##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the three months ended March 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to  to
 Commission File No. 0-20600
 
 ZOLTEK COMPANIES, INC.
  Missouri
    
    43-1311101(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)3101 McKelvey Road, St. Louis, Missouri
    
    63044(Address of principal executive offices)
    
    (Zip Code)
  þ o
  Large accelerated Filer
þ
    
    Accelerated Filer
o
    
    Non-accelerated Filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



ZOLTEK COMPANIES, INC.
INDEX
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheet  March 31, 2008 and September 30, 2007Condensed Consolidated Statements of Operations  Three and Six Months Ended March 31, 2008 and 2007Condensed Consolidated Statement of Changes in Shareholders Equity  Six Months Ended March 31, 2008Condensed Consolidated Statements of Cash Flows  Six Months Ended March 31, 2008 and 2007Condensed Consolidated Statements of Comprehensive Income  Three and Six Months Ended March 31,
2008 and 2007Notes to Condensed Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 4. Submission of Matters to a Vote of Security HoldersItem 6. ExhibitsSIGNATURESEXHIBIT INDEXEmployment AgreementCertification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a)Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 ZOLTEK COMPANIES, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEET
 March 31,
    
    
    September 30,2008
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    55,856
    
    
    $
    121,761Restricted cash
    
    
    23,500
    
    
    
    13,815Accounts receivable, less allowance for doubtful accounts of $542 and
$729 respectively
    
    
    42,304
    
    
    
    37,495Inventories
    
    
    39,767
    
    
    
    27,941Other current assets
    
    
    11,893
    
    
    
    10,858Total current assets
    
    
    173,320
    
    
    
    211,870Property and equipment, net
    
    
    260,514
    
    
    
    188,801Other assets
    
    
    1,744
    
    
    
    2,928Total assets
    
    $
    435,578
    
    
    $
    403,599Liabilities and Shareholders EquityCurrent liabilities:Current maturities of long-term debt
    
    $
    7,518
    
    
    $
    13,813Trade accounts payable
    
    
    21,922
    
    
    
    17,253Legal liabilities
    
    
    23,990
    
    
    
    24,543Accrued expenses and other liabilities
    
    
    10,597
    
    
    
    8,305Total current liabilities
    
    
    64,027
    
    
    
    63,914Long-term debt, less current maturities
    
    
    5,234
    
    
    
    6,851Hungarian grant, long-term
    
    
    11,719
    
    
    
    7,969Deferred tax liabilities
    
    
    4,597
    
    
    
    4,046Other long-term liabilities
    
    
    56
    
    
    
    52Total liabilities
    
    
    85,633
    
    
    
    82,832Commitments and contingencies (see Note 8)Shareholders equity:Preferred stock, $.01 par value, 1,000,000 shares authorized,
no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, 50,000,000 shares authorized, 34,055,762 and
33,653,735 shares issued and outstanding at March 31, 2008 and
September 30, 2007, respectively
    
    
    346
    
    
    
    337Additional paid-in capital
    
    
    485,184
    
    
    
    476,205Accumulated deficit
    
    
    (157,109
    )
    
    
    (164,024
    )Accumulated other comprehensive income
    
    
    21,524
    
    
    
    8,249Total shareholders equity
    
    
    349,945
    
    
    
    320,767Total liabilities and shareholders equity
    
    $
    435,578
    
    
    $
    403,599
  3




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##### Table of Contents



ZOLTEK COMPANIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 Three months ended March 31,
    
    
    Six months ended March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    49,581
    
    
    $
    36,742
    
    
    $
    89,653
    
    
    $
    67,027Cost of sales
    
    
    35,556
    
    
    
    26,154
    
    
    
    64,869
    
    
    
    48,588Gross profit
    
    
    14,025
    
    
    
    10,588
    
    
    
    24,784
    
    
    
    18,439Application and development costs
    
    
    2,062
    
    
    
    1,820
    
    
    
    3,958
    
    
    
    3,412Selling, general and administrative expenses
    
    
    3,653
    
    
    
    2,910
    
    
    
    7,725
    
    
    
    6,152Operating income from continuing operations
    
    
    8,310
    
    
    
    5,858
    
    
    
    13,101
    
    
    
    8,875Other (expense) income:Interest expense, excluding amortization of financing fees,
debt discount, warrants and conversion feature
    
    
    (374
    )
    
    
    (471
    )
    
    
    (1,051
    )
    
    
    (1,531
    )Amortization of financing fees and debt discount
    
    
    (1,843
    )
    
    
    (4,677
    )
    
    
    (3,398
    )
    
    
    (5,980
    )Warrant issuance expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,362
    )Loss on value of warrants and conversion feature
    
    
    
    
    
    
    (276
    )
    
    
    
    
    
    
    (72
    )Interest income
    
    
    847
    
    
    
    268
    
    
    
    2,039
    
    
    
    654Other, net
    
    
    (225
    )
    
    
    (467
    )
    
    
    (367
    )
    
    
    (741
    )Income (loss) from continuing operations before income taxes
    
    
    6,715
    
    
    
    235
    
    
    
    10,324
    
    
    
    (5,157
    )Income tax expense
    
    
    2,404
    
    
    
    292
    
    
    
    3,409
    
    
    
    495Net income (loss) from continuing operations
    
    
    4,311
    
    
    
    (57
    )
    
    
    6,915
    
    
    
    (5,652
    )Discontinued operations:Income (loss) from discontinued operations, net of taxes
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    (17
    )Net income (loss)
    
    $
    4,311
    
    
    $
    (6
    )
    
    $
    6,915
    
    
    $
    (5,669
    )Net loss per share:Basic and diluted income (loss) per share:Continuing operations
    
    $
    0.13
    
    
    $
    (0.00
    )
    
    $
    0.20
    
    
    $
    (0.21
    )Discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Total
    
    $
    0.13
    
    
    $
    (0.00
    )
    
    $
    0.20
    
    
    $
    (0.21
    )Weighted average common shares outstanding  basic
    
    
    33,942,747
    
    
    
