<PAGE>


                     SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, DC 20549




                                  FORM 10-Q

              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                   OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarter ended December 31, 2003            Commission File No. 0-20600
                      -----------------                                -------


                           ZOLTEK COMPANIES, INC.
                           ----------------------
           (Exact name of registrant as specified in its charter)

         Missouri                                              43-1311101
         --------                                              ----------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                             Identification No.)

3101 McKelvey Road, St. Louis, Missouri                          63044
---------------------------------------                          -----
(Address of principal executive offices)                       (Zip Code)

Registrant's telephone number, including area code:  (314) 291-5110

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  X   No
    ---     ---

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-25 of the Act).
Yes      No  X
    ---     ---

Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: As of February
17, 2004, 16,343,338 shares of Common Stock, $.01 par value, were
outstanding.



<PAGE>
<PAGE>


PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

<TABLE>
                                                    ZOLTEK COMPANIES, INC.

                                                  CONSOLIDATED BALANCE SHEET
                                                  --------------------------
                                 (Amounts in thousands, except share and per share amounts)
                                                         (Unaudited)

<CAPTION>
                                                                                             DECEMBER 31,     SEPTEMBER 30,
ASSETS                                                                                           2003              2003
---------------------------------------------------------------------------------------------------------------------------

<S>                                                                                            <C>              <C>
Current assets:
     Cash and cash equivalents................................................................ $     192        $    838
     Accounts receivable, less allowance for doubtful accounts of $962 and
       $931, respectively.....................................................................    10,405          10,380
     Inventories..............................................................................    28,437          26,978
     Other current assets.....................................................................     1,857           1,483
                                                                                               ---------        --------
          Total current assets................................................................    40,891          39,679
Property and equipment, net...................................................................    77,554          77,373
Other assets..................................................................................     2,029           2,403
                                                                                               ---------        --------
          Total assets........................................................................ $ 120,474        $119,455
                                                                                               =========        ========

LIABILITIES AND SHAREHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------------------
Current liabilities:
     Actual current maturities of long-term debt.............................................. $  12,946        $    933
     Trade accounts payable...................................................................    15,491          11,892
     Notes payable............................................................................     1,719           2,916
     Note payable to related party............................................................     1,400               -
     Accrued expenses and other liabilities...................................................     5,411           5,148
                                                                                               ---------        --------
          Total current liabilities...........................................................    36,967          20,889
Other long-term liabilities...................................................................       574             509
Long-term debt, less current maturities.......................................................    20,920          33,541
                                                                                               ---------        --------
          Total liabilities...................................................................    58,461          54,939
                                                                                               ---------        --------

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,
       16,343,338 and 16,307,338 shares issued and outstanding, respectively..................       163             163
     Additional paid-in capital...............................................................   109,290         109,290
     Retained deficit.........................................................................   (36,228)        (32,505)
     Accumulated other comprehensive loss.....................................................   (11,212)        (12,432)
                                                                                               ---------        --------
          Total shareholders' equity..........................................................    62,013          64,516
                                                                                               ---------        --------
          Total liabilities and shareholders' equity ......................................... $ 120,474        $119,455
                                                                                               =========        ========

                 The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>


                                     2

<PAGE>
<PAGE>

<TABLE>
                                                    ZOLTEK COMPANIES, INC.

                                            CONSOLIDATED STATEMENT OF OPERATIONS
                                            ------------------------------------
                                        (Amounts in thousands, except per share data)
                                                          (Unaudited)

<CAPTION>
                                                                                               THREE MONTHS ENDED DECEMBER 31,
                                                                                               -------------------------------
                                                                                                  2003                2002
------------------------------------------------------------------------------------------------------------------------------

<S>                                                                                              <C>                <C>
Net sales....................................................................................... $13,331            $16,959
Cost of sales, excluding available unused capacity costs........................................  12,180             14,902
Available unused capacity costs.................................................................   1,431              1,326
Application and development costs...............................................................     747                895
Selling, general and administrative expenses....................................................   2,128              2,664
                                                                                                 -------            -------
     Operating loss from continuing operations..................................................  (3,155)            (2,828)
Other income (expense):
     Interest expense...........................................................................    (657)              (478)
     Interest income............................................................................      12                 20
     Other, net.................................................................................     155                (19)
                                                                                                 -------            -------
         Loss before income taxes...............................................................  (3,645)            (3,305)
Income tax expense (benefit)....................................................................      78               (135)
                                                                                                 -------            -------
Net loss........................................................................................ $(3,723)           $(3,170)
                                                                                                 =======            =======

Net loss per share:
     Basic and diluted loss per share........................................................... $ (0.23)           $ (0.19)
                                                                                                 =======            =======

Weighted average common shares outstanding......................................................  16,310             16,297

                   The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                     3

<PAGE>
<PAGE>

<TABLE>
                                                   ZOLTEK COMPANIES, INC.

                                           CONSOLIDATED STATEMENT OF CASH FLOWS
                                           ------------------------------------
                                                  (Amounts in thousands)
                                                        (Unaudited)

<CAPTION>
                                                                                              THREE MONTHS ENDED DECEMBER 31,
                                                                                              -------------------------------
                                                                                                  2003             2002
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                             <C>              <C>
Cash flows from operating activities:
      Net loss................................................................................  $(3,723)         $(3,170)
      Adjustments to reconcile net loss to net cash
        provided (used) by operating activities:
           Depreciation and amortization......................................................    1,563            1,571
           Foreign currency transaction (gains) losses........................................       57             (188)
           Other, net.........................................................................      (36)              (5)
           Changes in assets and liabilities:
                 Decrease in accounts receivable..............................................      243              570
                 (Increase) decrease in inventories...........................................     (747)             539
                 (Increase) decrease in prepaid expenses and other assets.....................       34             (904)
                 Increase in trade accounts payable...........................................    2,836            2,295
                 (Decrease) in accrued expenses and other liabilities.........................   (1,116)            (309)
                 Increase (decrease) in other long-term liabilities...........................      171             (179)
                                                                                                -------          -------
                      Total adjustments.......................................................    3,005            3,390
                                                                                                -------          -------
      Net cash provided (used) by operating activities........................................     (718)             220

Cash flows from investing activities:
           Payments for purchase of property and equipment....................................     (470)            (345)
           Proceeds from sale of property and equipment.......................................      119               15
                                                                                                -------          -------
      Net cash used by investing activities...................................................     (351)            (330)

Cash flows from financing activities:
           Proceeds from issuance of notes payable............................................      467              303
           Proceeds from issuance of note payable to related party............................    1,400                -
           Repayment of notes payable.........................................................   (1,425)            (199)
                                                                                                -------          -------
Net cash provided by financing activities.....................................................      442              104
Effect of exchange rate changes on cash.......................................................      (19)               4
                                                                                                -------          -------
Net increase (decrease) in cash...............................................................     (646)              (2)
Cash and cash equivalents at beginning of period..............................................      838              685
                                                                                                -------          -------
Cash and cash equivalents at end of period....................................................  $   192          $   683
                                                                                                =======          =======

Supplemental disclosures of cash flow information:
Net cash paid during the period for:
     Interest.................................................................................  $   531          $   473
     Income taxes.............................................................................  $     -          $    94

                  The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                     4

<PAGE>
<PAGE>


                           ZOLTEK COMPANIES, INC.

            NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
            ----------------------------------------------------

1.   BASIS OF PRESENTATION AND ACCOUNTING POLICIES

The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements and should be read in conjunction with the Company's 2003 Annual
Report to Shareholders, which includes consolidated financial statements and
notes thereto for the fiscal year ended September 30, 2003. In the opinion
of management, all normal recurring adjustments and estimates considered
necessary for a fair presentation have been included. Certain
reclassifications have been made to conform prior year's data to the current
presentation. The results for the period ended December 31, 2003 are not
necessarily indicative of the results which may be expected for the fiscal
year ending September 30, 2004.

