has made it more difficult to retain existing customers, attract new customers and has placed increasing pressure on prices for the Company’s premium and value shafts.  The Company believes that it is the largest supplier of graphite shafts 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.

Aldila competes against other shaft manufacturers, both graphite and steel, and in the past also against golf club companies that produced their own shafts internally, some of which may have or had greater resources than Aldila.  The Company also faces potential competition from those golf club manufacturers that currently purchase golf shaft components from outside suppliers but that may have, develop or acquire the ability to manufacture all or a portion of its graphite shafts internally.  Should any of the Company’s significant customers decide to meet any of its shaft needs internally, it could have an adverse effect on the Company.  The Company also competes against companies who manufacture one or more of three principal components of the golf club, the grip, the shaft and the club head, and assemble completed golf clubs for delivery to club companies.  Should any of the Company’s significant customers decide to source their golf clubs in this manner where an Aldila shaft is not included, it could have an adverse effect on the Company.

8

The Company also competes for sales of prepreg from its prepreg facility and carbon fiber through its 50% interest in CFT with other producers of prepreg and carbon fibers, many of which have substantially greater research and development, managerial and financial resources than the Company.  Some producers have been producing prepreg and carbon fiber for substantially longer periods of time than the Company has, and represent significant competition to the Company.  The Company’s ability to compete in the sale of prepreg and carbon fiber is dependent to some extent on the Company’s ability to cause manufacturers and consumers of carbon fiber-based products to utilize large bundle carbon fiber, which is the sole type of carbon fiber manufactured by CFT and a significant portion of the carbon fiber used in Aldila’s graphite prepreg, rather than the small bundle, aerospace grade carbon fiber.  In addition, the ability to purchase fiber from an outside source when required in today’s fiber market, limits 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 continue to protect them to the fullest extent practicable.  As of December 31, 2003 the Company had approximately 58 United States and foreign registered trademarks.

Employees

As of December 31, 2003, Aldila employed 1,180 persons on a full-time basis, including nine in sales and marketing, 20 in research, development and engineering and 1,013 in production. The balance is administrative and support staff.  The number of full-time employees includes 392 persons who are employed in the Company’s Mexico facility and 656 who are employed in the Company’s China facility.  Because of seasonal demands, the Company hires a significant number of temporary employees.  As of December 31, 2003, the Company also employed an additional 32 temporary employees on a full-time basis.  Aldila considers its employee relations to be good.

Seasonality

Because the Company’s customers have historically built inventory in anticipation of purchases by golfers in the spring and summer, the principal selling season for golf equipment, the Company’s operating results have been affected by seasonal demand for golf clubs, which has generally resulted in highest sales occurring in the 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, 2003, the Company had a sales backlog of approximately $11.0 million compared to approximately $6.8 million as of December 31, 2002.  The Company believes that the dollar volume of its current backlog will be shipped over the next three months.  Orders can typically be cancelled without penalty up to 30 days prior to shipment.  Historically, the Company’s backlog generally has been highest in the first and second quarters, due in large part to seasonal factors.  Due to the timing and receipt of customer orders, backlog is not necessarily indicative of future operating results.

Business Risks

Customer Concentration.  The Company’s sales have been, and very likely will continue to be, concentrated among a small number of customers.  In 2003, sales to the Company’s top five customers represented approximately 68% 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 2003, Callaway Golf accounted for 21% of net sales, Acushnet Company accounted for 26% of net sales and Ping 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.  In this regard, Callaway Golf, Acushnet Company and Ping, who collectively represent in excess of 57% of the Company’s net sales in 2003, each purchased from at least two other graphite shaft suppliers.  In the event Callaway Golf,

9

Acushnet Company, Ping or any other significant customer increases purchases from its other suppliers or adds additional suppliers, the Company could be adversely affected.  Although the Company believes that its relationships with its customers are good, the loss of a significant customer or a substantial decrease in sales to a significant customer could have a material adverse effect on the Company’s business and operating results.  In addition, sales by the Company’s major customers are likely to vary dramatically from time to time due to fluctuating public demand for golf equipment generally and for their specific products.

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

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

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

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^TM, 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 Off-Shore Manufacturing Facilities.  The Company operates manufacturing facilities in Tijuana, Mexico and Zhuhai, People’s Republic of China.  The Company pays certain expenses of these facilities in Mexican pesos and Chinese renminbis, respectively, which are subject to fluctuations in currency value and exchange rates.  The Company operates a shaft manufacturing facility in Tijuana, Mexico pursuant to the “maquiladora” duty-free program established by the Mexican and United States governments.  Such program enables the Company to take advantage of generally lower costs in Mexico, without paying duty on inventory shipped into or out of Mexico.  The Company also operates in the People’s Republic of China in a special economic zone, which affords special advantages to companies with regards to income taxes, import and export duties and value added taxes.  There can be no assurance that the governments of Mexico or the People’s Republic of China will continue the programs currently in place or that the Company will continue to be able to benefit from these programs.  The loss of these benefits could have an adverse effect on the Company’s business.  The Company is also subject to other customary risks of doing business outside the United States, including political instability, other import/export regulations and cultural differences

Raw Material Cost/Availability.  The Company’s gross profit margins, in part, are dependent on the price paid for carbon fiber purchased from outside vendors, and more substantially starting in the latter part of 1998, the cost of production of carbon fiber at the Evanston, Wyoming facility, including the price paid for the acrylic fiber used for the manufacture of carbon fiber and the other costs associated with the operation of the carbon fiber plant.