    27,296,348
    
    
    
    33,848,966
    
    
    
    26,613,100Weighted average common shares outstanding  diluted
    
    
    34,041,851
    
    
    
    27,296,348
    
    
    
    34,007,284
    
    
    
    26,613,100
  4




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ZOLTEK COMPANIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
   Addl
    
    
    
    
    
    
    Accumulated OtherCommon
    
    
    Paid-In
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Total ShareholdersStock
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    EquityBalance, September 30, 2007
    
    $
    337
    
    
    $
    476,205
    
    
    $
    (164,024
    )
    
    $
    8,249
    
    
    $
    320,767Convertible debt converted
    
    
    9
    
    
    
    5,661
    
    
    
    
    
    
    
    
    
    
    
    5,670Stock option compensation expense
    
    
    
    
    
    
    1,124
    
    
    
    
    
    
    
    
    
    
    
    1,124Restricted stock issued
    
    
    
    
    
    
    1,251
    
    
    
    
    
    
    
    
    
    
    
    1,251Warrants exercised
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    150Exercise of stock options
    
    
    
    
    
    
    793
    
    
    
    
    
    
    
    
    
    
    
    793Net income
    
    
    
    
    
    
    
    
    
    
    6,915
    
    
    
    
    
    
    
    6,915Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,275
    
    
    
    13,275Balance, March 31, 2008
    
    $
    346
    
    
    $
    485,184
    
    
    $
    (157,109
    )
    
    $
    21,524
    
    
    $
    349,945
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 Three months ended March 31,
    
    
    Six months ended March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    4,311
    
    
    $
    (6
    )
    
    $
    6,915
    
    
    $
    (5,669
    )Foreign currency translation adjustments
    
    
    11,200
    
    
    
    3,084
    
    
    
    13,275
    
    
    
    11,486Comprehensive income (loss)
    
    $
    15,511
    
    
    $
    3,078
    
    
    
    20,190
    
    
    
    5,817
  5




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ZOLTEK COMPANIES, INC.
 
 CONSDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 Six months ended March 31,2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    6,915
    
    
    $
    (5,669
    )Net loss from discontinued operations
    
    
    
    
    
    
    17Net income (loss) from continuing operations
    
    
    6,915
    
    
    
    (5,652
    )Adjustments to reconcile net income (loss) to net cash from operating activities:Depreciation and amortization
    
    
    7,162
    
    
    
    4,470Amortization of financing fees and debt discount
    
    
    3,398
    
    
    
    5,980Deferred taxes
    
    
    1,306
    
    
    
    Warrant issue expense
    
    
    
    
    
    
    6,362Loss on value of warrants and conversion feature
    
    
    
    
    
    
    72Foreign currency transaction losses
    
    
    205
    
    
    
    295Stock option compensation expense
    
    
    1,124
    
    
    
    350Changes in assets and liabilities:Increase in accounts receivable
    
    
    (2,866
    )
    
    
    (4,565
    )Increase in inventories
    
    
    (13,034
    )
    
    
    (4,581
    )Increase in other current assets and other assets
    
    
    (2,054
    )
    
    
    (1,378
    )Increase in trade accounts payable
    
    
    3,227
    
    
    
    3,313Increase (decrease) in accrued expenses and other liabilities
    
    
    1,719
    
    
    
    (738
    )Increase in other long-term liabilities
    
    
    
    
    
    
    121Net cash provided by continuing operations
    
    
    7,102
    
    
    
    4,049Net cash provided by discontinued operations
    
    
    
    
    
    
    1,526Net cash provided by operating activities
    
    
    7,102
    
    
    
    5,575Cash flows from investing activities:Purchases of property and equipment
    
    
    (24,705
    )
    
    
    (30,270
    )Purchase of Mexico facility
    
    
    (35,000
    )
    
    
    Proceeds received from Hungarian grant
    
    
    3,253
    
    
    
    Change in cash restricted for letters of credit
    
    
    (9,685
    )
    
    
    6,634Net cash used in investing activities
    
    
    (66,137
    )
    
    
    (23,636
    )Cash flows from financing activities:Proceeds from exercise of stock options and warrants
    
    
    943
    
    
    
    12,957Proceeds from issuance of convertible debt
    
    
    
    
    
    
    7,409Payment of financing fees
    
    
    
    
    
    
    (742
    )Repayment (borrowings) of notes payable and long-term debt
    
    
    (8,080
    )
    
    
    1,805Net cash (used in) provided by financing activities
    
    
    (7,137
    )
    
    
    21,429Effect of exchange rate changes on cash and cash equivalents
    
    
    267
    
    
    
    396Net (decrease) increase in cash and cash equivalents
    
    
    (65,905
    )
    
    
    3,764Cash and cash equivalents at beginning of period
    
    
    121,761
    
    
    
    10,802Cash and cash equivalents at end of period
    
    $
    55,856
    
    
    $
    14,566Supplemental disclosures of cash flow information:Non-cash conversion of convertible debentures
    
    $
    5,670
    
    
    $
    29,509Net cash paid during the period for income taxes
    
    $
    1,102
    
    
    $
    Net cash paid during the period for interest
    
    $
    890
    
    
    $
    2,777
  6




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##### Table of Contents



ZOLTEK COMPANIES, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. ORGANIZATION AND BASIS OF PRESENTATION
  Basis of Presentation
   Adoption of New Accounting Standards
  2. INVENTORIES
  March 31,
    
    
    September 30,2008
    
    
    2007Raw materials
    
    $
    5,257
    
    
    $
    7,941Work-in-process
    
    
    15,543
    
    
    
    11,832Finished goods
    
    
    18,298
    
    
    
    7,632Supplies and other
    
    
    669
    
    
    