The unaudited interim consolidated financial statements include the accounts
and transactions of the Company and its wholly-owned subsidiaries.
Adjustments resulting from the translation of financial statements of the
Company's foreign subsidiaries are reflected as other comprehensive income
(loss) within shareholders' equity. Gains and losses from foreign currency
transactions are included in the results of operations. All significant
inter-company transactions and balances have been eliminated upon
consolidation.

2.   FINANCING

As of December 31, 2003, the Company was not in compliance with essentially
all financial covenants requirements included in the credit facility with
its bank. The subordinated convertible debentures contain certain
cross-default provisions related to the Company's other debt agreements. The
covenant non-compliances under the Company's senior U.S. credit facility at
December 31, 2003 resulted in the possibility of a default event being
declared by the subordinated convertible debenture holders, which would
result in that debt being immediately due and payable. As a result of the
2004 refinancing transactions described below, the Company obtained waivers
of the covenant non-compliance with the covenants included in the loan
agreement as of December 31, 2003. Additionally, the Company obtained
financial covenant waivers for all periods through February 13, 2005.

2004 Refinancing
----------------

In January 2004, the Company issued and sold convertible debentures in the
aggregate principal amount of $7.0 million to institutional private equity
and other investors (including $250,000 to each of Mr. Rumy and Mr.
McDonnell who are members of the Company's Board of Directors). The
convertible debentures have a stated maturity of 30 months and bear interest
at 6% per annum and are convertible into common stock shares at $5.40 per
share for each investor other than Messrs. Rumy and McDonnell and $5.42 per
share for each of Messrs. Rumy and McDonnell. The Company also issued to the
investors five-year warrants to purchase an aggregate of 323,994 shares of
common stock of the Company at an exercise price of $5.40 per share for each
investor other than Messrs. Rumy and McDonnell and $5.42 per share for each
of Messrs. Rumy and McDonnell. Proceeds from the issuance of these
convertible debentures will be used for working capital purposes.

As part of the Company's refinancing, the bank lender to the Company's
Hungarian subsidiary amended certain financial covenants and extended the
maturity date of its loan to December 31, 2004. In connection with such
actions, the bank required that the Company make arrangements to settle
intercompany accounts payable by Zoltek U.S. operations to its Hungarian
subsidiary in the amount of approximately $2.8 million. The bank was
unwilling to keep open its offer to restructure Zoltek Rt.'s loans until
after the Company's refinancing package was completed. Prior to the
refinancing, the Company did not have cash on hand or available borrowings
that would enable it to make the settlement of the intercompany accounts
required by the Hungarian bank. In order to proceed expeditiously to resolve
the Company's financing requirements, Zsolt Rumy, the Company's Chief
Executive Officer and a director of the Company, loaned the Company $1.4
million in cash and posted a $1.4 million letter of credit for the benefit
of the Company. This arrangement was approved by the Company's board of
directors and audit committee. The loan by Mr. Rumy bears interest on the
amount advanced and the notional amount of the letter of credit at a rate
per annum equal to LIBOR plus 11% with a LIBOR floor of 2%, the same
interest rate of the mortgage financing discussed below. As a result of the
Company completing the refinancing transactions making available the cash to
settle the intercompany accounts, the letter of credit has been released.
The $1.4 million loan remains outstanding and the Company expects to repay
it during the current fiscal year.

The Company also entered into a mortgage note with a bank in the aggregate
principal amount of $6.0 million. The note has a stated maturity of three
years and bears interest at a rate of LIBOR plus 11% with a LIBOR floor of
2%. The Company will pay interest only on a monthly basis with principal
balance due at time of maturity. The loan is collateralized by a security
interest in the Company's headquarters facility and its two U.S. carbon
fiber manufacturing facilities. The proceeds of this transaction were used
to pay down debt of $6.0 million with its U.S. bank. Of such proceeds, $0.5
million is currently held in an escrow account to be released when the


                                     5

<PAGE>
<PAGE>

Company completes certain post-closing requirements with respect to the
loan. The Company expects the conditions will be met in February 2004.

Due to the refinancing received subsequent to the Company's fiscal year end,
the Company's U.S. bank waived the financial covenant non-compliance as of
December 31, 2003, and waived all financial covenants through February 13,
2005. Accordingly, the holders of the subordinated debentures have no right
to accelerate maturity. Additionally, the expiration of the Company's
revolving credit loan was extended from January 31, 2004 to January 31,
2005. The refinancing allows the Company to execute its 2004 business plan,
which was uncertain until the refinancing occurred. The Company will require
further refinancing in fiscal 2005 and beyond. However, the Company can give
no assurance that it will be successful in its attempt to obtain new
financing and if the Company is unsuccessful, it would have a material
adverse effect on its future financial condition and its ability to continue
to pursue its current business plan.

2003 Refinancing
----------------

The Company executed an amended credit facility agreement, dated as of
February 13, 2003, with the U.S. bank. The amended credit facility agreement
is structured as a term loan in the amount of $3.5 million (due February 13,
2005) and a revolving credit loan in the amount of $5.0 million (originally
due January 31, 2004, now due January 31, 2005 - see above). The Company
repaid $5.0 million of this loan from the proceeds of the sale of
subordinated convertible debentures as discussed below. Borrowings under the
amended facility are based on a formula of eligible accounts receivable and
inventories of the Company's U.S.-based subsidiaries. The outstanding loans
under the agreement bear interest at the prime interest rate plus 2% per
annum. The loan agreement contains quarterly financial covenants related to
borrowings, working capital, debt coverage, current ratio and capital
expenditures. Total borrowings under the revolving credit agreement were
$4.6 million and the available credit under this agreement was $0.4 million
at September 30, 2003.

The Company also entered into a debenture purchase agreement, dated as of
February 13, 2003, under which the Company issued and sold to 14 investors,
including certain directors, subordinated convertible debentures in the
aggregate principal amount of $8.1 million. The subordinated convertible
debentures have stated maturities of five years, bear interest at 7% per
annum and are convertible into an aggregate of 2,314,286 shares of common
stock of the Company at a conversion price of $3.50 per share. The Company
also issued to the investors five-year warrants to purchase an aggregate of
405,000 shares of common stock of the Company at an exercise price of $5.00
per share. The fair value of the warrants, at the time of issuance, was
estimated to be $376,650. Proceeds from the issuance of these convertible
debentures were used to repay existing borrowings as well as for working
capital.

Credit Facilities
-----------------

The Company's financing of its U.S. operations is separate from that of its
Hungarian operations. Availability of credit is based on the collateral
value at each operation. However, the covenants of the term loan and
revolving line of credit from a U.S. bank, which has been waived through
February 13, 2005, apply to the Company on a consolidated basis.

US Operations - In May 2001, the Company entered into a two-year credit
facility with a U.S. bank in the amount of $14.0 million. The credit
facility was originally structured as a term loan in the amount of $4.0
million and a revolving credit loan in the amount of $10.0 million. As
discussed above, in February 2003, the term loan was reduced to $3.5 million
and the revolving credit loan was reduced to $5.0 million. In consideration
for certain amendments and waivers to the credit facility, the interest rate
on the term and revolving credit loans was adjusted to the prime rate plus
1.0% per annum.

Hungarian Operations - In May 2001, the Company's Hungarian subsidiary
entered into a credit facility with a Hungarian bank. The facility consists
of a $6.0 million bank guarantee and factoring facility, a $4.0 million
capital investment facility and a $2.0 million working capital facility. All
of the Hungarian bank debt is due on December 31, 2004.

