<PAGE>




                                UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION


                            WASHINGTON, DC 20549





                                 FORM 10-Q/A



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






For the quarter ended March 31, 2005            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-2 of the Act).
Yes  x   No
    ---    ---

Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: As of May 13,
2005, 18,895,305 shares of Common Stock, $.01 par value, were outstanding.




<PAGE>
<PAGE>

EXPLANATORY NOTE
----------------

The Company's calculation of diluted earnings per share for the three-month
and nine-month periods ended June 30, 2004 and the three-month and six-month
periods ended March 31, 2005 did not capture the effects of convertible and
potentially dilutive securities in the appropriate sequence.

Also, on May 20, 2005, the Company concluded that its financial results for
the fiscal year ended September 30, 2004 and interim periods ended March 31,
June 30, September 30 and December 31, 2004 would be restated to reflect
additional non-operating gains and losses related to the correction of its
accounting for the conversion feature and related warrants to purchase the
Company's common stock associated with convertible debt issued by the
Company in January, March and October 2004 and the amortization expense
associated with debt discount. Historically, the Company had classified the
value of warrants to purchase common stock and the beneficial conversion
feature, when applicable, as equity as the Company believed these
instruments met the exceptions for recording these instruments as
liabilities. After further review the Company determined that these
instruments did not meet these exceptions and should have been classified as
liabilities on its balance sheet at the fair value of each instrument. In
subsequent periods the change in fair value of these instruments will result
in an adjustment to this liability with the corresponding gain or loss being
recorded in the statement of operations. At the date of their respective
conversion of the instrument or exercise of the warrants the corresponding
liability will be reclassified to equity. In addition, the Company recorded
individually immaterial adjustments to property and equipment, net and other
assets that increased other expenses by $0.1 million in the quarter ended
March 31, 2004 and to accounts receivable, net that increased other expenses
by $0.2 million in the quarter ended September 30, 2004.

As a result of the restatement, the Company is filing this amended Form
10-Q/A for the period ended March 31, 2005 and has filed an amended Form
10-K/A for the year ended September 30, 2004 and an amended Form 10-Q/A for
the periods ended June 30, 2004 and December 31, 2004, in December 2005. The
Company previously filed restated information for these periods in the Form
10-Q for the quarter ended March 31, 2005, however, the calculation of fully
diluted earnings per share for the three-month and nine-month periods ended
June 30, 2004 and three-month and nine-month periods ended March 31, 2005,
were reported incorrectly as it did not capture the effects of all the
convertible and potentially dilutive securities in the appropriate sequence
as prescribed in SFAS No. 128, Earnings per Share.

The impact of the restatements related to the change in accounting for the
conversion feature and the related warrants are summarized below:

For the quarter ended March 31, 2004, the loss on the fair value of the
warrants and conversion feature and increased amortization expense,
increased the net loss by $5.7 million. This result increased the Company's
basic and diluted loss per share from $0.23 to $0.59 for the quarter and
March 31, 2004 and from $0.46 to $0.82 for the six months ended March 31,
2004. The Company's previously reported long-term and total liabilities
increased by $12.0 million with a corresponding decrease in the Company's
equity.

For the quarter ended June 30, 2004, there was a gain on the fair value of
the warrants and conversion feature, partially offset by the increase in
amortization expense that decreased the previously reported net loss by $4.3
million. This result decreased the Company's basic loss per share from a
loss of $0.22 to income of $0.04 and diluted loss per share from a loss of
$0.22 to a loss of $0.12 for the quarter ended June 30, 2004. The Company's
previously reported long-term and total liabilities increased by $7.7
million with a corresponding decrease in the Company's equity.

For the quarter ended September 30, 2004, the loss on the fair value of the
warrants and conversion feature and increased amortization expense increased
the previously reported net loss by $4.3 million. This result increased the
Company's basic and diluted loss per share from $0.34 to $0.62 for the
quarter ended September 30, 2004.

For the fiscal year ended September 30, 2004, the loss on the fair value of
warrants and conversion feature and increased amortization expense increased
the previously reported net loss by $5.7 million. This result increased the
Company's basic and diluted loss per share from $1.02 to $1.40 for the
fiscal year ended September 30, 2004. The Company's previously reported
long-term and total liabilities increased by $12.0 million with a
corresponding decrease in the Company's equity.

For the quarter ended December 31, 2004, the loss on the fair value of
warrants and conversion feature and increased amortization expense,
increased the previously reported net loss by $26.4 million. This result
increased our basic and diluted loss per share from $0.21 to $1.82 for the
quarter ended December 31, 2004. The Company's previously reported long-term
and total liabilities increased by $40.9 million with a corresponding
decrease in the Company's equity.

The foregoing adjustments do not affect previously recorded net sales,
operating loss or cash flows from continuing operations. Furthermore, these
adjustments do not affect previously reported income tax expense as the
Company has recorded a full valuation allowance against all deferred tax
assets.



                                     2

<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>
                                                                                                MARCH 31,      SEPTEMBER 30,
ASSETS                                                                                            2005             2004
------------------------------------------------------------------------------------------------------------------------------
                                                                                                                (RESTATED-
                                                                                                                SEE NOTE 2)
<S>                                                                                            <C>              <C>
Current assets:
     Cash and cash equivalents.................................................................$    1,344       $      267
     Accounts receivable, less allowance for doubtful accounts of $1,149 and
       $981, respectively......................................................................    11,756           11,611
     Inventories...............................................................................    29,535           25,902
     Other current assets......................................................................     1,400            1,167
                                                                                               ----------       ----------
          Total current assets.................................................................    44,035           38,947
Property and equipment, net....................................................................    85,012           80,414
Other assets...................................................................................     3,394            3,094
                                                                                               ----------       ----------
          Total assets.........................................................................$  132,441       $  122,455
                                                                                               ==========       ==========


<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>              <C>
Current liabilities:
     Current maturities of long-term debt......................................................$    2,144       $      570
     Trade accounts payable....................................................................    11,690           13,257
     Notes payable.............................................................................     1,722            2,441
     Accrued expenses and other liabilities....................................................     6,126            5,877
                                                                                               ----------       ----------
          Total current liabilities............................................................    21,682           22,145
Other long-term liabilities....................................................................       167              357
Value of warrants and conversion feature associated with convertible debt issuances............    31,083           13,721
Long-term debt, less current maturities........................................................    29,008           42,002
                                                                                               ----------       ----------
          Total liabilities....................................................................    81,940           78,225
                                                                                               ----------       ----------
Commitments and contingencies (Notes 2)

Shareholders' equity:
     Preferred stock, $.01 par value, 1,000,000 shares authorized,
       no shares issued or outstanding.........................................................         -                -
     Common stock, $.01 par value, 50,000,000 shares authorized,
       18,858,795 and 16,307,338 shares issued and outstanding, respectively...................       189              163
     Additional paid-in capital................................................................   142,320          109,524
     Accumulated deficit.......................................................................   (83,129)         (55,312)
     Accumulated other comprehensive loss......................................................    (8,879)         (10,145)
                                                                                               ----------       ----------
          Total shareholders' equity...........................................................    50,501           44,230
                                                                                               ----------       ----------
          Total liabilities and shareholders' equity ..........................................$  132,441       $  122,455
                                                                                               ==========       ==========




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



                                     3

<PAGE>
<PAGE>

<TABLE>
                                                       ZOLTEK COMPANIES, INC.

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


<CAPTION>
                                                                       THREE MONTHS ENDED MARCH 31,     SIX MONTHS ENDED MARCH 31,
                                                                       ----------------------------     --------------------------
                                                                            2005         2004              2005          2004
-----------------------------------------------------------------------------------------------------------------------------------
                                                                         (RESTATED-   (RESTATED-        (RESTATED-   (RESTATED-
                                                                         SEE NOTE 2)  SEE NOTE 2)       SEE NOTE 2)  SEE NOTE 2)
<S>                                                                      <C>          <C>               <C>          <C>
Net sales................................................................$    15,772  $    11,537       $    29,290  $    19,688
Cost of sales, excluding available unused capacity costs.................     14,860        9,523            27,256       16,526
Available unused capacity costs..........................................        524        1,259             1,049        2,686
Application and development costs........................................        824          758             1,652        1,504
Selling, general and administrative expenses.............................      1,612        1,342             3,023        2,940
                                                                         -----------  -----------       -----------  -----------
     Operating loss from continuing operations...........................     (2,048)      (1,345)           (3,690)      (3,968)
Other income (expense):
     Interest expense, excluding amortization of financing fees and
       debt discount.....................................................     (1,140)        (778)           (2,181)      (1,384)
     Amortization of financing fees and debt discount....................     (2,622)        (425)           (4,436)        (475)
     Gain (loss) on value of warrants and conversion feature.............      9,128       (5,574)          (16,426)      (5,574)
     Interest income.....................................................          -            -                 2           12
     Other, net..........................................................       (974)        (272)             (400)        (172)
                                                                         -----------  -----------       -----------  -----------
         Income (loss) from continuing operations before income taxes....      2,344       (8,394)          (27,131)     (11,561)
Income tax expense.......................................................        104          111               219          189
                                                                         -----------  -----------       -----------  -----------
Income (loss) from continuing operations.................................      2,240       (8,505)          (27,350)     (11,750)
Discontinued operations:
     Operating loss, net of taxes........................................        (94)      (1,192)             (467)      (1,638)
                                                                         -----------  -----------       -----------  -----------
         Loss on discontinued operations.................................        (94)      (1,192)             (467)      (1,638)
                                                                         -----------  -----------       -----------  -----------
Net income (loss)........................................................$     2,146  $    (9,697)      $   (27,817) $   (13,388)
                                                                         ===========  ===========       ===========  ===========
Net income (loss) per share:
     Basic income (loss) per share:
         Continuing operations...........................................$      0.13  $     (0.52)      $     (1.60) $     (0.72)
         Discontinued operations.........................................      (0.01)       (0.07)            (0.03)       (0.10)
                                                                         -----------  -----------       -----------  -----------
              Total......................................................$      0.12  $     (0.59)      $     (1.63) $     (0.82)
                                                                         ===========  ===========       ===========  ===========
     Diluted income (loss) per share:
         Continuing operations...........................................$     (0.22) $     (0.52)      $     (1.65) $     (0.72)
         Discontinued operations.........................................      (0.01)       (0.07)            (0.03)       (0.10)
                                                                         -----------  -----------       -----------  -----------
              Total......................................................$     (0.23) $     (0.59)      $     (1.68) $     (0.82)
                                                                         ===========  ===========       ===========  ===========
Weighted average common shares outstanding - basic.......................     17,783       16,341            17,107       16,326

Weighted average common shares outstanding - diluted.....................     20,802       16,341            18,107       16,326






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



                                     4

<PAGE>
<PAGE>

<TABLE>
                                                  ZOLTEK COMPANIES, INC.