    536$
    39,767
    
    
    $
    27,941
 7




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##### Table of Contents



3. SEGMENT INFORMATION
    Three months ended March 31, 2008Carbon
    
    Technical
    
    Corporate/Fibers
    
    Fibers
    
    Other
    TotalNet sales
    
    $
    41,857
    
    
    $
    6,564
    
    
    $
    1,160
    
    
    $
    49,581Cost of sales
    
    
    29,481
    
    
    
    5,084
    
    
    
    991
    
    
    
    35,556Gross profit
    
    
    12,376
    
    
    
    1,480
    
    
    
    169
    
    
    
    14,025Operating income (loss)
    
    
    10,335
    
    
    
    859
    
    
    
    (2,884
    )
    
    
    8,310Depreciation and amortization expense
    
    
    2,935
    
    
    
    467
    
    
    
    400
    
    
    
    3,802Capital expenditures
    
    
    9,577
    
    
    
    307
    
    
    
    2,341
    
    
    
    12,225
 Three months ended March 31, 2007Carbon
    
    Technical
    
    Corporate/Fibers
    
    Fibers
    
    Other
    TotalNet sales
    
    $
    29,074
    
    
    $
    7,058
    
    
    $
    610
    
    
    $
    36,742Cost of sales
    
    
    20,582
    
    
    
    5,245
    
    
    
    327
    
    
    
    26,154Gross profit
    
    
    8,492
    
    
    
    1,813
    
    
    
    283
    
    
    
    10,588Operating income (loss)
    
    
    5,967
    
    
    
    1,473
    
    
    
    (1,582
    )
    
    
    5,858Depreciation and amortization expense
    
    
    1,656
    
    
    
    259
    
    
    
    545
    
    
    
    2,460Capital expenditures
    
    
    16,406
    
    
    
    991
    
    
    
    535
    
    
    
    17,932
 Six months ended March 31, 2008Carbon
    
    Technical
    
    Corporate/Fibers
    
    Fibers
    
    Other
    TotalNet sales
    
    $
    75,976
    
    
    $
    11,597
    
    
    $
    2,080
    
    
    $
    89,653Cost of sales
    
    
    54,439
    
    
    
    8,797
    
    
    
    1,633
    
    
    
    64,869Gross profit
    
    
    21,537
    
    
    
    2,800
    
    
    
    447
    
    
    
    24,784Operating income (loss)
    
    
    18,151
    
    
    
    942
    
    
    
    (5,992
    )
    
    
    13,101Depreciation and amortization expense
    
    
    5,528
    
    
    
    1,009
    
    
    
    625
    
    
    
    7,162Capital expenditures
    
    
    21,639
    
    
    
    623
    
    
    
    2,443
    
    
    
    24,705
 Six months ended March 31, 2007Carbon
    
    Technical
    
    Corporate/Fibers
    
    Fibers
    
    Other
    TotalNet sales
    
    $
    50,195
    
    
    $
    15,577
    
    
    $
    1,255
    
    
    $
    67,027Cost of sales
    
    
    37,058
    
    
    
    10,916
    
    
    
    614
    
    
    
    48,588Gross profit
    
    
    13,137
    
    
    
    4,661
    
    
    
    641
    
    
    
    18,439Operating income (loss)
    
    
    8,622
    
    
    
    3,983
    
    
    
    (3,730
    )
    
    
    8,875Depreciation and amortization expense
    
    
    3,003
    
    
    
    809
    
    
    
    658
    
    
    
    4,470Capital expenditures
    
    
    25,666
    
    
    
    2,752
    
    
    
    1,852
    
    
    
    30,270
 8




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##### Table of Contents



Total AssetsCarbon
    
    Technical
    
    Corporate/Fibers
    
    Fibers
    
    Other
    
    TotalMarch 31, 2008
    
    $
    305,895
    
    
    $
    35,607
    
    
    $
    94,076
    
    
    $
    435,578September 30, 2007
    
    
    217,662
    
    
    
    36,833
    
    
    
    149,104
    
    
    
    403,599
 4. FINANCING
 Bond Related to SP Systems Case
   Hungarian Government Grant
   Fiscal 2007 Financing Activity
  Convertible Debt
  Three months ended December 31, 2007
    
    
    Three months ended March 31, 2008Number of Shares
    
    
    Conversion
    
    
    Principal
    
    
    Number of Shares
    
    
    Conversion
    
    
    PrincipalIssuance
    
    Converted
    
    
    Price
    
    
    Converted
    
    
    Converted
    
    
    Price
    
    
    ConvertedFebruary 2003
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    September 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    May 2006
    
    
    54,879
    
    
    
    25.51
    
    
    
    1,399,963
    
    
    
    75,338
    
    
    
    25.51
    
    
    
    1,921,872July 2006
    
    
    9,820
    
    
    
    25.51
    
    
    
    250,508
    
    
    
    9,820
    
    
    
    25.51
    
    
    
    250,508October 2006
    
    
    47,040
    
    
    
    25.51
    
    
    
    1,199,990
    
    
    
    26,133
    
    
    
    25.51
    
    
    
    666,653111,739
    
    
    
    
    
    
    $
    2,850,461
    
    
    
    111,291
    
    
    
    
    
    
    $
    2,839,033
 9




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##### Table of Contents



Three months ended December 31, 2006
    
    
    Three months ended March 31, 2007Number of Shares
    
    
    Conversion
    
    
    Principal
    
    
    Number of Shares
    
    
    Conversion
    
    
    PrincipalIssuance
    
    Converted
    
    
    Price
    
    
    Converted
    
    
    Converted
    
    
    Price
    
    
    ConvertedFebruary 2003
    
    
    342,858
    
    
    $
    3.50
    
    
    $
    1,200,003
    
    
    
    
    
    
    $
    
    
    
    $
    September 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196,121
    
    
    
    12.50
    
    
    
    2,451,513December 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,251,143
    
    
    
    12.50
    
    
    
    15,639,288February 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    768,673
    
    
    
    13.07
    
    
    
    10,046,556May 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    July 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    October 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    342,858
    
    
    
    
    
    
    $
    1,200,003
    
    
    
    2,215,937
    
    
    