In March 2003, the Company's Hungarian subsidiary entered into a credit
agreement with another Hungarian bank for $2.2 million. The facility
consists of a bank guarantee, factoring and mortgages and expires December
31, 2004.

Total borrowings of the Hungarian subsidiary were $11.9 million at December
31, 2003, all of which have been classified as current due to their stated
maturity of December 31, 2004. Borrowings under the Hungarian bank credit
facilities cannot be used in Zoltek's U.S. operations.

                                     6

<PAGE>
<PAGE>

3.   COMPREHENSIVE LOSS

Comprehensive loss for the quarters ended December 31, 2003 and 2002 was as
follows (in thousands):

<TABLE>
<CAPTION>
                                                              2003           2002
                                                             -------        -------
<S>                                                          <C>            <C>
          Net loss.......................................... $(3,723)       $(3,170)
          Foreign currency translation adjustment...........  (1,220)         2,550
                                                             -------        -------
          Comprehensive loss................................ $(2,503)       $  (620)
                                                             =======        =======
</TABLE>

4.   STOCK OPTION PLAN

At December 31, 2003, the Company had stock-based employee compensation
plans. The Company accounts for those plans under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25 ("APB
25"), Accounting for Stock Issued to Employees, and its related
interpretations. No stock-based employee compensation costs are reflected in
net loss, as all options granted under those plans had an exercise price
equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net loss and loss per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123 ("FAS 123"), Accounting
for Stock Based Compensation, to stock-based employee compensation (in
thousands, except per share):

<TABLE>
<CAPTION>
                                                                       THREE MONTHS ENDED DECEMBER 31,
                                                                       -------------------------------
                                                                            2003             2002
                                                                           -------          -------
<S>                                                                        <C>              <C>
         Reported net loss..............................................   $(3,723)         $(3,170)
         Total stock-based employee compensation expense
           determined under fair value based method for all awards,
           net of tax effects...........................................       (13)             (51)
                                                                           -------          -------
         Pro forma net loss.............................................   $(3,736)         $(3,221)
                                                                           =======          =======
         Reported basic and diluted loss per share......................   $ (0.23)         $ (0.19)
         Pro forma basic and diluted loss per share.....................   $ (0.23)         $ (0.20)
</TABLE>

5.   SEGMENT INFORMATION

The Company's strategic business units are based on product lines and have
been presented as three reportable segments: Carbon Fibers, Technical Fibers
and Specialty Products. Effective in the fourth quarter of fiscal year 2003,
the Company began reporting the former Carbon Fibers segment as two
reportable segments: Carbon Fibers and Technical Fibers. The Company made
this change based on the current economic characteristics of these two
operating segments. Segment information for the first quarter of fiscal 2003
has been reclassified to reflect this change. The Company's former Composite
Intermediates segment was combined with the Carbon Fibers segment in the
third quarter of fiscal 2002 to reflect that its products and services are
now strategically focused on the Company's strategy of commercializing the
use of carbon fibers as reinforcement in advanced composite materials,
including providing composite design and engineering services for
development of applications for carbon fiber reinforced composites.
Effective with the third quarter of fiscal 2002, Company management reviewed
the performance of each of these two segments, allocated resources between
these segments and reported on the overall financial and operating
performance of each to the chief executive officer of the Company. Segment
data for the comparable periods for fiscal year 2001 and 2002 has been
restated to reflect this change.

The Carbon Fibers segment manufactures low-cost carbon fibers used as
reinforcement material in composites, carbon fiber composite products and
filament winding equipment used in the composite industry. The Technical
Fibers segment manufactures aircraft brakes and oxidized acrylic fibers for
heat/fire barrier applications. These two segments also facilitate
development of product and process applications to increase the demand for
carbon fibers and technical fibers and aggressively market carbon fibers and
technical fibers. The Carbon Fibers and Technical Fibers segments are
located geographically in the United States and Hungary. The Specialty
Products segment manufactures and markets acrylic and nylon products and
fibers primarily to the textile industry and is located in Hungary. With the
exception of the Technical Fibers segment, none of the segments are
substantially dependent on sales from one customer nor a small group of
customers


                                     7

<PAGE>
<PAGE>


Management evaluates the performance of its operating segments on the basis
of operating income (loss) contribution to the Company. The following table
presents financial information on the Company's operating segments as of and
for the first quarter ended December 31, 2003 and 2002 (amounts in
thousands):

<TABLE>
<CAPTION>
                                                                               THREE MONTHS ENDED DECEMBER 31, 2003
                                                                               ------------------------------------
                                                                                                       Corporate
                                                                                                     Headquarters
                                                          Technical       Carbon       Specialty         and
                                                           Fibers         Fibers        Products     Eliminations        Total
                                                          ---------      -------       ---------     ------------      -------
<S>                                                         <C>          <C>             <C>           <C>             <C>
Net sales............................................       $3,281       $ 2,610         $7,440        $     -         $13,331
Net sales - intersegment.............................            -         1,269              -         (1,269)              -
Cost of sales, excluding available unused capacity...        2,785         3,518          6,989         (1,112)         12,180
Available unused capacity expenses...................            -         1,431              -              -           1,431
Operating (loss) income..............................          165        (1,929)          (605)          (786)         (3,155)
Depreciation and amortization expense................          156         1,102            278             27           1,563
Capital expenditures.................................           90           124            216             40             470

<CAPTION>
                                                                               THREE MONTHS ENDED DECEMBER 31, 2002
                                                                               ------------------------------------
                                                                                                       Corporate
                                                                                                     Headquarters
                                                          Technical       Carbon       Specialty         and
                                                           Fibers         Fibers        Products     Eliminations        Total
                                                          ---------      -------       ---------     ------------      -------
<S>                                                         <C>          <C>             <C>           <C>             <C>
Net sales............................................       $3,593       $ 3,571         $9,795         $     -        $16,959
Net sales - intersegment.............................            -         1,583              -          (1,583)             -
Cost of sales, excluding available unused capacity...        2,700         4,663          9,109          (1,570)        14,902
Available unused capacity expenses...................            -         1,326              -               -          1,326
Operating (loss) income..............................          388        (2,026)          (523)           (667)        (2,828)
Depreciation and amortization expense................          259         1,015            228              69          1,571
Capital expenditures.................................           43           220             82               -            345

<CAPTION>
                                                                                       TOTAL ASSETS
                                                                                       ------------
                                                                                                       Corporate
                                                                                                     Headquarters
                                                          Technical       Carbon       Specialty         and
                                                           Fibers         Fibers        Products     Eliminations        Total
                                                          ---------      -------       ---------     ------------      --------
<S>                                                        <C>           <C>            <C>            <C>             <C>
December 31, 2003....................................      $17,801       $65,211        $38,047        $  (585)        $120,474
September 30, 2003...................................       22,611        66,226         32,569         (1,951)         119,455
</TABLE>

<TABLE>
GEOGRAPHIC INFORMATION (UNAUDITED) / (AMOUNTS IN THOUSANDS)
-----------------------------------------------------------
<CAPTION>
                                                                    REVENUES (1)
                                                               ---------------------          LONG-LIVED ASSETS (2)
                                                                 THREE MONTHS ENDED      ------------------------------
                                                                    DECEMBER 31,         DECEMBER 31,     SEPTEMBER 30,
                                                                 2003          2002         2003              2003
                                                               -------       -------       -------           -------
<S>                                                            <C>           <C>           <C>               <C>
United States................................................. $ 4,348       $ 6,458       $45,122           $45,936
Hungary.......................................................   8,983        10,501        32,432            31,436
                                                               -------       -------       -------           -------
Total......................................................... $13,331       $16,959       $77,554           $77,373
                                                               =======       =======       =======           =======

<FN>
--------
(1)  Revenues are attributed to the entity recognizing the sale in the
     interim statements, as it is not practical to accumulate every
     customer's country of domicile on an interim basis.