                                CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                                ---------------------------------------------------------
                                                  (Amounts in thousands)
                                                       (Unaudited)


<CAPTION>
                                     Total Share-              Add'l    Accumulated Other
                                       holders'    Common     Paid-In     Comprehensive    Accumulated   Comprehensive
                                        Equity     Stock      Capital          Loss          Deficit     Income (Loss)
-------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>       <C>            <C>            <C>           <C>
Balance, September 30, 2004
   (Restated-See Note 2)...........  $   44,230    $ 163     $ 109,524      $ (10,145)      $ (55,312)

Net loss...........................     (27,817)       -             -              -         (27,817)   $    (27,817)

Foreign currency translation
  adjustment.......................       1,266        -             -          1,266               -           1,266
                                                                                                         ------------
         Comprehensive loss........                                                                      $    (26,551)
                                                                                                         ============

Value of warrants and conversion
  feature at time of conversion....      24,505        -        24,505              -               -

Unamortized value of convertible debt
  discount at time of conversion...      (5,463)       -        (5,463)

Warrants exercised.................         704        1           703              -               -

Convertible debt converted.........      13,050       22        13,028              -               -

Interest paid in stock.............          92        -            92              -               -

Issuance cost related to convert-
 ible debt conversions.............        (401)                  (401)

Exercise of stock options..........         335        3           332              -               -
                                     ----------    -----     ---------      ---------       ---------
Balance, March 31, 2005............  $   50,501    $ 189     $ 142,320      $  (8,879)      $ (83,129)
                                     ==========    =====     =========      =========       =========











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


                                     5

<PAGE>
<PAGE>


<TABLE>
                                                    ZOLTEK COMPANIES, INC.

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

<CAPTION>
                                                                                                SIX MONTHS ENDED MARCH 31,
                                                                                                --------------------------
                                                                                                  2005             2004
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                               (RESTATED-
                                                                                                               SEE NOTE 2)
<S>                                                                                            <C>              <C>
Cash flows from operating activities:
      Net loss.................................................................................$ (27,817)       $ (13,388)
      Adjustments to reconcile net loss to net cash used in operating activities:
           Loss from discontinued operations...................................................      467            1,638
           Depreciation and amortization.......................................................    2,606            2,848
           Amortization of financing fees and debt discount....................................    4,436              475
           Loss on value of warrants and conversion feature....................................   16,426            5,574
           Foreign currency transaction losses.................................................      148              120
           Other, net..........................................................................      (44)             (37)
           Changes in assets and liabilities:
                 Increase in accounts receivable...............................................   (1,305)            (585)
                 (Increase) decrease in inventories............................................   (4,013)             167
                 Decrease (increase) in other assets...........................................    1,029             (768)
                 Increase in trade accounts payable............................................      677            1,618
                 Decrease in accrued expenses and other liabilities............................      (90)          (1,804)
                 Increase (decrease) in other long-term liabilities............................     (336)             352
                                                                                               ---------        ---------
                      Total adjustments........................................................   20,001            9,598
                                                                                               ---------        ---------
      Net cash used in continuing operations...................................................   (7,816)          (3,790)
      Net cash used in discontinued operations.................................................     (588)            (888)
                                                                                               ---------        ---------
      Net cash used in operating activities....................................................   (8,404)          (4,678)
                                                                                               ---------        ---------

Cash flows from investing activities:
           Payments for purchase of property and equipment.....................................   (5,777)          (3,055)
           Proceeds from sale of property and equipment........................................      145              247
                                                                                               ---------        ---------
      Net cash used in investing activities....................................................   (5,632)          (2,808)
                                                                                               ---------        ---------

Cash flows from financing activities:
           Proceeds from exercise of stock options and warrants................................      937              124
           Proceeds from issuance of convertible debt..........................................   40,000           12,000
           Proceeds from issuance of notes payable.............................................        -            7,198
           Proceeds from issuance of note payable to related party.............................        -            1,150
           Payment of financing fees...........................................................   (2,188)            (966)
           Repayment of notes payable and long-term debt.......................................  (23,637)         (10,835)
                                                                                               ---------        ---------
Net cash provided by financing activities......................................................   15,112            8,671
Effect of exchange rate changes on cash........................................................        1               29
                                                                                               ---------        ---------
Net increase in cash...........................................................................    1,077            1,214
Cash and cash equivalents at beginning of period...............................................      267              838
                                                                                               ---------        ---------
Cash and cash equivalents at end of period.....................................................$   1,344        $   2,052
                                                                                               =========        =========

Supplemental disclosures of cash flow information:
Net cash paid during the period for:
     Interest..................................................................................$   1,411        $   1,420
     Income taxes..............................................................................$       -        $       -




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



                                     6

<PAGE>
<PAGE>


                           ZOLTEK COMPANIES, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
           ------------------------------------------------------


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 2004 Annual
Report to Shareholders, which includes consolidated financial statements and
notes thereto for the fiscal year ended September 30, 2004. However, certain
amounts in the prior period financial statements relating to accounting for
the conversion feature and related warrants to purchase the Company's common
stock associated with convertible debt issued by the Company in January,
March and October 2004 have been restated, as discussed in Note 2 -
Restatement. The Company intends to file an amended Form 10-K for the year
ended September 30, 2004 and amended Form 10-Q reports for the periods ended
June 30, 2004 and December 31, 2004. 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. In the fourth quarter
of fiscal 2004, the Company formally adopted a plan to discontinue and exit
two divisions of its Zoltek Rt. operations which manufactured textile
acrylic and nylon fibers and yarns. These divisions had been included in the
Specialty Products segment (see Note 7). The prior period financial
statements have been conformed to current year discontinued operations
presentation.

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 consolidated statement of operations as
"Other, net." All significant inter-company transactions and balances have
been eliminated in consolidation.

Revenue Recognition
-------------------

Sales transactions are initiated through customer purchase order or sales
agreement which includes fixed pricing terms. The Company recognizes sales
for manufactured products on the date title to the sold product transfers to
the customer, which is either the shipping date or the date consumed by the
customer if sold on consignment. Revenues generated by its Entec Composite
Machines subsidiary are recognized on a percentage of completion basis based
on the percentage of total project cost incurred to date which include
change orders, revisions to estimates and provisions for anticipated losses
on contracts. Manufactured products are accepted prior to shipment and thus
an allowance for returns is not accrued as historical returns have not been
material. The Company reviews its accounts receivable on a monthly basis to
identify any specific customers for collectibility issues. If the Company
deems that an amount due from a customer is uncollectible, the amount is
recorded as expense in the statement of operations.

Stock Option Plan
-----------------

At March 31, 2005, 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. During the first
quarter of fiscal 2005, the Company granted 150,000 employee stock options
with an exercise price that equaled



                                     7

<PAGE>
<PAGE>

the Company's stock price on the applicable 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               SIX MONTHS
                                                                            ENDED MARCH 31,            ENDED MARCH 31,
                                                                            ---------------            ---------------
                                                                           2005         2004          2005         2004
                                                                         ---------    ---------    ---------    ---------
                                                                         (RESTATED-   (RESTATED-   (RESTATED-   (RESTATED-
                                                                        SEE NOTE 2)   SEE NOTE 2)  SEE NOTE 2)  SEE NOTE 2)
<S>                                                                      <C>          <C>          <C>          <C>
         Reported net income (loss)......................................$   2,146    $  (9,697)   $ (27,817)   $ (13,388)
         Total stock-based employee compensation expense
           determined under fair value based method for all awards,
           net of tax effects............................................      (70)         (92)        (140)        (105)
                                                                         ---------    ---------    ---------    ---------
         Pro forma net income (loss).....................................$   2,076    $  (9,789)   $ (27,957)   $ (13,493)
                                                                         =========    ==========   =========    =========
         Reported basic income (loss) per share..........................$    0.12    $   (0.59)   $   (1.63)   $   (0.82)
                                                                         =========    =========    =========    =========
         Pro forma basic income (loss) per share.........................$    0.12    $   (0.60)   $   (1.63)   $   (0.83)
                                                                         =========    =========    =========    =========
         Reported diluted income (loss) per share........................$   (0.23)   $   (0.59)   $   (1.68)   $   (0.82)
                                                                         =========    =========    =========    =========
         Pro forma diluted income (loss) per share.......................$   (0.23)   $   (0.60)   $   (1.68)   $   (0.83)
                                                                         =========    =========    =========    =========
</TABLE>