    
    
    
    $
    28,137,357
 As of March 31, 2008Number of Shares
    
    
    Conversion
    
    
    PrincipalIssuance
    
    Outstanding
    
    
    Price
    
    
    OutstandingFebruary 2003
    
    
    
    
    
    $
    
    
    
    $
    September 2005
    
    
    
    
    
    
    
    
    
    
    December 2005
    
    
    
    
    
    
    
    
    
    
    February 2006
    
    
    
    
    
    
    
    
    
    
    May 2006
    
    
    500,215
    
    
    
    25.51
    
    
    
    12,760,485July 2006
    
    
    78,361
    
    
    
    25.51
    
    
    
    1,998,989October 2006
    
    
    225,188
    
    
    
    25.51
    
    
    
    5,744,546803,764
    
    
    
    
    
    
    $
    20,504,020
   Outstanding Convertible Debt Issuances
 May 2006(1)
    
    July 2006(1)
    
    October 2006(1)Amount of debenture (millions)
    
    $
    20.0
    
    
    $
    2.5
    
    
    $
    7.5Per share conversion price on debenture
    
    $
    25.51
    
    
    $
    25.51
    
    
    $
    25.51Interest rate
    
    
    7.5
    %
    
    
    7.5
    %
    
    
    7.5
    %Term of debenture
    
    42 months

    
    42 months
 
    
    42 monthsWarrants issued
    
    
    274,406
    
    
    
    34,370
    
    
    
    102,835Term of warrants
    
    60 months
 
    
    60 months
 
    
    60 monthsPer share exercise price of warrants
    
    $
    28.06
    
    
    $
    28.06
    
    
    $
    28.06Fair value per warrant at issuance
    
    $
    26.03
    
    
    $
    23.89
    
    
    $
    22.13Value per share conversion feature at issuance
    
    $
    18.80
    
    
    $
    19.21
    
    
    $
    19.57Stock price on date of agreement
    
    $
    32.25
    
    
    $
    29.28
    
    
    $
    26.81Stock volatility at issuance
    
    
    106
    %
    
    
    111
    %
    
    
    117
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Risk-free interest rate at issuance
    
    
    4.88
    %
    
    
    4.88
    %
    
    
    4.65
    %Converted
    
    Partial

    
    Partial

    
    PartialWarrants exercised
    
    No

    
    No

    
    Partial
 
 (1)
    
    The May 2006, July 2006 and October 2006 issuances had a beneficial conversion
feature. 10




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##### Table of Contents



Warrant and Conversion Features
   Three months ended March 31, 2007
    
    
    Six months ended March 31, 2007Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    Features
    
    
    Total
    
    
    Warrants
    
    
    Features
    
    
    TotalJanuary 2004 issuance  mark to market
    
    $
    (276
    )
    
    $
    
    
    
    $
    (276
    )
    
    $
    (72
    )
    
    $
    
    
    
    $
    (72
    )Loss on value of warrants and
conversion feature
    
    $
    (276
    )
    
    $
    
    
    
    $
    (276
    )
    
    $
    (72
    )
    
    $
    
    
    
    $
    (72
    )
 Amortization of Financing Fees and Debt Discount
    Three months ended March 31, 2008
    
    
    Six months ended March 31, 2008Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    Feature
    
    
    Total
    
    
    Warrants
    
    
    Feature
    
    
    TotalMay 2006 issuance
    
    $
    550
    
    
    $
    812
    
    
    $
    1,362
    
    
    $
    964
    
    
    $
    1,422
    
    
    $
    2,386July 2006 issuance
    
    
    59
    
    
    
    71
    
    
    
    130
    
    
    
    120
    
    
    
    146
    
    
    
    266October 2006 issuance
    
    
    82
    
    
    
    95
    
    
    
    177
    
    
    
    213
    
    
    
    246
    
    
    
    459$
    691
    
    
    $
    978
    
    
    
    1,669
    
    
    $
    1,297
    
    
    $
    1,814
    
    
    
    3,111Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    174
    
    
    
    
    
    
    
    
    
    
    
    287Total
    
    
    
    
    
    
    
    
    
    $
    1,843
    
    
    
    
    
    
    
    
    
    
    $
    3,398
 Three months ended March 31, 2007
    
    
    Six months ended March 31, 2007Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    Feature
    
    
    Total
    
    
    Warrants
    
    
    Feature
    
    
    TotalSeptember 2005 issuance
    
    $
    85
    
    
    $
    
    
    
    $
    85
    
    
    $
    158
    
    
    $
    
    
    
    $
    158December 2005 issuance
    
    
    155
    
    
    
    
    
    
    
    155
    
    
    
    285
    
    
    
    
    
    
    
    285February 2006 issuance
    
    
    1,818
    
    
    
    1,870
    
    
    
    3,688
    
    
    
    1,830
    
    
    
    1,882
    
    
    
    3,712
 11




---



##### Table of Contents



Three months ended March 31, 2007
    
    
    Six months ended March 31, 2007Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    Feature
    
    
    Total
    
    
    Warrants
    
    
    Feature
    
    
    TotalMay 2006 issuance
    
    
    42
    
    
    
    63
    
    
    
    105
    
    
    
    345
    
    
    
    509
    
    
    
    854July 2006 issuance
    
    
    40
    
    
    
    49
    
    
    
    89
    
    
    
    65
    
    
    
    80
    
    
    
    145October 2006 issuance
    
    
    66
    
    
    
    76
    
    
    
    142
    
    
    
    107
    
    
    
    123
    
    
    
    230$
    2,206
    
    
    $
    2,058
    
    
    
    4,264
    
    
    $
    2.790
    
    
    $
    2,594
    
    
    
    5,384Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    413
    
    
    
    
    
    
    
    
    
    
    
    596Total
    
    
    
    
    
    
    
    
    
    $
    4,677
    
    
    
    
    
    
    
    
    