(2)  Property and equipment and intangibles, net of accumulated depreciation
     and amortization, are based on country location of assets.
</TABLE>


                                     8

<PAGE>
<PAGE>


6.   INVENTORIES

Inventories consist of the following (amounts in thousands):

<TABLE>
<CAPTION>

                                                            DECEMBER 31,  SEPTEMBER 30,
                                                               2003           2003
                                                            ------------  -------------
<S>                                                           <C>           <C>
         Raw materials.....................................   $ 5,908       $ 4,859
         Work-in-process...................................     1,051         1,132
         Finished goods....................................    20,272        19,057
         Supplies, spares and other........................     1,206         1,930
                                                              -------       -------
                                                              $28,437       $26,978
                                                              =======       =======
</TABLE>

The Company has undertaken aggressive steps to sell carbon fiber inventories
to improve its cash flow. The Company has decreased the actual inventory by
$0.2 million but this decrease was offset by the significant increase in the
value of the Hungarian currency against the U.S. Dollar, which has increased
the carrying value of the Hungarian inventory.

7.   NEW ACCOUNTING POLICIES

The FASB issued FASB Interpretation No. 46 "Consolidation of Variable
Interest Entities" in January 2003 and issued its deferral in FASB
Interpretation No. 46-R "Consolidation of Variable Interest Entities" (FIN
No. 46-R) in December 2003, which addressed the requirements for
consolidating certain variable interest entities. Variable interest entities
are required to be accounted for under FIN No. 46-R, as revised in December
2003. FIN No. 46-R applied immediately to variable interest entities created
after January 31, 2003 and to variable interest entities that are considered
special purpose entities as of December 31, 2003. FIN No. 46-R applies to
all other variable interest entities as of March 31, 2004. The Company
currently has no interests in entities that are considered special purpose
entities. The company is still evaluating the requirements of FIN 46-R on
the consolidated financial statements but does not expect the impact to be
material.

8.   COMMITMENTS AND CONTINGENCIES

Legal
-----

In October 2003, the Company was named as a defendant in a civil action
filed in the Court of Common Pleas for Cuyahoga County, Ohio by the former
owner of Hardcore Composites Operations, LLC ("Hardcore") alleging breach by
Hardcore and the Company of their respective obligations under a sublease,
the Company's guaranty of the sublease, and prior settlement agreement among
the parties. The former owner's action claims damages from the Company in
the amount of $300,000 for breaches by the Company of its obligations under
the guaranty and the settlement agreement and, in addition, demands $450,000
in damages from the Company and Hardcore, jointly and severally, under the
terms of the settlement agreement. The Company intends to vigorously defend
this matter and assert any counterclaims as appropriate. Management believes
that the ultimate resolution of this litigation will not have a material
adverse effect on the Company's results of operations or financial
condition.

The Company is a party to various claims and legal proceedings arising out
of the normal course of its business. In the opinion of management, the
ultimate outcome of these claims and lawsuits will not have a material
adverse effect upon the financial condition or results of operations of the
Company and its subsidiaries taken as a whole.

Sources of Supply
-----------------

As part of its growth strategy, the Company has developed its own precursor
acrylic fibers and all of its carbon fibers, excluding the aircraft brake
products, are now manufactured from this precursor. The primary source of
raw material for the precursor is ACN (acrylonitrile), which is a commodity
product with multiple sources.

The Company currently obtains most of its acrylic fiber precursor to supply
its carbon fiber operations for the aircraft brake applications from a
single supplier which is the only supplier that currently produces precursor
approved for use in aircraft brake applications. The Company believes this
supplier is a reliable source of supply at the Company's current operating
levels. However, the Company has initiated trials at an aircraft brake
manufacturer with its own precursor-based products, which might protect its
business if there were an interruption in supply from the supplier.

The major materials used by the Specialty Products Business Segment include
acrylonitrile and other basic commodity products, which are widely available
from a variety of sources.

                                     9

<PAGE>
<PAGE>

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

GENERAL
-------

The Company's mission is to commercialize the use of carbon fibers as a
low-cost but high performance reinforcement for composites used as the
primary building material in everyday commercial products. The performance
benefits of carbon fibers - light weight, high strength and stiffness - have
been demonstrated in aerospace applications for many years. Eventually
carbon fibers were introduced in high performance sporting goods, but carbon
fiber's high price and lack of availability prevented it from general
introduction into higher volume commercial applications. The Company has
developed and is implementing a strategy to manufacture and sell carbon
fibers into commercial applications competitive with other materials.

In addition to its underlying strategy to penetrate future markets, the
Company is the leading supplier of carbon fibers, through the technical
fibers segment, to the aircraft brake industry. Also, the Company
participates in traditional carbon fiber markets, such as sporting goods and
conductive thermoplastic manufacturing. The Company also manufactures and
markets oxidized acrylic fibers, an intermediate product of the carbon fiber
manufacturing process, for fire and heat resistant applications. Outside of
the carbon fiber business, the Company sells acrylic and nylon fibers into
the textile markets and manufactures other specialty products in Hungary.
The Company intends to sell or discontinue these products when it can
utilize a significant portion of the acrylic fiber capacity to supply
precursor for its carbon fiber manufacturing operations.

The Company's strategic plan of introducing low-cost carbon fibers into high
potential end uses to attract significant new applications for carbon fiber
reinforced composites in automotive, infrastructure, wind energy, oil and
gas production and other industries has been well received. The Company
believes it is the lowest cost producer of carbon fibers and it is well
positioned to produce sufficient volumes of carbon fibers to satisfy
indicated future demand. The Company is participating in ongoing development
projects and expects that certain of these emerging applications will begin
to generate meaningful orders during fiscal 2004 as described below.

The Company introduced its carbon fibers strategic plan in 1995 to develop a
low-cost process to produce carbon fibers and build significant capacity
while encouraging growth of new applications. As part of its strategy to
establish availability of carbon fibers on a scale sufficient to encourage
growth of large-volume applications, the Company completed a major carbon
fiber production capacity expansion in fiscal 1998 at its Abilene, Texas
facility. While the Company succeeded in developing its infrastructure to
become the low-cost producer, the large volume applications have been slower
to develop than anticipated. Since 1998 total carbon fiber usage has not
grown significantly but the aerospace applications have declined.

The Company believes that market conditions will change. Two major aerospace
applications, the introduction of the Airbus A-380 and the Boeing 7E7 are
expected to absorb excess aerospace fiber capacity, which we anticipate will
result in the divergence of the aerospace and commercial markets for carbon
fibers. We believe that our receipt of 1.8 million pound of carbon fiber
orders from Asian sporting goods manufacturers toward the beginning of this
fiscal year reflects this shift. In the past, sales in this market were
aggressively pursued by aerospace fiber manufacturers willing to sell at
distress prices. These contracts have not yet affected our financial results
because of timing of export licenses and the need for inventory build and
qualification runs. Shipments to these customers have begun on a regular and
routine basis in the second quarter of fiscal 2004.