The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted
average assumption:

<TABLE>
<CAPTION>
                                                                                         SIX MONTHS ENDED MARCH 31,
                                                                                         --------------------------
         ASSUMPTIONS                                                                        2005              2004
         -----------                                                                    -----------        ----------
<S>                                                                                        <C>               <C>
         Expected life of option.....................................................      6 years           6 years
         Risk-free interest rate.....................................................        4.25%             4.25%
         Volatility of stock.........................................................          77%               77%
         Expected dividend yield.....................................................           --                --
</TABLE>

2.   RESTATEMENT

On May 20, 2005, the Company concluded that its financial results for the
fiscal year ended September 30, 2004 and interim periods ended March 31,
June 30, September 30 and December 31, 2004 would be restated to reflect
additional non-operating gains and losses related to the classification and
accounting for the conversion feature and the related warrants to purchase
the Company's common stock associated with convertible debt issued by the
Company in January, March and October 2004 and the amortization expense
associated with debt discount. Historically, the Company has classified the
value of warrants to purchase common stock and the beneficial conversion
feature, when applicable, as equity as the Company believed these
instruments met exceptions that did not require recording these instruments
as derivative liabilities. After further review the Company has determined
that these instruments did not meet these exceptions and should have been
classified as derivative liabilities at the fair value of each instrument,
and must be recorded as such on the balance sheet. In subsequent periods the
change in fair value of these instruments will result in an adjustment to
this liability with the corresponding gain or loss being recorded in the
statement of operations. At the date of their respective conversion of the
instrument or exercise of the warrants the corresponding derivative
liability will be reclassified to equity. In addition, the Company recorded
individually immaterial adjustments to property and equipment, net and other
assets that increased other expenses by $0.1 million in the quarter ended
March 31, 2004 and to accounts receivable, net that increased other expenses
by $0.2 million in the quarter ended September 30, 2004.

The impact of the adjustments related to the classification and accounting
for the conversion feature and the related warrants are summarized below:

For the quarter ended March 31, 2004, the loss on the fair value of the
warrants and conversion feature and increased amortization expense,
increased the net loss by $5.7 million. This result increased the Company's
basic and diluted loss per share from $0.23 to $0.59 for the quarter ended
March 31, 2004 and from $0.46 to $0.82 for the six months ended March 31,
2004. The Company's previously reported long-term and total liabilities
increased by $12.0 million with a corresponding decrease in the Company's
equity.

For the quarter ended June 30, 2004, there was a gain on the fair value of
the warrants and conversion feature, partially offset by the increase in
amortization expense that decreased the previously reported net loss by $4.3
million. This result decreased our basic loss per share from a loss of $0.22
to income of $0.04 and diluted loss per share from a loss of $0.22 to a loss
of $0.11 for the quarter ended June 30, 2004. The Company's previously
reported long-term and total liabilities increased by $7.7 million with a
corresponding decrease in the Company's equity.


                                     8

<PAGE>
<PAGE>

For the quarter ended September 30, 2004, the loss on the fair value of the
warrants and conversion feature and increased amortization expense increased
the previously reported net loss by $4.3 million. This result increased our
basic and diluted loss per share from $0.34 to $0.62 for the quarter ended
September 30, 2004.

For the fiscal year ended September 30, 2004, the loss on the fair value of
warrants and conversion feature and increased amortization expense increased
the previously reported net loss by $5.7 million. This result increased our
basic and diluted loss per share from $1.02 to $1.40 for the fiscal year
ended September 30, 2004. The Company's previously reported long-term and
total liabilities increased by $12.0 million with a corresponding decrease
in the Company's equity.

For the quarter ended December 31, 2004, the loss on the fair value of
warrants and conversion feature and increased amortization expense,
increased the previously reported net loss by $26.4 million. This result
increased our basic and diluted loss per share from $0.21 to $1.82 for the
quarter ended December 31, 2004. The Company's previously reported long-term
and total liabilities increased by $40.9 million with a corresponding
decrease in the Company's equity.

The foregoing adjustments do not affect previously recorded net sales,
operating loss or cash flows from continuing operations. Furthermore, these
adjustments do not affect previously reported income tax expense as the
Company has recorded a full valuation allowance against all deferred tax
assets.

As a result of the restatement, the Company has to file an amended Form
10-K/A for the year ended September 30, 2004 and an amended Form 10-Q/A for
the periods ended June 30, 2004 and December 31, 2004, in December 2005. The
Company previously filed restated information for these periods in the Form
10-Q for the quarter ended March 31, 2005, however, the calculation of fully
diluted earnings per share for the three-month and nine-month periods ended
June 30, 2004 and three-month and nine-month periods ended March 31, 2005,
were reported incorrectly as it did not capture the effects of all the
convertible and potentially dilutive securities in the appropriate sequence
as prescribed in SFAS No. 128, Earnings per Share. The following tables
summarize in a condensed format, the consolidated financial statements as
previously reported and as restated for the fiscal year ended September 30,
2004 and the quarters ended March 31, June 30, September 30, and December
31, 2004. The previously reported amounts for the periods ended March 31,
2004 and September 30, 2004 have been adjusted for discontinued operations
presentation discussed in Note 4.

<TABLE>
<CAPTION>
                                                                                   MARCH 31, 2004              MARCH 31, 2004
                                                                                   --------------              --------------
                                                                                   AS                          AS
                                                                               PREVIOUSLY       AS         PREVIOUSLY       AS
CONSOLIDATED STATEMENT OF OPERATIONS                                            REPORTED     RESTATED       REPORTED     RESTATED
------------------------------------                                            --------     --------       --------     --------
<S>                                                                             <C>          <C>            <C>          <C>
Operating loss from continuing operations.......................................$ (1,345)    $ (1,345)      $  (3,968)   $  (3,968)
Interest expense, excluding amortization of financing fees and debt discount....    (778)        (778)         (1,384)      (1,384)
Amortization of financing fees and debt discount................................    (290)        (425)           (341)        (475)
Loss on value of warrants and conversion feature................................       -       (5,574)              -       (5,574)
Other net and interest income...................................................    (128)        (272)            (16)        (160)
                                                                                --------     --------       ---------    ---------
Loss from continuing operations before income taxes.............................  (2,541)      (8,394)         (5,709)     (11,561)
Income taxes....................................................................     111          111             189          189
                                                                                --------     --------       ---------    ---------
Loss from continuing operations.................................................  (2,652)      (8,505)         (5,898)     (11,750)
Loss from discontinued operations...............................................  (1,192)      (1,192)         (1,638)      (1,638)
                                                                                --------     --------       ---------    ---------
Net loss........................................................................$ (3,844)    $ (9,697)      $  (7,536)   $ (13,388)
                                                                                ========     ========       =========    =========

Basic and diluted loss per share:
     Continuing operations......................................................$  (0.16)    $  (0.52)      $   (0.36)   $   (0.72)
     Discontinued operations....................................................   (0.07)        (.07)          (0.10)       (0.10)
                                                                                --------     --------       ---------    ---------
         Total..................................................................$  (0.23)    $  (0.59)      $   (0.46)   $   (0.82)
                                                                                ========     ========       =========    =========




                                     9

<PAGE>
<PAGE>



<CAPTION>
                                                                                  MARCH 31, 2004
                                                                                  --------------
                                                                                  AS
                                                                              PREVIOUSLY       AS
CONSOLIDATED BALANCE SHEET                                                     REPORTED     RESTATED
--------------------------                                                     --------     --------
<S>                                                                           <C>           <C>
Total current assets..........................................................$   41,808    $  41,808
Property and equipment, net...................................................    79,652       79,528
Other assets..................................................................     3,346        3,326
                                                                              ----------    ---------
Total assets..................................................................$  124,806    $ 124,662
                                                                              ==========    =========
Total current liabilities.....................................................$   35,991    $  35,991
Other long-term liabilities...................................................       822          822
Value of warrants and conversion feature associated with
  convertible debentures......................................................         -       14,375
Long-term debt, less current maturities ......................................    22,657       20,269
                                                                              ----------     --------
Total liabilities.............................................................    59,470       71,457
Common stock..................................................................       163          163
Additional paid in capital....................................................   115,693      109,414
Accumulated deficit...........................................................   (40,041)     (45,893)
Accumulated other comprehensive loss..........................................   (10,479)     (10,479)
                                                                              ----------    ---------
Total shareholders' equity....................................................    65,336       53,205
                                                                              ----------    ---------
Total liabilities and shareholders' equity....................................$  124,806    $ 124,662
                                                                              ==========    =========