    
    $
    5,980
  March 31, 2008ConversionWarrants
    
    
    Feature
    
    
    TotalMay 2006 issuance
    
    $
    3,067
    
    
    $
    4,528
    
    
    $
    7,595July 2006 issuance
    
    
    427
    
    
    
    514
    
    
    
    941October 2006 issuance
    
    
    640
    
    
    
    737
    
    
    
    1,377$
    4,134
    
    
    $
    5,779
    
    
    
    9,913Debt acquisition cost and financing fees
    
    
    
    
    
    
    
    
    
    
    644Total
    
    
    
    
    
    
    
    
    
    $
    10,557
 September 30, 2007ConversionWarrants
    
    
    Feature
    
    
    TotalMay 2006 issuance
    
    $
    4,728
    
    
    $
    6,981
    
    
    $
    11,709July 2006 issuance
    
    
    403
    
    
    
    485
    
    
    
    888October 2006 issuance
    
    
    1,236
    
    
    
    1,422
    
    
    
    2,658$
    6,367
    
    
    $
    8,888
    
    
    
    15,255Debt acquisition cost and financing fees
    
    
    
    
    
    
    
    
    
    
    985Total
    
    
    
    
    
    
    
    
    
    $
    16,240
 Earnings Per Share
   Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerators:Net income (loss)
    
    $
    4,311
    
    
    $
    (6
    )
    
    $
    6,915
    
    
    $
    (5,669
    )Denominators:Average shares outstanding  basic
    
    
    33,942
    
    
    
    27,296
    
    
    
    33,849
    
    
    
    26,613Impact of convertible debt, warrants and stock options
    
    
    99
    
    
    
    
    
    
    
    158
    
    
    
    Average shares outstanding  diluted
    
    
    34,041
    
    
    
    27,296
    
    
    
    34,007
    
    
    
    26,613Income (loss) per share  basic:Continuing operations
    
    $
    0.13
    
    
    $
    (0.00
    )
    
    $
    0.20
    
    
    $
    (0.21
    )Discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Basic income (loss) per share
    
    $
    0.13
    
    
    $
    (0.00
    )
    
    $
    0.20
    
    
    $
    (0.21
    )
 12




---



##### Table of Contents



Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Income (loss) per share  diluted:Continuing operations
    
    $
    0.13
    
    
    $
    (0.00
    )
    
    $
    0.20
    
    
    $
    (0.21
    )Discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Diluted income (loss) per share
    
    $
    0.13
    
    
    $
    (0.00
    )
    
    $
    0.20
    
    
    $
    (0.21
    )
 5. DEBT
 Credit Facilities
    March 31,
    
    
    September 30,2008
    
    
    2007Note payable with interest at 7%, payable in eleven monthly installments of
principal and interest of $15 to maturity in January 2009
    
    $
    1,235
    
    
    $
    1,272Non-interest bearing note payable (discounted at 8%) to the City of Abilene, Texas
to be repaid from real estate and personal property tax abatements
    
    
    
    
    
    
    2,030Facilities with Hungarian banks (interest rate of 5.5% to 10.6%)
    
    
    880
    
    
    
    6,417Convertible debentures final payment due November 2009 bearing interest at 8.8%
    
    
    12,600
    
    
    
    16,200Convertible debentures final payment due January 2010 bearing interest at 7.5%
    
    
    1,998
    
    
    
    2,505Convertible debentures final payment due January 2010 bearing interest at 7.5%
    
    
    5,951
    
    
    
    7,495Total long-term debt including current maturities
    
    
    22,664
    
    
    
    35,919Less: Debt discount associated with conversion feature and warrants
    
    
    (9,913
    )
    
    
    (15,255
    )Less: Amounts payable within one year, net of discount of $5,402 and $7,006
    
    
    (7,517
    )
    
    
    (13,813
    )Total long-term debt, less current maturities
    
    $
    5,234
    
    
    $
    6,851
 6. DISCONTINUED OPERATIONS
  13




---



##### Table of Contents



Three months ended
    
    
    Six months endedMarch 31, 2007
    
    
    March 31, 2007Net sales
    
    $
    213
    
    
    $
    1,506Cost of sales
    
    
    101
    
    
    
    1,353Gross profit
    
    
    112
    
    
    
    153Selling, general and administrative expenses
    
    
    36
    
    
    
    123Income from operations
    
    
    76
    
    
    
    30Other loss
    
    
    (25
    )
    
    
    (47
    )Income (loss) on discontinued operations
    
    $
    51
    
    
    $
    (17
    )
 7. STOCK OPTION COMPENSATION PLANS
  Stock option awards
  Wtd. Avg.
    
    Options
    
    Wtd. Avg.Options
    
    Exercise Price
    
    Exercisable
    
    Exercise PriceBalance, September 30, 2007
    
    
    369,810
    
    
    $
    16.02
    
    
    
    264,800
    
    
    $
    17.23Granted
    
    
    212,500
    
    
    
    33.11Cancelled
    
    
    (30,000
    )
    
    
    39.00Exercised
    
    
    (100,713
    )
    
    
    7.87Balance, March 31, 2008
    
    
    451,597
    
    
    
    23.03
    
    
    
    264,097
    
    
    
    17.29
  Options Outstanding
    
    Options ExercisableRange of
    
    
    
    
    
    
    
    Wtd. Avg.
    
    Wtd. Avg.
    