The disappointing rate of market development caused the Company last year to
reassess its strategy. The Company reconfirmed the validity of the strategy,
however, as a result of that reassessment, the Company has specifically
targeted three significant and emerging applications: wind energy, flame
retardant bedding and home furnishings and automotive. Although the Company
has not yet achieved the sales volume it had expected, development of the
use of carbon fibers is continuing in each of these targeted market
segments.

     o    Wind energy is one of the fastest growing industries globally. The
          desire by consumers and the government support for renewable
          energy has been growing in the past decade. Of all the current
          technologies, wind generated electricity is the most competitive
          and technically viable renewable energy source. The wind turbine's
          ability to generate electricity is increased by the square of its
          blade length. With 55-60 meter (approximately 175-200 feet) long
          blades, a wind turbine can generate 3 MW of electricity at costs
          competitive with fossil fuels. All the major wind turbine
          manufacturers have announced plans to introduce such large
          turbines in 2004. The length of these blades requires the use of
          carbon fibers. The Company has put forth a significant effort to
          qualify and certify our Panex(R)-35 fibers for this application.

          The largest supplier of wind turbines has approved the Company as a
          one of two sources of carbon fiber for the production of blades
          and we expect significant carbon fiber orders from this
          application in fiscal 2004. Another significant blade manufacturer
          has now begun using our fibers. Also, the Company's Entec
          subsidiary has signed an agreement with the second largest
          supplier of wind turbines to build machinery to make the blades
          for the wind turbines with an automated process, which the Company
          believes will lead to meaningful carbon fiber sales beginning in
          the latter part of 2004.

     o    It is expected that consumer product safety standards that
          regulate flame-retardant bedding and furniture will begin to be
          enforced by the State of California starting in 2005. The first
          regulations in place relate to the mattress products. The Company,
          in cooperation with a major supplier to the mattress industry, has
          developed a solution for the regulations put in


                                     10

<PAGE>
<PAGE>

          place by the State of California. The Company believes its PYRON(R)
          products will offer the best and most economical solution for this
          application in large segments of the market. U.S. federal
          regulations are expected to be substantially similar to California
          and are scheduled to be in place January 1, 2005. In view of
          recent legal developments regarding implementation of these laws
          and rules at this time it is not clear when the industry will
          implement the introduction of the flame resistant mattresses.
          However, it is the Company's belief that the potential exposure to
          product liability eventually will force the industry to comply and
          do so across the United States. The Company is already selling its
          products to institutional mattress manufacturers and expects sales
          to begin in consumer markets in fiscal 2004.

     o    The Company believes that use of carbon fibers in automobiles will
          become the most significant application within 10 years. The
          performance properties of carbon fiber reinforced composites can
          reduce the weight of a car by 60% versus steel and 35% versus
          aluminum. This allows either a significant improvement in the
          car's performance and/or fuel consumption. Both are significant
          attributes for the automobile industry. The Company has been
          working with BMW exclusively to efficiently and reliably produce
          structural parts for automobiles. The results from this
          development work have been favorable. As a result, the Company
          believes that the introduction of carbon fibers in series
          production cars will occur within the next few years. The Company
          anticipates that significant orders eventually will be forthcoming
          from BMW.

          In addition to BMW, the Company has worked with a number of other
          auto companies and their vendors. Current indications are that
          a number of other applications are coming to fruition. We expect
          that several component made with our carbon fibers will appear on
          series production cars by 2005.

Carbon fiber sales in current markets have been depressed. The aircraft
brake business which has been the Company's strongest market, has been
significantly affected by the events of 9/11 and the subsequent major
reduction in the number of aircraft in service and the reduced build rate of
new aircraft. The other existing commercial carbon fiber markets have been
affected by excess capacity across the industry and distressed pricing
across most existing markets. The Company's strategy for near-term sales
increases was to rely primarily on what had been growing commercial markets
(conductive plastics used in electronic products and sporting goods). With
the new orders in place and additional indications for significant orders,
the Company is planning to restart its major carbon fiber manufacturing
facility in Abilene, Texas which has been temporarily idled. Maintaining
this excess capacity has been costly, but the Company believed it is
necessary to assure customers of adequate supply and encourage them to shift
to carbon fibers from other materials. With the reactivation of the plant,
unused capacity costs will diminish and, ultimately, disappear. The Company
also moved its fiber prepreg facilities from San Diego to Salt Lake City in
the first quarter of fiscal 2004. This facility will be ready for production
in March 2004 with a much improved facility and cost base.

RESULTS OF OPERATIONS
---------------------

THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THREE MONTHS ENDED
-------------------------------------------------------------------
DECEMBER 31, 2002
-----------------

The Company's sales decreased 21.3%, or $3.6 million, to $13.3 million in
the first quarter of fiscal 2004 from $17.0 million in the first quarter of
fiscal 2003. Technical fiber sales decreased 8.6%, or $0.3 million, to $3.3
million in the first quarter fiscal 2004 from $3.6 million in the first
quarter fiscal 2003. Technical fiber sales decreased due to depressed demand
from aircraft brake customers, reflecting the worldwide decline in the
airline industry activity, as well as reduced production schedules at the
Company's principal aircraft brake customer in December 2003. That
customer's purchases have resumed to historical levels in the second
quarter-to-date. Carbon fiber sales decreased 25%, or $1.3 million, to $3.9
million in the first quarter of fiscal 2004 from $5.2 million in the first
quarter of fiscal 2003. The carbon fiber sales decrease was related
primarily to the Company's decision to relocate its prepreg operations from
California to Utah to combine its operations with another of the Company's
facilities. Sales for the prepreg operation in the first quarter of fiscal
2003 were $1.8 million compared to $0.4 million in the first quarter of
fiscal 2004 as no prepreg was produced during November and December. The
Company expects to have its prepreg production operational by the beginning
of the third quarter of fiscal 2004. As a result, sales in the second
quarter of fiscal 2004 from these operations will be zero compared to $1.7
million in the second quarter of last year. Sales of the specialty products
business segment decreased 23.6%, or $2.3 million, to $7.4 million in the
first quarter of fiscal 2004 from $9.7 million in the first quarter of
fiscal 2003. The reduced revenue was primarily the result of lower acrylic
fiber production to limit sales at unfavorable profit levels. The Company
expects these depressed conditions impacting the carbon fiber and acrylic
markets to continue during fiscal 2004.

The Company's cost of sales (excluding available unused capacity costs)
decreased by 18.7%, or $2.8 million, to $12.1 million in the first quarter
of fiscal 2004 from $14.9 million in the first quarter of fiscal 2003. The
decrease in cost of sales (excluding available unused capacity costs) was
consistent with the decrease in sales, however, not to the degree of the
sales decline due to both the carbon fiber and specialty fiber products
having been impacted from industry-wide excess capacity that resulted in
distressed pricing across most existing markets and lower sales volume that
has not supported the level of the Company's fixed manufacturing cost.
Technical fiber margins declined as well due to lower sales volumes
attributable to the customer scheduling described above which resulted in
unfavorable overhead absorbsion.

The Company continued to incur costs related to the underutilized productive
capacity for carbon fibers at the Abilene, Texas facilities. These costs
included depreciation and other overhead associated with the unused
capacity. These costs, which were separately identified on the income
statement, were approximately $1.4 million during the first quarter of
fiscal 2004 and $1.3 million


                                     11

<PAGE>
<PAGE>

in the first quarter of fiscal 2003. The Company believes it is necessary to
maintain available capacity to encourage development of significant new
large-scale applications. With the increased orders expected in fiscal 2004,
the Company expects that its unused capacity costs will be eliminated by the
end of fiscal 2005. See additional discussion of the Abilene facility under -
"Liquidity and Capital Resources".

Application and development costs were $747,000 in the first quarter of
fiscal 2004 and $895,000 in the first quarter of fiscal 2003. These costs
included product and market development efforts, product trials and sales
and product development personnel and related travel. Targeted emerging
applications include automobile components, fire/heat barrier and alternate
energy technologies.