<CAPTION>
                                                                                                               NINE MONTHS ENDED
                                                                                    JUNE 30, 2004                JUNE 30, 2004
                                                                                    -------------                -------------
                                                                                   AS                           AS
                                                                               PREVIOUSLY       AS          PREVIOUSLY       AS
CONSOLIDATED STATEMENT OF OPERATIONS                                            REPORTED     RESTATED        REPORTED     RESTATED
------------------------------------                                            --------     --------        --------     --------
<S>                                                                             <C>          <C>            <C>          <C>
Operating loss from continuing operations.......................................$   (646)    $   (646)      $  (4,615)   $  (4,615)
Interest expense, excluding amortization of financing fees and debt discount....    (882)        (882)         (2,266)      (2,266)
Amortization of financing fees and debt discount................................    (710)      (1,046)         (1,051)      (1,522)
Gain or (loss) on value of warrants and conversion feature......................       -        4,627               -         (947)
Other net and interest income...................................................     121          121             105          (38)
                                                                                --------     --------       ---------    ---------
(Loss) income from continuing operations before income taxes....................  (2,117)       2,174          (7,827)      (9,388)
Income taxes....................................................................     135          135             324          324
                                                                                --------     --------       ---------    ---------
Income (loss) from continuing operations........................................  (2,252)       2,039          (8,151)      (9,712)
Net loss from discontinued operations...........................................  (1,286)      (1,286)         (2,923)      (2,923)
                                                                                --------     --------       ---------    ---------
Net income (loss)...............................................................$ (3,538)    $    753       $ (11,074)   $ (12,635)
                                                                                ========     ========       =========    =========
Basic and diluted income (loss) per share:
     Continuing operations - basic..............................................$  (0.14)    $   0.12       $   (0.50)   $   (0.59)
     Discontinued operations - basic............................................   (0.08)       (0.08)          (0.18)       (0.18)
                                                                                --------     --------       ---------    ---------
         Total - basic..........................................................$  (0.22)    $   0.04       $   (0.68)   $   (0.77)
                                                                                ========     ========       =========    =========

     Continuing operations - diluted............................................$  (0.14)    $  (0.05)      $   (0.50)   $   (0.61)
     Discontinued operations - diluted..........................................   (0.08)       (0.07)          (0.18)       (0.17)
                                                                                --------     --------       ---------    ---------
         Total - diluted........................................................$  (0.22)    $  (0.12)      $   (0.68)   $   (0.78)
                                                                                ========     ========       =========    =========
</TABLE>

The following table summarizes in a condensed format the diluted earnings
per share information reported for the quarter and nine months ended June
30, 2004, in the March 31, 2005 Form 10-Q and as restated in this filing.

<TABLE>
<CAPTION>
                                                                                                              NINE MONTHS ENDED
                                                                                    JUNE 30, 2004               JUNE 30, 2004
                                                                                    -------------               -------------
                                                                                   AS                           AS
                                                                               PREVIOUSLY       AS          PREVIOUSLY       AS
                                                                                REPORTED     RESTATED        REPORTED     RESTATED
                                                                                --------     --------        --------     --------
<S>                                                                             <C>          <C>            <C>          <C>
     Continuing operations - diluted............................................$  (0.03)    $  (0.05)      $   (0.59)   $   (0.61)
     Discontinued operations - diluted..........................................   (0.08)       (0.07)          (0.18)       (0.17)
                                                                                --------     --------       ---------    ---------
         Total - diluted........................................................$  (0.11)    $  (0.12)      $   (0.77)   $   (0.78)
                                                                                ========     ========       =========    =========



                                     10

<PAGE>
<PAGE>

<CAPTION>
                                                                                   JUNE 30, 2004
                                                                                   -------------
                                                                                  AS
                                                                              PREVIOUSLY       AS
CONSOLIDATED BALANCE SHEET                                                     REPORTED     RESTATED
--------------------------                                                     --------     --------
<S>                                                                           <C>           <C>
Total current assets..........................................................$   39,319    $  39,319
Property and equipment........................................................    78,750       78,626
Other assets..................................................................     3,029        3,009
                                                                              ----------    ---------
Total assets..................................................................$  121,098    $ 120,954
                                                                              ==========    =========
Total current liabilities.....................................................$   34,636    $  34,636
Other long-term liabilities...................................................     1,517        1,517
Value of warrants and conversion feature associated with convertible
 debentures...................................................................         -        9,748
Long-term debt, less current maturities ......................................    23,825       21,773
                                                                              ----------     --------
Total liabilities.............................................................    59,978       67,674
Common stock..................................................................       163          163
Additional paid in capital....................................................   115,747      109,468
Accumulated deficit...........................................................   (43,579)     (45,140)
Accumulated other comprehensive loss..........................................   (11,211)     (11,211)
                                                                              ----------    ---------
Total shareholders' equity....................................................    61,120       53,280
                                                                              ----------    ---------
Total liabilities and shareholders' equity....................................$  121,098    $ 120,954
                                                                              ==========    =========
<CAPTION>
                                                                                                                  YEAR ENDED
                                                                                 SEPTEMBER 30, 2004           SEPTEMBER 30, 2004
                                                                                 ------------------           ------------------
                                                                                   AS                           AS
                                                                               PREVIOUSLY       AS          PREVIOUSLY       AS
CONSOLIDATED STATEMENT OF OPERATIONS                                            REPORTED     RESTATED        REPORTED     RESTATED
------------------------------------                                            --------     --------        --------     --------
<S>                                                                             <C>          <C>            <C>          <C>
Operating loss from continuing operations.......................................$   (870)    $   (870)      $  (5,485)   $  (5,485)
Interest expense, excluding amortization of financing fees and debt discount....  (1,163)      (1,163)         (3,429)      (3,429)
Amortization of financing fees and debt discount................................    (720)      (1,055)         (1,771)      (2,577)
Loss on value of warrants and conversion feature................................       -       (3,973)              -       (4,920)
Other net and interest income...................................................     106          (95)            210         (134)
                                                                                --------     --------       ---------    ---------
Loss from continuing operations before income taxes.............................  (2,647)      (7,156)        (10,475)     (16,545)
Income taxes....................................................................     110          110             434          434
                                                                                --------     --------       ---------    ---------
Loss from continuing operations.................................................  (2,757)      (7,266)        (10,909)     (16,979)
Loss from discontinued operations...............................................  (2,906)      (2,905)         (5,828)      (5,828)
                                                                                --------     --------       ---------    ---------
Net loss........................................................................$ (5,663)    $(10,171)      $ (16,737)   $ (22,807)
                                                                                ========     ========       =========    =========
Basic and diluted loss per share:
     Continuing operations......................................................$  (0.17)    $  (0.44)      $   (0.67)   $   (1.04)
     Discontinued operations....................................................   (0.17)       (0.18)          (0.35)       (0.36)
                                                                                --------     --------       ---------    ---------
         Total..................................................................$  (0.34)    $  (0.62)      $   (1.02)   $   (1.40)
                                                                                ========     ========       =========    =========

<CAPTION>
                                                                                 SEPTEMBER 30, 2004
                                                                                 ------------------
                                                                                   AS
                                                                               PREVIOUSLY       AS
CONSOLIDATED BALANCE SHEET                                                      REPORTED     RESTATED
--------------------------                                                      --------     --------
<S>                                                                             <C>          <C>
Cash............................................................................$    267     $    267
Accounts receivable.............................................................  11,811       11,611
Inventories.....................................................................  25,902       25,902
Other current assets............................................................   1,167        1,167
                                                                                --------     --------
Total current assets............................................................  39,147       38,947
Property and equipment..........................................................  80,538       80,414
Other assets....................................................................   3,114        3,094
                                                                                --------     --------
Total assets.................................................................... 122,799     $122,455
Total current liabilities.......................................................  22,145       22,145
Other long-term liabilities.....................................................     357          357
Value of warrants and conversion feature associated with convertible debentures.       -       13,721
Long-term debt, less current maturities ........................................  43,718       42,002
                                                                                --------     --------
Total liabilities...............................................................  66,220       78,225
Common stock....................................................................     163          163
Additional paid in capital...................................................... 115,803      109,524
Accumulated deficit............................................................. (49,242)     (55,312)
Accumulated other comprehensive loss............................................ (10,145)     (10,145)
                                                                                --------     --------
Total shareholders' equity......................................................  56,579       44,230
                                                                                --------     --------
Total liabilities and shareholders' equity......................................$122,799     $122,455
                                                                                ========     ========

                                     11

<PAGE>
<PAGE>

<CAPTION>
                                                                                  DECEMBER 31, 2004
                                                                                  -----------------
                                                                                   AS
                                                                               PREVIOUSLY       AS
CONSOLIDATED STATEMENT OF OPERATIONS                                            REPORTED     RESTATED
------------------------------------                                            --------     --------
<S>                                                                             <C>          <C>
Operating loss from continuing operations.......................................$ (1,642)    $ (1,642)
Interest expense, excluding amortization of financing fees and debt discount....  (1,107)      (1,107)
Amortization of financing fees and debt discount................................    (904)      (1,815)
Loss on value of warrants and conversion feature and discount write-off.........       -      (25,518)
Other net and interest income...................................................     641          641
                                                                                --------     --------
Loss from continuing operations before income taxes.............................  (3,012)     (29,441)
Income taxes....................................................................     115          115
                                                                                --------     --------
Loss from continuing operations.................................................  (3,127)     (29,556)
Loss from discontinued operations...............................................    (373)        (373)
                                                                                --------     --------
Net loss........................................................................$ (3,500)    $(29,929)
                                                                                ========     ========
Basic and diluted loss per share:
     Continuing operations......................................................$  (0.19)    $  (1.80)
     Discontinued operations....................................................   (0.02)       (0.02)
                                                                                --------     --------
         Total..................................................................$  (0.21)    $  (1.82)
                                                                                ========     ========