    
    
    
    
    Wtd. Avg.Exercise Prices
    
    
    
    Number
    
    Remaining Life
    
    Exercise Price
    
    Number
    
    Exercise Price$
    1.33-2.80
    
    
    
    
    
    17,000
    
    
    5 years
    
    $
    2.44
    
    
    
    17,000
    
    
    $
    2.443.25-5.67
    
    
    
    
    
    7,500
    
    
    3 years
    
    
    5.25
    
    
    
    7,500
    
    
    
    5.256.25-9.25
    
    
    
    
    
    55,087
    
    
    8 years
    
    
    8.32
    
    
    
    55,087
    
    
    
    8.329.60-22.69
    
    
    
    
    
    107,010
    
    
    7 years
    
    
    15.90
    
    
    
    82,010
    
    
    
    14.1026.22-39.00
    
    
    
    
    
    265,000
    
    
    8 years
    
    
    30.64
    
    
    
    102,500
    
    
    
    29.351.33-39.00
    
    
    
    
    
    451,597
    
    
    8 years
    
    
    23.03
    
    
    
    264,097
    
    
    
    17.29
  Assumptions
    
    Fiscal 2008
    
    Fiscal 2007Expected life of option
    
    4 & 7.5 years
    
    3 & 7.5 yearsRisk-free interest rate
    
    
    1.8
    %
    
    
    4.9
    %Volatility of stock
    
    
    66
    %
    
    
    68
    %Forfeiture experience
    
    
    30
    %
    
    
    30
    %
  14




---



##### Table of Contents



Restricted stock awards.
 Wtd. Avg.
    
    Wtd. Avg.
    
    Wtd. Avg.Options
    
    Exercise Price
    
    Exercisable
    
    Exercise PriceBalance, September 30, 2007
    
    
    0
    
    
    $
    
    
    
    
    
    
    
    $
    Granted
    
    
    47,500
    
    
    
    26.34
    
    
    
    
    
    
    
    Balance, March 31, 2008
    
    
    47,500
    
    
    
    26.34
    
    
    
    
    
    
    
    
    8. COMMITMENTS AND CONTINGENCIES
 Legal
   15




---



##### Table of Contents



Concentration of Credit Risk
   Environmental
  Sources of Supply
  9. INCOME TAXES
  16




---



##### Table of Contents



10. SUBSEQUENT EVENTS
   17




---



##### Table of Contents



11. NEW ACCOUNTING PRONOUNCEMENTS
  * * *
 Special Note Regarding Forward-Looking Statements
  * * *
 18




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 General
         19




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##### Table of Contents



20




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##### Table of Contents



Results of Operations
 Three months ended March 31, 2008 compared to three months ended March 31, 2007
        21




---



##### Table of Contents



Six months ended March 31, 2008 compared to six months ended March 31, 2007
   22




---



##### Table of Contents



23




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##### Table of Contents



Liquidity and Capital Resources
  Cash Provided By (Used In) Continuing Operating Activities
  Cash Provided By Discontinued Operating Activities
  Cash Used In Investing Activities
     24




---



##### Table of Contents



Cash Provided By Financing Activities
  25




---



##### Table of Contents



Future Contractual Obligations
  Less thanTotal
    
    
    1 year
    
    
    1-3 yearsConvertible debentures (a)
    
    $
    20,549
    
    
    $
    10,844
    
    
    $
    9,705Long-term debt, including current maturities (a)
    
    
    2,133
    
    
    
    2,133
    
    
    
    Total debt
    
    
    22,682
    
    
    
    12,977
    
    
    
    9,705Operating leases
    
    
    163
    
    
    
    40
    
    
    
    123Total debt and operating leases
    
    
    22,845
    
    
    
    13,017
    
    
    
    9,828Contractual interest payments (b)
    
    
    1,532
    
    
    
    1,145
    
    
    
    387Accrued litigation cost (c)
    
    
    23,990
    
    
    
    23,990
    
    
    
    Purchase obligations (d)
    
    
    4,745
    
    
    
    4,745
    
    
    
    Total contractual obligations
    
    $
    53,112
    
    
    $
    42,897
    
    
    $
    10,215
 
 (a)
    
    Convertible debentures and long-term debt are presented on the balance sheet net of debt
discount of $10.0 million.(b)
    
    Amounts represent the expected cash payment for interest on our debt.(c)
    
    Amount includes $18.1 million accrued for potential damages and litigation cost related to SP
Systems case and $5.8 million related to the investment banker case and other pending
litigation. See Note 8 to the condensed consolidated financial statements.(d)
    
    Purchase obligations include agreements to purchase goods or services that are enforceable
and legally binding and that specify all significant terms, including fixed or minimum
quantities to be purchased, fixed, minimum or variable price provisions, and the approximate
timing of the transactions. Purchase obligations exclude agreements that are cancelable at any
time without penalty.  Conversion
    
    
    
    
    
    
    Less thanprice
    
    
    Total
    
    
    1 year
    
    
    1-3 yearsTotal contractual obligations
    
    
    
    
    
    $
    53,112
    
    
    $
    42,897
    
    
    $
    10,215May 2006 issuance
    
    $
    25.51
    
    
    
    (12,600
    )
    
    
    (7,200
    )
    
    
    (5,400
    )July and October 2006 issuance
    
    $
    25.51
    
    
    
    (7,949
    )
    
    
    (3,644
    )
    
    
    (4,305
    )Interest payments
    
    
    
    
    
    
    (1,503
    )
    
    
    (1,145
    )
    
    
    (358
    )Total contractual obligations assuming
conversion on March 31, 2008
    
    
    
    
    
    $
    31,060
    
    
    $
    30,908
    
    
    $
    152
  Bond Related to SP Systems Case
   26




---



##### Table of Contents



Hungarian Government Grant
   Fiscal 2007 Financing Activity
  Convertible Debt
  Three months ended December 31, 2007
    
    
    Three months ended March 31, 2008Number of Shares
    
    
    Conversion
    
    
    Principal
    
    
    Number of Shares
    
    
    Conversion
    
    
    PrincipalIssuance
    
    Converted
    
    
    Price
    
    
    Converted
    
    
    Converted
    
    
    Price
    
    
    ConvertedFebruary 2003
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    September 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    May 2006
    
    
    54,879
    
    
    
    25.51
    
    
    
    1,399,963
    
    
    
    75,338
    
    
    
    25.51
    
    
    
    1,921,872July 2006
    
    
    9,820
    
    
    
    25.51
    
    
    
    250,508
    
    
    
    9,820
    
    
    
    25.51
    
    
    
    250,508October 2006
    
    
    47,040
    
    
    
    25.51
    
    
    