Selling, general and administrative expenses were $2.1 million in the first
quarter of fiscal 2004 compared to $2.7 million in the first quarter of
fiscal 2003. The decrease in expense was primarily due to the cost
containment measures implemented during fiscal 2003.

Interest expense was approximately $0.7 million in the first quarter of
fiscal 2004 compared to $0.5 million in the first quarter of fiscal 2003.
The increase in interest expense resulted from increased borrowings under
the Company's credit facility and the increased interest rate related to the
Company's amended credit facility and the issuance of convertible
subordinated debentures in February 2003.

Other income/expense, net, was $0.2 million of income in the first quarter
of 2004 compared to $19,000 expense for the first quarter of fiscal 2003 due
to an increase in the foreign currency transactional gain on the Company's
debt at its Hungarian subsidiary which is denominated in U.S. dollars or
Euros.

Income tax expense increased $0.2 million to $0.1 million for the first
quarter of fiscal 2004 from an income tax benefit of $0.1 million for the
corresponding period in the prior year. A valuation allowance was recorded
against the income tax benefit resulting from the pre-tax loss for the first
quarter of fiscal 2004.

The foregoing resulted in a net loss from continuing operations of $3.7
million for the first quarter of fiscal 2004 compared to a net loss of $3.2
million for the first quarter of fiscal 2003. Similarly, the Company
reported net loss from continuing operations per share of $0.23 and $0.19 on
a basic and diluted basis for the first quarter of fiscal 2004 and 2003,
respectively. The weighted average common shares outstanding were 16.3
million for the first quarters of both 2003 and 2002.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

The Company intends for the primary source of liquidity to be cash flow from
operating activities. However, the Company has realized a cash use from
operating activities in each of the last three fiscal years. As a result,
the Company has executed refinancing arrangements and made borrowings under
credit facilities, supplemented with long-term debt financing utilizing the
equity in the Company's real estate properties, to maintain adequate
liquidity to support the Company's operating and capital activities.

Management will seek to fund its near-term operations from continued sale of
excess inventory and continued aggressive management of the Company's
working capital, as well as possible additional borrowings, private equity
and debt financing. However, management can make no assurances that these
objectives will be sufficient to fund near-term liquidity needs.

As of December 31, 2003, the Company was not in compliance with essentially
all financial covenants requirements included in the credit facility with
its bank. The subordinated convertible debentures contain certain
cross-default provisions related to the Company's other debt agreements. The
covenant non-compliances under the Company's senior U.S. credit facility at
September 30, 2003 and December 31, 2003 resulted in the possibility of a
default event being declared by the subordinated convertible debenture
holders, which would result in that debt being immediately due and payable.
As a result of the 2004 refinancing transactions described below, the
Company obtained waivers of the covenant non-compliance in the loan
agreement as of December 31, 2003.

                                     12

<PAGE>
<PAGE>

2004 Refinancing
----------------

In January 2004, the Company issued and sold convertible debentures in the
aggregate principal amount of $7.0 million to institutional private equity
and other investors (including $250,000 to each of Mr. Rumy and Mr.
McDonnell who are members of the Company's Board of Directors). The
convertible debentures have a stated maturity of 30 months and bear interest
at 6% per annum and are convertible into common stock shares at $5.40 per
share for each investor other than Messrs. Rumy and McDonnell and $5.42 per
share for each of Messrs. Rumy and McDonnell. The Company also issued to the
investors five-year warrants to purchase an aggregate of 323,994 shares of
common stock of the Company at an exercise price of $5.40 per share for each
investor other than Messrs. Rumy and McDonnell and $5.42 per share for each
of Messrs. Rumy and McDonnell. Proceeds from the issuance of these
convertible debentures will be used for working capital purposes.

As part of the Company's refinancing, the bank lender to the Company's
Hungarian subsidiary amended certain financial covenants and extended the
maturity date of its loan to December 31, 2004. In connection with such
actions, the bank required that the Company make arrangements to settle
intercompany accounts payable by Zoltek U.S. operations to its Hungarian
subsidiary in the amount of approximately $2.8 million. The bank was
unwilling to keep open its offer to restructure Zoltek Rt.'s loans until
after the Company's refinancing package was completed. Prior to the
refinancing, the Company did not have cash on hand or available borrowings
that would enable it to make the settlement of the intercompany accounts
required by the Hungarian bank. In order to proceed expeditiously to resolve
the Company's financing requirements, Zsolt Rumy, the Company's Chief
Executive Officer and a director of the Company, loaned the Company $1.4
million in cash and posted a $1.4 million letter of credit for the benefit
of the Company. This arrangement was approved by the Company's board of
directors and audit committee. The loan by Mr. Rumy bears interest on the
amount advanced and the notional amount of the letter of credit at a rate
per annum equal to LIBOR plus 11% with a LIBOR floor of 2%, the same
interest rate of the mortgage financing discussed below. As a result of the
Company completing the refinancing transactions making available the cash to
settle the intercompany accounts, the letter of credit has been released.
The $1.4 million loan remains outstanding. See Note 2 to the accompanying
interim consolidated financial statements.

The Company also entered into a mortgage note with a bank in the aggregate
principal amount of $6.0 million. The note has a stated maturity of three
years and bears interest at a rate of LIBOR plus 11% with a LIBOR floor of
2%. The Company will pay interest only on a monthly basis with principal
balance due at time of maturity. The loan is collateralized by a security
interest in the Company's headquarters facility and its two U.S. carbon
fiber manufacturing facilities. The proceeds of this transaction were used
to pay down debt of $6.0 million with its U.S. bank. Of such proceeds, $0.5
million is currently held in an escrow account to be released when the
Company completes certain post-closing requirements with respect to the
loan. The Company expects the conditions will be met in February 2004.

Due to the refinancing received subsequent to the Company's fiscal year end,
the Company's U.S. bank waived the financial covenant non-compliance as of
December 31, 2003, and waived all financial covenants through February 13,
2005. Accordingly, the holders of the subordinated debentures have no right
to accelerate maturity. Additionally, the expiration of the Company's
revolving credit loan was extended from January 31, 2004 to January 31,
2005. The refinancing allows the Company to execute its 2004 business plan,
which was uncertain until the refinancing occurred. The Company will require
further refinancing in fiscal 2005 and beyond. However, the Company can give
no assurance that it will be successful in its attempt to obtain new
financing and if the Company is unsuccessful, it would have a material
adverse effect on its future financial condition and its ability to continue
to pursue its current business plan.

2003 Refinancing
----------------

The Company executed an amended credit facility agreement, dated as of
February 13, 2003, with the U.S. bank. The amended credit facility agreement
is structured as a term loan in the amount of $3.5 million (due February 13,
2005) and a revolving credit loan in the amount of $5.0 million (originally
due January 31, 2004, now due January 31, 2005 - see above). The Company
repaid $5.0 million of this loan from the proceeds of the sale of
subordinated convertible debentures as discussed below. Borrowings under the
amended facility are based on a formula of eligible accounts receivable and
inventories of the Company's U.S.-based subsidiaries. The outstanding loans
under the agreement bear interest at the prime interest rate plus 2% per
annum. The loan agreement contains quarterly financial covenants related to
borrowings, working capital, debt coverage, current ratio and capital
expenditures. Total borrowings under the revolving credit agreement were
$4.6 million and the available credit under this agreement was $0.4 million
at September 30, 2003.