<CAPTION>
                                                                                  DECEMBER 31, 2004
                                                                                  -----------------
                                                                                   AS
                                                                               PREVIOUSLY       AS
CONSOLIDATED BALANCE SHEET                                                      REPORTED     RESTATED
--------------------------                                                      --------     --------
<S>                                                                             <C>          <C>
Cash                                                                            $    430     $    430
Accounts receivable.............................................................  11,393       11,193
Inventories.....................................................................  29,927       29,927
Other current assets............................................................   2,216        2,216
                                                                                --------     --------
Total current assets............................................................  43,966       43,766
Property and equipment..........................................................  85,334       85,210
Other assets....................................................................   3,616        3,596
                                                                                --------     --------
Total assets....................................................................$132,916     $132,572
                                                                                ========     ========
Total current liabilities.......................................................$ 23,259     $ 23,259
Other long-term liabilities.....................................................     190          190
Value of warrants and conversion feature associated with
   convertible debentures.......................................................       -       49,430
Long-term debt, less current maturities ........................................  51,097       42,599
                                                                                --------     --------
Total liabilities...............................................................  74,546      115,478
Common stock....................................................................     165          165
Additional paid in capital...................................................... 118,383      109,606
Accumulated deficit............................................................. (52,742)     (85,241)
Accumulated other comprehensive loss............................................  (7,436)      (7,436)
                                                                                --------     --------
Total shareholders' equity......................................................  58,370       17,094
                                                                                --------     --------
Total liabilities and shareholders' equity......................................$132,916     $132,572
                                                                                ========     ========
</TABLE>

The following table summarizes in a condensed format the diluted earnings
per share information reported for the quarter and six months ended March
31, 2005, in the March 31, 2005 Form 10-Q and as restated in this filing.

<TABLE>
<CAPTION>
                                                                                                               SIX MONTHS ENDED
                                                                                    MARCH 31, 2005              MARCH 31, 2005
                                                                                    --------------              --------------
                                                                                   AS                           AS
                                                                               PREVIOUSLY       AS          PREVIOUSLY       AS
                                                                                REPORTED     RESTATED        REPORTED     RESTATED
                                                                                --------     --------        --------     --------
<S>                                                                             <C>          <C>            <C>          <C>
     Continuing operations - diluted............................................$  (0.02)    $  (0.22)      $   (1.60)   $   (1.65)
     Discontinued operations - diluted..........................................   (0.01)       (0.01)          (0.03)       (0.03)
                                                                                --------     --------       ---------    ---------
         Total - diluted........................................................$  (0.03)    $  (0.23)      $   (1.63)   $   (1.68)
                                                                                ========     ========       =========    =========
</TABLE>

3.   FINANCING

Management will seek to fund its near-term operations from the sale of
excess inventories, continued aggressive management of the Company's working
capital and existing borrowing capacity under the Company's revolving credit
facility. As the demand for carbon fiber continues to increase, the Company
will need additional financing to execute its capacity expansion program.
Based upon these forecasts, borrowing capacity, and the completion of the
transaction discussed in "--Fiscal 2005 Refinancing" below, the Company
believes it has sufficient cash flows to continue operations for at least
the next 12 months.

                                     12

<PAGE>
<PAGE>

Due to the timing of development of markets for carbon fiber products, the
Company's operating activities have used cash in each of the past four
fiscal years and the first six months of the current fiscal year. As a
result, the Company has executed refinancing arrangements and incurred
borrowings under credit facilities, multiple convertible debenture
facilities, as well as 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.

The Company anticipates it will require further financing in 2006 to support
its previously announced capacity expansion program.

WARRANT AND CONVERSION FEATURES
-------------------------------

In January, March and October of 2004 and February 2005, the Company issued
convertible notes and warrants which would require the Company to register
the resale of the shares of common stock upon conversion or exercise of
these securities. The Company accounts for the fair value of these
outstanding warrants to purchase common stock and conversion feature of its
convertible notes in accordance with SFAS No. 133 "Accounting For Derivative
Instruments And Hedging Activities" and EITF Issue No. 00-19 "Accounting For
Derivative Financial Instruments Indexed To And Potentially Settled In A
Company's Own Stock;" which require the Company to bifurcate and separately
account for the conversion feature and warrants as embedded derivatives
contained in the Company's convertible notes. Pursuant to SFAS No. 133, the
Company bifurcated the fair value of the conversion feature from the
convertible notes, since the conversion features were determined to not be
clearly and closely related to the debt host. In addition, since the
effective registration of the securities underlying the conversion feature
and warrants is an event outside of the control of the Company, pursuant to
EITF Issue No. 00-19, the Company recorded the fair value of the conversion
feature and warrants as long-term liabilities as it was assumed that the
Company would be required to net-cash settle the underlying securities. The
Company is required to carry these embedded derivatives on its balance sheet
at fair value and unrealized changes in the values of these embedded
derivatives are reflected in the consolidated statement of operations as
"Gain (loss) on value of warrants and conversion feature." See table below
for impact on the quarterly and six-month financial results ended March 31,
2005 and 2004.

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED MARCH 31, 2005          SIX MONTHS ENDED MARCH 31, 2005
                                                        ---------------------------------          -------------------------------
                                                                   CONVERSION                               CONVERSION
                                                        WARRANTS    FEATURES      TOTAL          WARRANTS    FEATURES       TOTAL
                                                        --------    --------      -----          --------    --------       -----
<S>                                                     <C>        <C>          <C>             <C>         <C>          <C>
January 2004 issuance - mark to market .................$    783   $  (1,003)   $   (220)       $  (1,032)  $   (8,164)  $   (9,196)
March 2004 issuance - mark to market ...................     522        (778)       (256)            (727)      (5,684)      (6,411)
October 2004 issuance - mark to market .................   1,005       3,604       4,609           (1,392)      (4,422)      (5,814)
February 2005 issuance - mark to market ................   1,637       3,358       4,995            1,637        3,358        4,995
                                                        --------   ---------    --------        ---------   ----------   ----------
         Totals.........................................$  3,947   $   5,181    $  9,128        $  (1,514)  $  (14,912)  $  (16,426)
                                                        ========   =========    ========        =========   ==========   ==========

<CAPTION>
                                                THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 2004
                                                ------------------------------------------------
                                                             (RESTATED-SEE NOTE 2)

                                                                     CONVERSION
                                                          WARRANTS    FEATURES     TOTAL
                                                          --------    --------     -----
<S>                                                       <C>         <C>         <C>
January 2004 issuance - mark to market .................  (1,144)     (4,430)     (5,574)
</TABLE>

Fiscal 2005 Refinancing
-----------------------

In February 2005, the Company issued convertible debentures in the aggregate
principal amount of $20.0 million to institutional private equity investors.
The convertible debentures have a stated maturity of 42 months and bear
interest at a variable rate of six-month LIBOR plus 4% which was 7.5% at
March 2005, and are presently convertible into 1,000,000 shares of common
stock at a conversion price of $20.00 per share. The Company also issued to
the investors four-year warrants to purchase an aggregate of 457,142 shares
of common stock of the Company at an exercise price of $17.50 per share. The
fair value of the debt discount associated with the warrants and conversion
feature of the debt at the time of issuance was $15.3 million and will be
amortized over the life of the convertible debt. Proceeds from issuance of
these convertible debentures were used to repay mortgage debt of $6.0
million and the balance to expand the capacity of carbon fiber operations to
meet demand.

During the quarter ended March 31, 2005, the investors converted $13.0
million of convertible debt issued in the January and March 2004 transaction
into 2,230,011 shares of common stock which was recorded into equity. The
Company also recorded into equity at the time of conversion the fair market
value of the conversion feature at the time of conversion of the debt issued
in the January and March 2004 issuances, which was valued at $24.5 million
which was offset by a reduction to equity of $5.5 million for the
unamortized portion of the debt discount. Also, at the time of conversion
the Company wrote off the unamortized deferred financing cost of $0.4
million related to these issuances into additional paid-in capital.

                                     13

<PAGE>
<PAGE>

The repayment of the $6.0 million mortgage note described above had a
stated maturity of three years and bore interest at a rate of LIBOR plus 11%
with a LIBOR floor of 2%. The Company paid a prepayment fee of $0.3 million,
which was expensed to the Company's statement of operations at the repayment
date. The Company also wrote off the unamortized amount of the deferred
financing cost related to the original issuances of the note of $0.4
million.

In October 2004, the Company issued convertible debentures in the aggregate
principal amount of $20.0 million to institutional private equity investors.
The convertible debentures have a stated maturity of 42 months and bear
interest at 7.5% per annum and are presently convertible into 1,666,666
shares of common stock at a conversion price of $12.00 per share. The
Company also issued to the investors six-year warrants to purchase an
aggregate of 500,000 shares of common stock of the Company at an exercise
price of $13.00 per share. The fair value of the debt discount associated
with the warrants and conversion feature of the debt at the time of issuance
was $10.2 million and will be amortized over the life of the convertible
debt. Proceeds from issuance of these convertible debentures were used to
reduce existing Hungarian bank debt by $12.0 million and the balance for
working capital purposes which allowed the Company to refinance the
remaining Hungarian bank debt to a three-year term loan for $3.0 million
with no financial covenants going forward.

In December 2004, the Company's U.S. bank extended the maturity and waived
the financial covenants of the Company's revolving credit loan, term loan
and mortgage on an existing property to January 1, 2006. The Company's U.S.
bank also increased the amount available under the revolving credit loan by
$0.5 million to $5.5 million and increased the term loan by $0.1 million to
$0.8 million. The principal of the term loan is payable on a quarterly basis
of $0.1 million with the remainder of the principal due at the maturity date
of January 1, 2006 and is therefore classified current. The mortgage is
payable on a monthly basis of $15,344 of principal and interest with the
remainder of the principal due at the maturity date of January 1, 2006 and
is therefore classified as current.