    1,199,990
    
    
    
    26,133
    
    
    
    25.51
    
    
    
    666,653111,739
    
    
    
    
    
    
    $
    2,850,461
    
    
    
    111,291
    
    
    
    
    
    
    $
    2,839,033
 Three months ended December 31, 2006
    
    
    Three months ended March 31, 2007Number of Shares
    
    
    Conversion
    
    
    Principal
    
    
    Number of Shares
    
    
    Conversion
    
    
    PrincipalIssuance
    
    Converted
    
    
    Price
    
    
    Converted
    
    
    Converted
    
    
    Price
    
    
    ConvertedFebruary 2003
    
    
    342,858
    
    
    $
    3.50
    
    
    $
    1,200,003
    
    
    
    
    
    
    $
    
    
    
    $
    September 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196,121
    
    
    
    12.50
    
    
    
    2,451,513December 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,251,143
    
    
    
    12.50
    
    
    
    15,639,288February 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    768,673
    
    
    
    13.07
    
    
    
    10,046,556May 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    July 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    October 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    342,858
    
    
    
    
    
    
    $
    1,200,003
    
    
    
    2,215,937
    
    
    
    
    
    
    $
    28,137,357
 27




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##### Table of Contents



As of March 31, 2008Number of Shares
    
    
    Conversion
    
    
    PrincipalIssuance
    
    Outstanding
    
    
    Price
    
    
    OutstandingFebruary 2003
    
    
    
    
    
    $
    
    
    
    $
    September 2005
    
    
    
    
    
    
    
    
    
    
    December 2005
    
    
    
    
    
    
    
    
    
    
    February 2006
    
    
    
    
    
    
    
    
    
    
    May 2006
    
    
    500,215
    
    
    
    25.51
    
    
    
    12,760,485July 2006
    
    
    78,361
    
    
    
    25.51
    
    
    
    1,998,989October 2006
    
    
    225,188
    
    
    
    25.51
    
    
    
    5,744,546803,764
    
    
    
    
    
    
    $
    20,504,020
   Outstanding Convertible Debt Issuances
 May 2006(1)
    
    July 2006(1)
    
    October 2006(1)Amount of debenture (millions)
    
    $
    20.0
    
    
    $
    2.5
    
    
    $
    7.5Per share conversion price on debenture
    
    $
    25.51
    
    
    $
    25.51
    
    
    $
    25.51Interest rate
    
    
    7.5
    %
    
    
    7.5
    %
    
    
    7.5
    %Term of debenture
    
    42 months

    
    42 months

    
    42 monthsWarrants issued
    
    
    274,406
    
    
    
    34,370
    
    
    
    102,835Term of warrants
    
    60 months

    
    60 months

    
    60 monthsPer share exercise price of warrants
    
    $
    28.06
    
    
    $
    28.06
    
    
    $
    28.06Fair value per warrant at issuance
    
    $
    26.03
    
    
    $
    23.89
    
    
    $
    22.13Value per share conversion feature at issuance
    
    $
    18.80
    
    
    $
    19.21
    
    
    $
    19.57Stock price on date of agreement
    
    $
    32.25
    
    
    $
    29.28
    
    
    $
    26.81Stock volatility at issuance
    
    
    106
    %
    
    
    111
    %
    
    
    117
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Risk-free interest rate at issuance
    
    
    4.88
    %
    
    
    4.88
    %
    
    
    4.65
    %Converted
    
    Partial
    

    Partial

    
    PartialWarrants exercised
    
    No

    
    No

    
    Partial
 
 (1)
    
    The May 2006, July 2006 and October 2006 issuances had a beneficial conversion feature. 28




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##### Table of Contents



Warrant and Conversion Features
   Three months ended March 31, 2007
    
    
    Six months ended March 31, 2007Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    Features
    
    
    Total
    
    
    Warrants
    
    
    Features
    
    
    TotalJanuary 2004 issuance  mark to market
    
    $
    (276
    )
    
    $
    
    
    
    $
    (276
    )
    
    $
    (72
    )
    
    $
    
    
    
    $
    (72
    )Loss on value of warrants and
conversion feature
    
    $
    (276
    )
    
    $
    
    
    
    $
    (276
    )
    
    $
    (72
    )
    
    $
    
    
    
    $
    (72
    )
 Amortization of Financing Fees and Debt Discount
    Three months ended March 31, 2008
    
    
    Six months ended March 31, 2008Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    Feature
    
    
    Total
    
    
    Warrants
    
    
    Feature
    
    
    TotalMay 2006 issuance
    
    $
    550
    
    
    $
    812
    
    
    $
    1,362
    
    
    $
    964
    
    
    $
    1,422
    
    
    $
    2,386July 2006 issuance
    
    
    59
    
    
    
    71
    
    
    
    130
    
    
    
    120
    
    
    
    146
    
    
    
    266October 2006 issuance
    
    
    82
    
    
    
    95
    
    
    
    177
    
    
    
    213
    
    
    
    246
    
    
    
    459$
    691
    
    
    $
    978
    
    
    
    1,669
    
    
    $
    1,297
    
    
    $
    1,814
    
    
    
    3,111Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    174
    
    
    
    
    
    
    
    
    
    
    
    287Total
    
    
    
    
    
    
    
    
    
    $
    1,843
    
    
    
    
    
    
    
    
    
    
    $
    3,398
 Three months ended March 31, 2007
    
    
    Six months ended March 31, 2007Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    Feature
    
    
    Total
    
    
    Warrants
    
    
    Feature
    
    
    TotalSeptember 2005 issuance
    
    $
    85
    
    
    $
    
    
    
    $
    85
    
    
    $
    158
    
    
    $
    
    
    
    $
    158December 2005 issuance
    
    
    155
    
    
    
    
    
    
    
    155
    
    
    
    285
    
    
    
    
    
    
    
    285February 2006 issuance
    
    
    1,818
    
    
    
    1,870
    
    
    
    3,688
    
    
    
    1,830
    
    
    