The Company also entered into a debenture purchase agreement, dated as of
February 13, 2003, under which the Company issued and sold to 14 investors,
including certain directors, subordinated convertible debentures in the
aggregate principal amount of $8.1 million. The subordinated convertible
debentures have stated maturities of five years, bear interest at 7% per
annum and are convertible into an aggregate of 2,314,286 shares of common
stock of the Company at a conversion price of $3.50 per share. The Company
also issued to the investors five-year warrants to purchase an aggregate of
405,000 shares of common stock of the Company at an exercise price of $5.00
per share. The fair value of the warrants, at the time of issuance, was
estimated to be $376,650. Proceeds from the issuance of these convertible
debentures were used to repay existing borrowings as well as for working
capital.

                                     13

<PAGE>
<PAGE>

Credit Facilities
-----------------

The Company's financing of its U.S. operations is separate from that of its
Hungarian operations. Availability of credit is based on the collateral
value at each operation. However, the covenants of the term loan and
revolving line of credit from a U.S. bank, which have been waived through
February 13, 2005, apply to the Company on a consolidated basis.

US Operations - In May 2001, the Company entered into a two-year credit
facility with a U.S. bank in the amount of $14.0 million. The credit
facility was structured as a term loan in the amount of $4.0 million and a
revolving credit loan in the amount of $10.0 million. As discussed above, in
February 2003, the term loan was reduced to $3.5 million and the revolving
credit loan was reduced to $5.0 million. In consideration for certain
amendments and waivers to the credit facility, the interest rate on the term
and revolving credit loans was adjusted to the prime rate plus 1.0% per
annum.

Hungarian Operations - In May 2001, the Company's Hungarian subsidiary
entered into a credit facility with a Hungarian bank. The facility consists
of a $6.0 million bank guarantee and factoring facility, a $4.0 million
capital investment facility and a $2.0 million working capital facility. All
of the Hungarian bank debt is due on December 31, 2004.

In March 2003, the Company's Hungarian subsidiary entered into a credit
agreement with another Hungarian bank for $2.2 million. The facility
consists of a bank guarantee, factoring and mortgages and expires December
31, 2004.

Total borrowings of the Hungarian subsidiary were $11.9 million at December
31, 2003, all of which have been classified as current on the December 31,
2003 balance sheet due to their stated maturity. Borrowings under the
Hungarian bank credit facilities cannot be used in Zoltek's U.S. operations.

Inventories consist of the following (amounts in thousands):

<TABLE>
<CAPTION>
                                                         DECEMBER 31,    SEPTEMBER 30,
                                                             2003             2003
                                                         ------------    -------------
<S>                                                        <C>              <C>
         Raw materials.................................    $ 5,908          $ 4,859
         Work-in-process...............................      1,051            1,132
         Finished goods................................     20,272           19,057
         Supplies, spares and other....................      1,206            1,930
                                                           -------          -------
                                                           $28,437          $26,978
                                                           =======          =======
</TABLE>

The Company has undertaken aggressive steps to sell carbon fiber inventories
to improve its cash flow. The Company has decreased the actual inventory by
$0.2 million but this decrease was offset by the significant increase in the
value of the Hungarian currency against the U.S. Dollar, which has increased
the carrying value of the Hungarian inventory.

Abilene, Texas Facility
-----------------------

In the third quarter of fiscal 2001, the Company elected to temporarily idle
a significant part of the operations located at the Abilene, Texas facility.
Management believes it will be necessary to return this facility to
operations within the next year given identified future market demand for
carbon fiber products. However, the idling of this facility constituted an
impairment indicator as defined by generally accepted accounting principles
and as a result management is required to periodically determine if the
carrying value of the Abilene facility is impaired as long as the indicators
exist. In light of the expected resumption of manufacturing, the Company
currently does not believe that any impairment exists based on an analysis
of expected future net cash flow to be generated from this facility over the
expected remaining useful life. However, if the forecasted levels of demand
do not materialize, the Company may be required to recognize an impairment
charge with respect to the manufacturing assets if the fair value is
determined to be less than the carrying value.

Cash Used By Operating Activities
---------------------------------

Net cash used by operating activities was $0.7 million for the three months
ended December 31, 2003. The cash flows used by operating activities during
the three months ended December 31, 2003 were primarily due to the net loss
of $3.7 million offset by non-cash items, including depreciation and
amortization of $1.5 million plus a decrease in net operating assets of $1.5
million. The decrease in net operating assets consisted of an increase in
inventories of $0.7 million offset by a $1.1 million increase in accrued
expenses and other liabilities and trade payables and a $0.2 million
increase in long-term liabilities and a $0.2 million decrease in accounts
receivable.

Cash Used For Investing
-----------------------

Net cash used for investing activities for the three months ended December
31, 2003 was $0.4 million which included capital expenditures, primarily at
the Hungarian subsidiary.

                                     14

<PAGE>
<PAGE>

Historically, cash used in investing activities has been expended for
equipment additions and the expansion of the Company's carbon fibers
production capacity. In the first three months of fiscal 2004, the Company
made capital expenditures of $0.5 million for various projects compared to
$0.3 million during the corresponding period of fiscal 2003. The Company
expects capital expenditures to total less than $1.9 million for fiscal 2004
unless near-term demand increases significantly.

Cash Provided By Financing Activities
-------------------------------------

Net cash provided by financing activities was $0.4 million for the three
months ended December 31, 2003. Net cash provided for the period included
borrowings under the amended credit agreement, a short-term loan of $1.4
million from Zsolt Rumy which facilitated the refinancing in January 2004,
and reduction in the debt outstanding in Hungary. (see Financing)

A summary of significant contractual obligations is shown below. See Note 5
to the Condensed Financial Statements for discussion of the Company's debt
agreements. The Company's financial commitments as of December 31, 2003
included the following:

<TABLE>
<CAPTION>
                                                                          LESS THAN                    3-5         MORE THAN
                                                               TOTAL        1 YEAR     1-3 YEARS      YEARS         5 YEARS
                                                              -------     ---------    ---------     ------        ---------
<S>                                                           <C>          <C>          <C>          <C>             <C>
         Notes payable....................................... $ 1,719      $ 1,719
         Purchase obligations................................     400          400
         Note payable to related party.......................   1,400        1,400
         Long-term debt, including current maturities........  33,866       12,946      $18,488      $2,432          $  -
                                                              -------      -------      -------      ------          ----
              Total debt.....................................  37,385       16,465       18,488       2,432             -
         Operating leases....................................   2,127        1,537          474         116             -
                                                              -------      -------      -------      ------          ----
              Total debt and operating leases................ $39,512      $18,002      $18,962      $2,548          $  -
                                                              =======      =======      =======      ======          ====
</TABLE>

In fiscal 2002, as a part of the sale of the Company's interest in Hardcore
Composites, the Company continues to guarantee Hardcore Composite's lease
obligations of approximately $30,000 per month to the former owner. The
obligation relates to a lease of the Hardcore Composites manufacturing
facility, which expires in March 31, 2008.

CRITICAL ACCOUNTING POLICIES
----------------------------

Outlined below are accounting policies that Zoltek believes are key to a
full understanding of the Company's operations and financial results. All of
the Company's accounting policies are in compliance with U.S. generally
accepted accounting principles (GAAP).

Revenue recognition

The Company recognizes sales on the date title to the sold product transfers
to the customer, which generally approximates the shipping date.
Historically, the Company has experienced very low levels of product returns
due to damaged goods or products that do not meet customer specifications.

Inventories

The Company evaluates its ending inventories for estimated excess quantities
and obsolescence. This evaluation includes analyses of sales levels by
product and projections of future demand within specific time horizons.
Inventories in excess of future demand, if any, are reserved. Remaining
inventory balances are adjusted to approximate the lower of cost on a
first-in, first-out basis or market value. Cost includes material, labor and
overhead. If future demand or market conditions are less favorable than the
Company's projections, additional inventory write-downs may be required and
would be reflected in cost of sales (excluding available unused capacity
costs) on the Company's statement of operations in the period in which the
revision is made.

