Item 1.01 Entry into a Material Definitive Agreement

and

Item 5.02 Compensation Arrangements of Certain Officers

On October 7, 2008, the Compensation 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 special cash dividend of $5.00 per common share paid on March 10, 2008 to shareholders of record as of February 25, 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.

No options issued under the Plan were exercised between February 25, 2008, the record date for the special dividend, and October 7, 2008 when the modifications became effective, so the modifications do not affect any options already exercised. The modified stock options include stock options granted to officers and directors, however, the automatic grant of stock options to Aldila directors made on May 30, 2008 were not modified. Commencing in 2006 Aldila has generally granted restricted stock to officers and employees rather than stock options. These modifications to the stock options do not affect any outstanding grants of restricted stock.

Aldila anticipates the modifications to the outstanding stock options will result in additional compensation expense of approximately $100,000. The compensation expense associated with fully vested stock options will be recognized during the fourth quarter of 2008. The compensation expense associated with unvested options will be recognized over the remaining vesting period of the option.

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