Fiscal 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 1,295,954 shares of common stock at
the date of issuance at a conversion 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. 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. The fair value of the debt discount
associated with the warrants and the conversion feature, at the time of
issuance, was $3.0 million and will be amortized over the life of the
convertible debt. Proceeds from the issuance of these convertible debentures
were used for working capital purposes. As previously discussed the
convertible debentures have been converted into the Company's stock during
the quarter ended March 31, 2005.

As part of the Company's January 2004 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 January 2004 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, in December 2003
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 bore
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 as 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
was released. After converting $250,000 into convertible debt as part of the
January 2004 financing, the remaining $1.15 million loan was repaid during
the third quarter of fiscal 2004.

Also in January 2004, the Company 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 note provided for payment of 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. manufacturing facilities that produce carbon and technical
fibers. 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 was held in an
escrow account to be released when the Company completed certain
post-closing requirements. The Company completed these requirements during
the third quarter of fiscal 2004 and the $0.5 million was released from
escrow. As previously discussed, the mortgage note was repaid during the
quarter ended March 31, 2005.

                                     14

<PAGE>
<PAGE>

In March 2004, the Company issued and sold convertible debentures in the
aggregate principal amount of $5.75 million to institutional private equity
investors and Mr. Dill ($750,000) who is member 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 have been converted into 895,908
shares of common stock at a conversion price of $6.25 per share for each
investor other than Mr. Dill and $7.82 per share for Mr. Dill. The Company
also issued to the investors five-year warrants to purchase an aggregate of
223,997 shares of common stock of the Company at an exercise price of $7.50
per share for each investor other than Mr. Dill whose warrants have an
exercise price of $7.82 per share. The fair value of the debt discount
associated with the warrants and conversion feature, at the time of
issuance, was $5.7 million and will be amortized over the life of the
convertible debt. Proceeds from the issuance of these convertible debentures
are being used for working capital and capital expenditures. As previously
discussed the convertible debentures have been converted into the Company's
stock during the quarter ended March 31, 2005.

Each issuance of convertible debt is summarized in the table below which
sets forth the significant term of the debt, warrants and assumptions
associated with valuing the conversion feature and warrants:

<TABLE>
<CAPTION>
                                                (1)FEBRUARY 2003   JANUARY 2004      MARCH 2004     OCTOBER 2004    FEBRUARY 2005
                                                   -------------   ------------      ----------     ------------    -------------
<S>                                                  <C>               <C>            <C>              <C>            <C>
Amount of debenture (millions)...................    $8.1              $7.0           $5.75            $20.0          $20.0
Per share conversion price on debenture..........    $3.25             $5.40          $6.25            $12.00         $20.00
Interest rate....................................    7.5%              6.0%           6.0%             7.0%           7.5%
Term of debenture................................    60 months         30 months      30 months        42 months      42 months
Warrants issued..................................    405,000           323,995        230,000          500,000        457,142
Term of warrant..................................    60 months         48 months      48 months        72 months      48 months
Per share exercise price of warrants.............    $5.00             $5.40          $7.50            $13.00         $17.50
Fair value per warrant at issuance...............    $0.93             $2.27          $5.43            $6.02          $10.47
Value per share conversion feature at issuance...    $3.11             $1.78          $5.06            $4.31          $10.47
Stock price on date of agreement.................    $1.58             $5.40          $9.53            $9.60          $16.68
Stock volatility at issuance.....................    100%              50%            61%              75%            84%
Dividend yield...................................    0.0%              0.0%           0.0%             0.0%           0.0%
Risk free interest rate at issuance..............    3.0%              2.78%          2.44%            3.71%          3.46%

<FN>
--------------------------------
(1)    The warrants issued in connection with the February 2003 convertible
       issuance meets the criteria of EITF 00-19 for equity classification
       as it does not contain similar registration rights obligations with
       respect to the underlying shares. The conversion feature does not
       require derivative accounting and no beneficial conversion feature
       exists on this issuance.
</TABLE>

Earnings Per Share (Restated-See Note 2)
----------------------------------------

The following is the diluted impact of the convertible debt and warrants on
earnings (loss) per share:

<TABLE>
<CAPTION>
                                                                                                     THREE MONTHS ENDED
                                                                                                       MARCH 31, 2005
                                                                                                       --------------
<S>                                                                                                       <C>
         Numerators:
         Income (loss) from continuing operations.........................................................$   2,240
         Impact of convertible debt and warrants:
                  Add: interest expense...................................................................      548
                  Add: amortization of financing fees and debt discount...................................    1,824
                  Less: gain on value of conversion feature and warrants..................................   (9,272)
                                                                                                          ---------
         Loss from continuing operations..................................................................   (4,660)
         Loss from discontinued operations................................................................      (94)
                                                                                                          ---------
         Net loss ........................................................................................$  (4,754)
                                                                                                          =========

         Denominators:
         Average shares outstanding - basic...............................................................   17,783
         Impact of convertible debt and warrants..........................................................    3,019
                                                                                                          ---------
         Average shares outstanding - diluted.............................................................   20,802
                                                                                                          =========



                                     15

<PAGE>
<PAGE>

<CAPTION>
                                                                                                    THREE MONTHS ENDED
                                                                                                       MARCH 31, 2005
                                                                                                       --------------
<S>                                                                                                       <C>
         Earnings (loss) per share - basic:
                  Continuing operations...................................................................$   0.13
                  Discontinued operations.................................................................   (0.01)
                                                                                                          --------
         Basic earnings (loss) per share..................................................................$   0.12
                                                                                                          ========

         Loss per share - diluted:
                  Continuing operations...................................................................$  (0.22)
                  Discontinued operations.................................................................   (0.01)
                                                                                                          --------
         Diluted loss per share...........................................................................$  (0.23)
                                                                                                          ========

<CAPTION>
                                                                                                      SIX MONTHS ENDED
                                                                                                       MARCH 31, 2005
                                                                                                       --------------
<S>                                                                                                       <C>
         Numerators:
         Loss from continuing operations..................................................................$ (27,350)
         Impact of convertible debt:
                  Add: interest expense...................................................................      198
                  Add: amortization of financing fees and debt discount...................................      669
                  Less: gain on value of conversion feature...............................................   (3,358)
                                                                                                          ---------
         Loss from continuing operations..................................................................  (29,841)
         Loss from discontinued operations................................................................     (467)
                                                                                                          ---------
         Net loss ........................................................................................$ (30,308)
                                                                                                          =========

         Denominators:
         Average shares outstanding - basic...............................................................   17,107
         Impact of convertible debt.......................................................................    1,000
                                                                                                          ---------
         Average shares outstanding - diluted.............................................................   18,107
                                                                                                          =========

         Loss per share - basic:
                  Continuing operations...................................................................$   (1.60)
                  Discontinued operations.................................................................    (0.03)
                                                                                                          ---------
         Basic loss per share.............................................................................$   (1.63)
                                                                                                          =========

         Loss per share - diluted:
                  Continuing operations...................................................................$   (1.65)
                  Discontinued operations.................................................................    (0.03)
                                                                                                          ---------
         Diluted loss per share...........................................................................$   (1.68)
                                                                                                          =========
</TABLE>

In accordance with SFAS No. 128, Earnings per Share, the Company has
adjusted the numerator in the diluted earnings per share calculation for the
mark to market gain (loss), interest expense, amortization of debt discount
and amortization of deferred financing cost on the Company's convertible
debentures and warrants. The Company does have outstanding stock options,
warrants and convertible debt outstanding at March 31, 2005 which are not
included in the determination of diluted earnings per share presented above
because the impact of these potential additional shares is anti-dilutive
after including the convertible debt. Had these securities been dilutive, an
additional 2.6 million shares for the quarter ended March 31, 2005 and 4.6
million shares for the six months ended March 31, 2005, would have been
included in the Company's diluted earnings per share calculation. Diluted
earnings per share is not presented for the three and six months ended March
31, 2004 because the impact of these potential additional shares is
anti-dilutive. Had these securities been dilutive, an additional 4.8 million
shares for the quarter ended March 31, 2004 and 4.6 million shares for the
six months ended March 31, 2004 would have been included in the Company's
diluted earnings per share calculation.

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

US Operations - The Company's current credit facility with its U.S. bank is
described above under "--Fiscal 2005 Refinancing." No financial covenants
apply to the credit facility from the U.S. bank, which mature on January 1,
2006. Total borrowings under the U.S. credit facility, including the
revolving line of credit and term loan, were $0.5 million at March 31, 2005
and are classified as current on the consolidated balance sheet.

Hungarian Operations - The Company's Hungarian subsidiary has a credit
facility with a Hungarian bank. Total borrowings under this credit facility
were $2.9 million at March 31, 2005. Due to the fiscal 2005 refinancing (see
"--Refinancing"), the credit facility is a term loan with interest payments
over the next three years and repayment of principal at the maturity date on
December 31, 2007.



                                     16

<PAGE>
<PAGE>

The Company's convertible debt issuances in fiscal 2004 and 2005 have
restrictive covenants related to minimum cash balances, dividends and use of
proceeds. The Company was in compliance with all restrictive covenants at
March 31, 2005.