The Company experienced an increase in carbon fiber prices in 1996 and 1997 due to the growth experienced in the use of carbon fiber coupled with relatively little excess capacity.  The prices paid by the Company for carbon fiber leveled in 1998 and decreased during 1999 through 2002, due to the current state of excess-capacity in the carbon fiber manufacturing industry.  However, that trend has begun to reverse itself in the later part of 2003.  The Company has begun to experience increases in certain grades of carbon fiber prices during the later part of 2003.  Management is not able to predict the timing or extent of any

10

future price changes for carbon fiber; however, the Company could be negatively impacted if future increases in carbon fiber prices have a negative impact on the Company’s gross margins.

The Company also has relationships with other outside vendors for its additional carbon fiber needs through 2003 and beyond.  Depending on market conditions prevailing at the time and extent to which production at CFT meets expectations, the Company may face difficulties in obtaining adequate supplies of carbon fiber from external sources to provide for any carbon fiber needs not met internally.  If it appears that CFT is not likely to satisfy a significant portion of the Company’s needs or if it appears that there will not be adequate availability in the market, the Company may not have made arrangements in advance for the purchase of material amounts of carbon fiber from alternative sources.

In addition, the Company is dependent on its internal production of graphite prepreg to support its shaft manufacturing operations and has not secured adequate additional sources of supply should its production of prepreg be interrupted for any reason.  The exposure to the Company resulting from its increasing reliance on its own internal production of the raw materials for its golf shaft business is enhanced because the Company currently operates only one prepreg facility and has an interest in only one carbon fiber manufacturing facility.  Until recently, there has been excess-capacity in these industries.  In the past, significant market shortages of both carbon fiber and graphite prepreg have occurred and if they re-occur, it could have a negative impact on the Company’s financial statements.

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

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

Potential Cash Flow Shortages.  The Company has cash and cash equivalents totaling $6.9 million as of December 31, 2003.  Management anticipates that these sources of funds when combined with cash flow generated from operations will be sufficient to finance its business operations at least through 2004.  If the Company is not able to generate the expected cash flows from operations, the Company could be adversely affected.

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 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.

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.

11

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.

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

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

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

Item 2. Properties

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

The Company’s principal executive offices were previously located in a 33,000 square foot leased facility in Poway, California, with a lease term through October 31, 2005.  During March of 2003, the Company consolidated its principal executive offices into its manufacturing facility in Poway, California.  The Company has negotiated a sub-lease of its previous executive offices with a tenant through October 31, 2005.

Item 3.  Legal Proceedings

None.

Item 4.  Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 2003.

12

PART II

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

COMMON STOCK PERFORMANCE

All the prices above reflect the Company’s one-for-three reverse stock split, for shareholders of record at the close of business on June 3, 2002.  On March 23, 2004, the closing common stock price was $5.33, and there were approximately 341 common stockholders of record.  The company believes a significant number of beneficial owners also own Aldila stock in “street name.”

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

The Company intends to retain earnings for use in operations and does not anticipate paying cash dividends on the common stock in the foreseeable future.  Aldila, Inc. is a holding company whose ability to pay dividends depends on the receipt of dividends or other payments from its two principal subsidiaries, Aldila Golf and Aldila Materials Technology Corp.

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, 2003 (all numbers of securities reflect the Company’s one-for-three reverse stock split on June 3, 2002):

13

(1) In 1992, the Company adopted the 1992 Stock Option Plan to provide equity incentives for the management and directors of the Company.  The Company has reserved 175,431 shares for issuance under this Plan.  The Company does not expect to issue additional options under the 1992 Plan.

(2) On March 20, 2000, the Company and Nick Price Group entered into a stock option agreement.  The option agreement allows Nick Price to purchase 50,000 shares of Common Stock at a purchase price of $4.89.  The shares are not currently registered under any of the Company’s stock option plans.  In return for the shares, the Company is receiving promotional and advisory services of Nick Price for a guaranteed minimum value of $4.50 per share, or a minimum aggregate consideration of $225,000. 

14

Item 6.   Selected Financial Data

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

ALDILA, INC.

SELECTED FINANCIAL DATA

(In thousands, except per share amounts)

15

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

Significant Accounting Estimates

We prepare the consolidated financial statements of the Company in conformity with accounting principles generally accepted in the United States of America.  As such, we are 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 we believe 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 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 shafts returned for breakage will be returned within three year s of the initial sale of the shaft.  The Company estimates 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 .40% and 1.54% (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, 2003 is .47%.  The Company’s breakage return rate has declined over the past years as the Company’s sales have decreased.  The highest four-year average over the past four years has been .89%.  If the Company were to use .89% in estimating its liability as of December 31, 2003, it would have the effect of increasing the liability by approximately $366,000, which would be recorded in cost of goods sold.  While such 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 bas ed upon payment history and the customer’s current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Since our accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectability of our accounts receivables 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 reserves for the receivable amount.  As of December 31, 2003, the Company estimated this amount to be approximately $34,000.  If the Company were to reserve for the total amount greater than 60 days past due, it would increase the allowance by approximately $67,000, which would be recorded in administrative expense.

Inventories

We value our inv entory 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; review on hand inventories of our top customers and compare to their