In recent years, carbon fiber sales have been depressed by excess capacity
across the industry, distressed pricing across most existing markets and
weakening economic conditions globally. These factors combined with the high
level of inventories maintained by the Company, have resulted in the Company
reducing the cost of certain carbon fiber inventories to their lower
estimated market values. If these industry conditions do not improve in a
reasonable period of time, or further deteriorate, it is possible that the
market value of certain of the Company's carbon fiber inventories may
further decrease resulting in additional charges to cost of sales.

Application and development expenses

The Company is actively pursuing the development of a number of applications
for the use of its carbon fiber and related products. The Company is
currently party to several developmental agreements with various prospective
users of these products for the purpose of accelerating the development of
various carbon fiber applications. Additionally, the Company is executing
several internal development strategies to further the use of carbon fiber
and consumer and industrial products made from carbon fiber. As a result,
the Company incurs certain costs for research, development and engineering
of products and manufacturing processes. These costs are expensed as
incurred and totaled approximately $747,000 and $895,000 in the first three
months of fiscal 2004 and 2003, respectively. Application and development
expenses are presented as an operating item on the Company's consolidated
statement of operations. Given the Company's


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position and strategy within the carbon fiber industry, it is expected that
similar or greater levels of application and development expenses could be
incurred in future periods.

Unused capacity costs

The Company is currently not operating its continuous carbonization lines
located at the Abilene, Texas facility at full capacity. As a result, the
Company has elected to categorize certain costs related to these idle assets
as unused capacity costs. Such costs totaled $1.4 million and $1.3 million
for the three months ended December 31, 2003 and 2002, respectively, and
include depreciation and other overhead expenses associated with unused
capacity. The unused capacity costs are presented as an operating item on
the Company's consolidated statement of operations. As discussed above,
management currently intends to return certain unused portions of the
Abilene, Texas facility to service in fiscal 2004. However, until the
facility is operating at certain production levels, these unused capacity
costs will continue to be incurred.

Valuation of long-lived assets

Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If
the sum of the expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the difference
between the fair value and the carrying value of the asset. In determining
expected future undiscounted cash flows attributable to a long-lived asset
or a group of long-lived assets, the Company must make certain judgments and
estimations including the expected market conditions and demand for products
produced by the assets, expected product pricing assumptions, and
assumptions related to the expected costs to operate the assets. These
judgments and assumptions are particularly challenging as they relate to the
Company's long-lived assets due to the developmental stage and current
market conditions of the carbon fiber industry. It is possible that actual
future cash flows related to the Company's long-lived assets may materially
differ from the Company's determination of expected future undiscounted cash
flows. Additionally, if the Company's expected future undiscounted cash
flows were less than the carrying amount of the asset being analyzed, it
would be necessary for the Company to make significant judgments regarding
the fair value of the asset due to the specialized nature of much of the
Company's carbon fiber production equipment in order to determine the amount
of the impairment charge.

NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------

See Note 7 to the accompanying interim consolidated financial statements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to changes in interest rates primarily as a result of
borrowing activities under its credit facilities. The nature and amount of
the Company's debt may vary as a result of future business requirements,
market conditions and other factors. The extent of the Company's interest
rate risk is not quantifiable or predictable because of the variability of
future interest rates and business financing requirements, but the Company
does not believe such risk is material. At December 31, 2003, the Company
did not have any interest rate swap agreements outstanding. A one percent
increase in the weighted average interest rate of the Company's debt would
result in a $0.3 million increase in interest expense based on the debt
levels at December 31, 2003.

The Company views as long-term its investment in Zoltek Rt., which has a
functional currency other than the U.S. dollar. As a result, the Company
does not hedge this net investment. In terms of foreign currency translation
risk, the Company is exposed to Zoltek Rt.'s functional currency, which is
the Hungarian Forint. The Company's net foreign currency investment in
Zoltek Rt. translated into U.S. dollars using period-end exchange rates was
$35.3 million and $19.5 million at December 31, 2003 and December 31, 2002,
respectively. The potential loss in value of the Company's net foreign
currency investment in Zoltek Rt. resulting from a hypothetical 10% adverse
change in quoted foreign currency exchange rate of the Hungarian Forint at
December 31, 2003 and December 30, 2002 amounted to $3.5 million and $2.9
million, respectively. In addition, Zoltek Rt. routinely sells its products
to customers located primarily throughout Europe in sales transactions that
are denominated in foreign currencies other than the Hungarian Forint. Also,
Zoltek Rt. has debt that is denominated in foreign currencies other than the
Hungarian Forint. As a result, Zoltek Rt. is exposed to foreign currency
risks related to these transactions. The Company does not currently employ a
foreign currency hedging strategy related to the sales of Zoltek Rt.
Management will continue to monitor the foreign currency aspects of the
Company's operations and may employ a foreign currency hedging strategy in
the future.

                                    * * *

This Quarterly Report on Form 10-Q contains forward-looking statements,
which are based upon the current expectations of the Company. Because these
forward-looking statements are inherently subject to risks and
uncertainties, there are a number of factors that could cause the Company's
plans, actions and actual results to differ materially. Among these factors
are the Company's ability to: execute restructuring and other cost reduction
plans; achieve profitable operations; raise new capital and increase its
borrowing at acceptable costs; manage changes in customers' forecasted
requirements for the Company's products; manage its current excess carbon
fiber production capacity and re-activation of its idle facilities as
required by future demand for the Company's products; continue investing in
application and market development; manufacture low-cost carbon fibers and
profitably market them; and penetrate existing, identified and emerging
markets. The timing and occurrence (or non-occurrence) of transactions and
events that determine the future effect of these factors on the


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Company, as well as other factors, may be beyond the control of the Company.
The Company undertakes no obligation to update any forward-looking statement
to reflect future events or circumstances.

ITEM 4.  CONTROLS AND PROCEDURES

Zsolt Rumy, the Company's Chief Executive Officer and Chief Financial
Officer has evaluated the Company's disclosure controls and procedures as of
the end of the period covered by the Quarterly Report on Form 10-Q and
concluded that the Company's disclosure controls and procedures (as defined
in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended) are effective. There have been no changes in internal control
over financial reporting that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.

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                           ZOLTEK COMPANIES, INC.

PART II. OTHER INFORMATION

     Item 6.  EXHIBITS AND REPORTS ON FORM 8-K
              --------------------------------

              (a) Exhibits:

                  Exhibit 31: Certification of Chief Executive Officer and
                  Chief Financial Officer pursuant to Rule 13a-14(a) under
                  the Securities Exchange Act of 1934, as amended.

                  Exhibit 32: 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.

              (b) Reports on Form 8-K:

                  On October 10, 2003, the Registrant filed a Current Report
                  on Form 8-K reporting under Item 5 the issuance of a
                  press release announcing orders for its commercial grade
                  carbon fiber tow.

                  On December 23, 2003, the Registrant filed a Current Report
                  on Form 8-K reporting under Item 5 the issuance of
                  press releases announcing developments in its patent
                  infringement lawsuit against the U.S. Government and the
                  entering into a definitive agreement with institutional
                  investors for a private placement.


                                  SIGNATURE
                                  ---------

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                                    Zoltek Companies, Inc.
                                                         (Registrant)

Date: February 17, 2004

                                               By:      /s/ Zsolt Rumy
                                                  ----------------------------
                                                          Zsolt Rumy
                                                    Chief Executive Officer
                                                    Chief Financial Officer


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