<TABLE>
<CAPTION>
Long-term debt consists of the following (amounts in thousands):                             MARCH 31,   SEPTEMBER 30,
                                                                                               2005          2004
                                                                                             --------     ---------
                                                                                                          (RESTATED-
                                                                                                          SEE NOTE 2)
<S>                                                                                          <C>          <C>
     Note payable with interest at 9%, payable in monthly installments of
         principal and interest of $15,392 to maturity in January 2006.......................$  1,571     $   1,419

     Non-interest bearing note payable (discounted at 8%) to the City of Abilene, Texas
          to be repaid from real estate and personal property tax abatements, maturing
          in February 2008...................................................................   1,796         1,781

     Convertible debentures due February 2008 bearing interest at 7.0%.......................   7,800         8,100

     Revolving credit agreement, maturing in January 2006, bearing interest at prime
         plus 2.0% (prime rate at March 31, 2005 was 5.5%)...................................       -         5,000

     Term loan, $0.5 million payable in 2005, balance payable in January 2006,
          bearing interest at prime plus 2.0% (prime rate at March 31, 2005 was 5.5%)........     500           700

     Convertible debentures due June 2006 bearing interest at 6%.............................       -         7,000

     Convertible debentures due September 2006 bearing interest at 6%........................       -         5,750

     Convertible debentures due April 2008 bearing interest at 7.0%..........................  20,000             -

     Convertible debentures due August 2008 bearing interest at LIBOR plus 4%,
         as of March 31, 2005................................................................  20,000             -

     Mortgage payable with interest of 13.5% interest only payments
         maturity in January 2007............................................................       -         6,000

     Facilities with Hungarian banks (interest rate of 5.5% to 10.6%)........................   2,913        13,568
                                                                                             --------     ---------
         Total debt..........................................................................  54,580        49,318
         Less: debt discount associated with conversion feature and warrants................. (23,428)       (6,746)
         Less: amounts payable within one year...............................................  (2,144)         (570)
                                                                                             --------     ---------
     Total long-term debt....................................................................$ 29,008     $  42,002
                                                                                             ========     =========
</TABLE>

Value of derivative liabilities at:
-----------------------------------

<TABLE>
<CAPTION>
                                                                   MARCH 31,2005                       SEPTEMBER 30, 2004
                                                                   -------------                       ------------------
                                                                                                     (RESTATED-SEE NOTE 2)

                                                                   CONVERSION                               CONVERSION
                                                        WARRANTS    FEATURES      TOTAL         WARRANTS     FEATURES       TOTAL
                                                        --------    --------      -----         --------     --------       -----
<S>                                                     <C>        <C>          <C>             <C>         <C>          <C>
January 2004 issuance  .................................$  2,878   $       -    $  2,878        $   1,844   $    6,351   $    8,195
March 2004 issuance  ...................................   1,925           -       1,925            1,198        4,328        5,526
October 2004 issuance...................................   4,400      11,605      16,005                -            -            -
February 2005 issuance..................................   3,126       7,149      10,275                -            -            -
                                                        --------   ---------    --------        ---------   ----------   ----------
         Totals.........................................$ 12,329   $  18,754    $ 31,083        $   3,042   $   10,679   $   13,721
                                                        ========   =========    ========        =========   ==========   ==========
</TABLE>


4.   DISCONTINUED OPERATIONS

In the fourth quarter of fiscal 2004, the Company formally adopted a plan to
discontinue and exit two divisions of its Zoltek Rt. operations which
manufacture textile acrylic and nylon fibers and yarns. These divisions were
not part of the long-term strategy of the Company and were not expected to
be profitable in the foreseeable future due to the continued pricing
pressure from competitive manufacturers. These divisions had been included
in the specialty products segment (see Note 7). The wind-down of

                                     17

<PAGE>
<PAGE>

these production lines was substantially completed by February 1, 2005.
Certain information with respect to the discontinued operations of the
textile acrylic and nylon fibers divisions for the quarters and six months
ended March 31, 2005 and 2004 is summarized as follows (amounts in
thousands):

<TABLE>
<CAPTION>
                                                                              THREE MONTHS               SIX MONTHS
                                                                             ENDED MARCH 31,           ENDED MARCH 31,
                                                                             ---------------           ---------------
                                                                            2005         2004         2005         2004
                                                                         ---------    ---------    ---------    ---------
<S>                                                                      <C>          <C>          <C>          <C>
         Net sales.....................................................  $     320    $   4,391    $   1,597    $   9,570
         Cost of sales.................................................        290        4,837        1,611       10,014
                                                                         ---------    ---------    ---------    ---------
              Gross profit (loss)......................................         30         (446)         (14)        (444)
         Selling, general and administrative expenses..................        (97)        (716)        (487)      (1,246)
                                                                         ---------    ---------    ---------    ---------
              Loss from operations.....................................        (67)      (1,162)        (501)      (1,690)
         Other income (loss)...........................................        (27)         (30)          34           52
                                                                         ---------    ---------    ---------    ---------
         Loss on discontinued operations...............................  $     (94)   $  (1,192)   $    (467)   $  (1,638)
                                                                         =========    =========    =========    =========
</TABLE>

5.  COMPREHENSIVE LOSS

Comprehensive loss for the quarter and six months ended March 31, 2005 and
2004 was as follows (in thousands):

<TABLE>
<CAPTION>
                                                                              THREE MONTHS               SIX MONTHS
                                                                             ENDED MARCH 31,           ENDED MARCH 31,
                                                                             ---------------           ---------------
                                                                           2005         2004         2005         2004
                                                                         ---------    ---------    ---------    ---------
                                                                                      (RESTATED-                (RESTATED-
                                                                                      SEE NOTE 2)               SEE NOTE 2)
<S>                                                                      <C>          <C>          <C>          <C>
         Net income (loss).............................................  $   2,146    $  (9,697)   $ (27,817)   $ (13,388)
         Foreign currency translation adjustment.......................     (1,443)         734        1,266        1,953
                                                                         ---------    ---------    ---------    ---------
         Comprehensive loss............................................  $     703    $  (8,963)   $ (26,551)   $ (11,435)
                                                                         =========    =========    =========    =========
</TABLE>

6.   SEGMENT INFORMATION

The Company's strategic business units are based on product lines and have
been grouped into three reportable segments: Carbon Fibers, Technical Fibers
and Specialty Products. In the fourth quarter of fiscal 2004, the Company
discontinued two divisions within its specialty fibers segment and the
results are reported as a discontinued operation. Segment information for
fiscal 2004 has been reclassified to reflect such 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 brake pads 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 seek to 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 located in Hungary, formerly manufactured and marketed
acrylic and nylon products and fibers primarily to the textile industry and
currently manufactures and markets plastic netting and filtration media for
industrial markets. In the fourth quarter of fiscal 2004, the Company
discontinued the acrylic and nylon products within this segment. With the
exception of the Technical Fibers segment, none of the segments are
substantially dependent on sales from one customer or a small group of
customers.

For the six months ended March 31, 2005 and 2004, the Company reported sales
of $4.2 million and $3.2 million, respectively, and $2.1 million and $1.7
million, respectively, for the three months then ended, to a major aircraft
brake manufacturer which was the only customer that represented greater than
10% of Company sales. There are no customers with a receivable balance in
excess of 10% of the total Company balance.

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
March 31, 2005 and September 30, 2004 and for the second quarter and six
months, ended March 31, 2005 and 2004 (amounts in thousands):

<TABLE>
<CAPTION>
                                                                             THREE MONTHS ENDED MARCH 31, 2005
                                                                             ---------------------------------
                                                           Carbon        Technical     Specialty       Corporate
                                                           Fibers         Fibers        Products      Headquarters       Total
                                                        ------------   -----------   -------------   --------------  -------------
<S>                                                     <C>            <C>           <C>             <C>             <C>
Net sales............................................   $      8,226   $     4,651   $     2,895     $         -     $    15,772
Cost of sales, excluding available unused capacity...          8,472         3,896         2,492               -          14,860
Available unused capacity expenses...................            524             -             -               -             524
Operating (loss) income..............................         (1,432)          392          (211)           (797)         (2,048)
Depreciation and amortization expense................            924           224           132              25           1,305
Capital expenditures.................................          3,330            92             4               -           3,426



                                     18

<PAGE>
<PAGE>

<CAPTION>
                                                                             THREE MONTHS ENDED MARCH 31, 2004
                                                                             ---------------------------------
                                                           Carbon        Technical     Specialty       Corporate
                                                           Fibers         Fibers        Products      Headquarters       Total
                                                        ------------   -----------   -------------   --------------  -------------
<S>                                                     <C>            <C>           <C>             <C>             <C>
Net sales............................................   $      4,697   $     3,663   $     3,177     $         -     $    11,537
Cost of sales, excluding available unused capacity...          3,744         3,250         2,529                           9,523
Available unused capacity expenses...................          1,259             -             -               -           1,259
Operating (loss) income..............................         (1,370)          260           279            (510)         (1,345)
Depreciation and amortization expense................            689           197           428              23           1,337
Capital expenditures.................................          2,539           114            12             (80)          2,585

<CAPTION>
                                                                              SIX MONTHS ENDED MARCH 31, 2005
                                                                              -------------------------------
                                                           Carbon        Technical     Specialty       Corporate
                                                           Fibers         Fibers        Products      Headquarters       Total
                                                        ------------   -----------   -------------   --------------  -------------
<S>                                                     <C>            <C>           <C>             <C>             <C>
Net sales............................................   $     15,278   $     8,429   $     5,583     $         -     $    29,290
Cost of sales, excluding available unused capacity...         15,547         6,865         4,844               -          27,256
Available unused capacity expenses...................          1,049             -             -               -           1,049
Operating (loss) income..............................         (3,114)          749            77          (1,402)         (3,690)
Depreciation and amortization expense................          1,816           463           273              54           2,606
Capital expenditures.................................          5,335           252           179              11           5,777