    1,882
    
    
    
    3,712
 29




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##### Table of Contents



Three months ended March 31, 2007
    
    
    Six months ended March 31, 2007Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    Feature
    
    
    Total
    
    
    Warrants
    
    
    Feature
    
    
    TotalMay 2006 issuance
    
    
    42
    
    
    
    63
    
    
    
    105
    
    
    
    345
    
    
    
    509
    
    
    
    854July 2006 issuance
    
    
    40
    
    
    
    49
    
    
    
    89
    
    
    
    65
    
    
    
    80
    
    
    
    145October 2006 issuance
    
    
    66
    
    
    
    76
    
    
    
    142
    
    
    
    107
    
    
    
    123
    
    
    
    230$
    2,206
    
    
    $
    2,058
    
    
    
    4,264
    
    
    $
    2.790
    
    
    $
    2,594
    
    
    
    5,384Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    413
    
    
    
    
    
    
    
    
    
    
    
    596Total
    
    
    
    
    
    
    
    
    
    $
    4,677
    
    
    
    
    
    
    
    
    
    
    $
    5,980
 The carrying values of unamortized debt discount and financing fees are as follows (amounts in thousands):
 March 31, 2008ConversionWarrants
    
    
    Feature
    
    
    TotalMay 2006 issuance
    
    $
    3,067
    
    
    $
    4,528
    
    
    $
    7,595July 2006 issuance
    
    
    427
    
    
    
    514
    
    
    
    941October 2006 issuance
    
    
    640
    
    
    
    737
    
    
    
    1,377$
    4,134
    
    
    $
    5,779
    
    
    
    9,913Debt acquisition cost and financing fees
    
    
    
    
    
    
    
    
    
    
    644Total
    
    
    
    
    
    
    
    
    
    $
    10,557
 September 30, 2007ConversionWarrants
    
    
    Feature
    
    
    TotalMay 2006 issuance
    
    $
    4,728
    
    
    $
    6,981
    
    
    $
    11,709July 2006 issuance
    
    
    403
    
    
    
    485
    
    
    
    888October 2006 issuance
    
    
    1,236
    
    
    
    1,422
    
    
    
    2,658$
    6,367
    
    
    $
    8,888
    
    
    
    15,255Debt acquisition cost and financing fees
    
    
    
    
    
    
    
    
    
    
    985Total
    
    
    
    
    
    
    
    
    
    $
    16,240
 Legal
   30




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##### Table of Contents



NEW ACCOUNTING PRONOUNCEMENTS
  31




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
    32




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
    
    
    The Company did not maintain effective entity level controls and procedures to prevent
certain accounting entries from being recorded prior to formal documentation of the
arrangements being obtained. Specifically, the Company lacked effective policies and
procedures for the review of revenue associated with certain customers sales contracts.
Additionally, the Company lacked effective policies and procedures to insure use of an
appropriate measurement date for the valuation of certain share-based payments (i.e., stock
options).
    
    The Company did not maintain effective policies and procedures related to the assessment
of reserves for possible liability arising from certain litigation matters.
  Changes in Internal Control Over Financial Reporting
  33




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##### Table of Contents



Managements Remediation Initiatives and Interim Measures
   
    
    Periodic meetings involving senior management, accounting and financial reporting
personnel, and applicable department responsible for contract oversight to confirm
documented terms and conditions have not been altered; and
    
    Review by financial reporting department of all existing significant contracts (and
establish requirement of all future contracts) for accounting implications, and
preparation of and approval by Chief Financial Officer of memo summarizing proper
accounting treatment.
  
    
    Establish formal policies and procedures in the granting and allocation process to
ensure that the measurement date and the grant date are the same;
    
    Establish formal policies and procedures to develop inter-departmental communication
protocol whereby the share-based compensation administrator will timely notify
accounting personnel of grants, modifications to grants, or other relevant information
so that accounting can make the necessary fair value adjustments;
    
    A member of our financial reporting and human resources groups will be consulted in
respect to assisting the share-based compensation administrator in the oversight of
documentation and accounting for all stock option grants; and
    
    Enhance the knowledge base of our personnel including providing instruction to the
share-based compensation administrator, Vice-President-Human Resources, Compensation
Committee and Chief Executive Officer regarding the definition of measurement date
issues for subsequent administration and instruction regarding the requirements of FAS
123(R) so they can properly account for share-based compensation.
  
    
    Liability requirements as quantified by the accounting and financial reporting
departments will be reviewed by the Audit Committee and outside legal counsel on a
quarterly basis; and
    
    Outside accounting professionals, when deemed necessary, will be consulted to assist
with interpretation and clarification of accounting standards.
 34




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##### Table of Contents



ZOLTEK COMPANIES, INC.
 
 PART II. OTHER INFORMATION
 
   
  Governmental investigations or proceedings could materially affect us.
   
    For Director
    
    FOR
    
    AGAINST
    
    ABSTAINZsolt Rumy
    
    
    22,795,847
    
    
    
    5,340,730
    
    
    
    1,189,250Charles A. Dill
    
    
    27,821,301
    
    
    
    315,276
    
    
    
    1,189,250
  
  35




---



##### Table of Contents



Number of VotesFOR
    
    
    12,276,760AGAINST
    
    
    8,934,049ABSTAIN
    
    
    85,015
   Number of VotesFOR
    
    
    17,875,453AGAINST
    
    
    3,348,375ABSTAIN
    
    
    71,996
   Number of VotesFOR
    
    
    29,138,671AGAINST
    
    
    147,125ABSTAIN
    
    
    40,031
  
   36




---



##### Table of Contents



SIGNATURE
  Zoltek Companies, Inc.(Registrant)Date:
June 26, 2008
    
    By:
    
    /s/ ZSOLT RUMY

Zsolt RumyChief Executive Officer and Chief Financial Officer
 37




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description of Document10.1
    
    Employment Agreement with Karen Bomba dated March 1, 2008, is filed herewith.31.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities
Exchange Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 38