<CAPTION>
                                                                              SIX MONTHS ENDED MARCH 31, 2004
                                                                              -------------------------------
                                                           Carbon        Technical     Specialty       Corporate
                                                           Fibers         Fibers        Products      Headquarters       Total
                                                        ------------   -----------   -------------   --------------  -------------
<S>                                                     <C>            <C>           <C>             <C>             <C>
Net sales............................................   $      7,769   $     6,484   $     5,435     $         -     $    19,688
Cost of sales, excluding available unused capacity...          6,689         5,496         4,341               -          16,526
Available unused capacity expenses...................          2,686             -             -               -           2,686
Operating (loss) income..............................         (3,299)          428           198          (1,295)         (3,968)
Depreciation and amortization expense................          1,808           353           637              50           2,848
Capital expenditures.................................          2,663           204           228             (40)          3,055

<CAPTION>
                                                                                       TOTAL ASSETS
                                                                                       ------------
                                                           Carbon        Technical     Specialty       Corporate
                                                           Fibers         Fibers        Products      Headquarters       Total
                                                        ------------   -----------   -------------   --------------  -------------
<S>                                                     <C>            <C>           <C>             <C>             <C>
March 31, 2005.......................................   $     89,719   $    23,056   $    11,107     $     8,559     $   132,441
September 30, 2004 (Restated - see Note 2)...........         82,756        22,154        14,506           3,039         122,455
</TABLE>

GEOGRAPHIC INFORMATION (IN THOUSANDS)
-------------------------------------

<TABLE>
<CAPTION>
                                                            REVENUES                 REVENUES
                                                       THREE MONTHS ENDED        SIX MONTHS ENDED           LONG-LIVED ASSETS (1)
                                                       ------------------        ----------------           ---------------------
                                                      MARCH 31,   MARCH 31,     MARCH 31,    MARCH 31,     MARCH 31,  SEPTEMBER 30,
                                                        2005        2004          2005         2004           2005        2004
                                                        ----        ----          ----         ----           ----        ----
<S>                                                  <C>         <C>            <C>          <C>           <C>         <C>
United States........................................$   5,418   $   5,497      $ 10,986     $ 10,412      $  47,728   $  46,582
Western Europe.......................................    6,141       2,185        10,867        2,920              -           -
Eastern Europe.......................................    2,864       2,924         5,635        5,067         37,284      33,832
Asia ................................................    1,349         931         1,802        1,264              -           -
Other................................................        -           -             -           25              -           -
                                                     ---------   ---------      --------     --------      ---------   ---------
Total................................................$  15,772   $  11,537      $ 29,290     $ 19,688      $  85,012   $  80,414
                                                     =========   =========      ========     ========      =========   =========
<FN>
------------------------
 (1) Property and equipment net of accumulated depreciation based on country
location of assets.
</TABLE>


                                     19

<PAGE>
<PAGE>

7.   INVENTORIES

Inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
                                                                                          MARCH 31,     SEPTEMBER 30,
                                                                                            2005            2004
                                                                                        -----------     -------------
<S>                                                                                      <C>              <C>
         Raw materials.................................................................  $  10,120        $   5,462
         Work-in-process...............................................................      1,058            1,177
         Finished goods................................................................     16,866           18,317
         Other.........................................................................      1,491              946
                                                                                         ---------        ---------
                                                                                         $  29,535        $  25,902
                                                                                         =========        =========
</TABLE>

8.   NEW ACCOUNTING PRONOUNCEMENTS

In October 2004, the government passed the "American Jobs Creation Act,"
which allows companies to repatriate cash balances from their controlled
foreign subsidiaries at a reduced tax rate and created a new deduction for
U.S. manufacturers related to qualified production activities for income tax
purposes. The Company is still considering the implications and evaluating
whether the Company will repatriate funds from its Hungarian subsidiary.

In December 2004, the FASB issued interpretation No. 123-R "Accounting for
Stock-Based Compensation" (SFAS No. 123-R), which addressed the requirement
for expensing the cost of employee services received in exchange for an
award of equity instrument. SFAS No. 123-R will apply to all equity
instruments awarded, modified or repurchased for fiscal year ends beginning
after June 15, 2005, which would be October 1, 2005 for the Company. The
Company is currently evaluating the effect of this interpretation on the
Company's financial statements when implemented.

9.   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 in the amount of $0.3
million for breaches by the Company of its obligations under the guaranty
and the settlement agreement and, in addition, demands $0.5 million in
damages from Hardcore and the Company, jointly and severally, under the
terms of the settlement agreement. In October 2004, the Court of Common
Pleas for Cuyahoga County, Ohio ruled in favor of the former owner of
Hardcore Composites in the amount of $1.1 million. In prior periods, the
Company has accrued $1.1 million in respect of the possible liability in
this matter, which it believes is its maximum obligation under this
guaranty. The Company is vigorously defending this matter, has filed
counterclaims and filed an appeal that represents its only recourse
regarding this guaranty. Management believes that the ultimate resolution of
this litigation will not have a further material adverse effect on the
Company's results of operations, financial condition or cash flow. To date,
the Company has not made any payments of any portion of this obligation,
although it posted an appeal bond in the amount of $1.3 million. The Company
executed a guaranty of Hardcore Composite's lease obligations of
approximately $30,000 per month to the former owner. The lease of the
Hardcore Composites manufacturing facility expires March 31, 2008. Hardcore
no longer occupies the facility and, accordingly, in connection with the
ongoing litigation with the former owner, Zoltek is asserting that Zoltek
has no further ongoing guarantee obligation with respect to the lease. The
Company also is the obligee on aggregate original value of unsecured
promissory notes of $9.3 million in connection with the sale of Hardcore,
for which a full valuation allowance has been recorded. A full valuation
allowance is appropriate in light of Hardcore's current financial condition
which, among other relevant factors, make the collection of the promissory
notes doubtful.

In September 2004, the Company was named a defendant in a civil action filed
by an investment banker that formerly was retained by the Company to locate
equity investors, alleging breach by the Company of its obligations under
the agreement signed by the parties. The investment banker alleges it is
owed commissions from equity investments obtained by the Company from a
different source. The Company has asserted various defenses, including that
the investment banker breached the agreement by not performing reasonable
efforts to obtain financing for the Company and, therefore, the agreement
was terminated by the Company prior to obtaining new financing. The
litigation is in its preliminary stages and, accordingly, the Company is
unable to predict the timing or the outcome of this litigation or the impact
on the Company's financial condition, results of operations and cash flows.

The Company is a plaintiff in a patent infringement lawsuit pending in the
United States Court of Federal Claims. The lawsuit, which has been pending
since 1996, involves the alleged unauthorized use of the Company's carbon
fiber processing technology in the manufacture of extremely stealthy
aircraft. A preliminary court ruling has been favorable for the Company, but
the Company cannot


                                     20

<PAGE>
<PAGE>

predict the timing or the outcome of this litigation or the impact on the
Company's financial condition, results of operations and cash flows.

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, cash flows, or results of
operations of the Company and its subsidiaries taken as a whole.

Environmental
-------------

The Company's operations generate various hazardous wastes, including
gaseous, liquid and solid materials. Zoltek believes that all of its
facilities are in substantial compliance with applicable environmental and
safety regulations applicable to their respective operations. Zoltek expects
that compliance with current environmental regulations will not have a
material adverse effect on the business, cash flows, results of operations
or financial condition of the Company, and therefore, no reserves have been
recorded. There can be no assurance, however, that the application of future
national or local environmental laws, regulations and enforcement policies
will not have a material adverse effect on the business, cash flows, results
of operations or financial condition of the Company.

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

As part of its growth strategy, the Company has developed its own precursor
acrylic fibers such that all of its carbon fiber and technical fiber
products, 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 technical 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. However, the Company has
initiated trials at all of its aircraft brake manufacturing customers with
its own precursor-based products, which might protect its business if there
were an interruption in supply from the aforementioned supplier.

The major materials used by the Specialty Products segment include basic
commodity products, which are widely available from a variety of sources.

Concentration of Credit Risk
----------------------------

For the six months ended March 31, 2005 and 2004, the Company reported sales
of $4.2 million and $3.2 million, respectively, and $2.1 million and $1.7
million, respectively, for the three months ended March 31, 2005 and 2004,
to a major aircraft brake manufacturer which was the only customer that
represented greater than 10% of Company sales. There is no concentration of
receivables with one customer in excess of 10%. There are no customers with
a receivable balance in excess of 10% of the total Company balance.

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

GENERAL
-------

On May 20, 2005, the Company concluded that its financial results for the
fiscal year ended September 30, 2004 and interim periods ended March 31,
June 30, September 30 and December 31, 2004 would be restated to reflect
additional non-operating gains and losses related to the correction of its
accounting for the conversion feature and related warrants to purchase the
Company's common stock associated with convertible debt issued by the
Company in January, March and October 2004 and the amortization expense
associated with debt discount. Historically, the Company had classified the
value of warrants to purchase common stock and the beneficial conversion
feature, when applicable, as equity as the Company believed these
instruments met the exceptions for recording these instruments as
liabilities. After further review the Company has determined that these
instruments did not meet these exceptions and should have been classified as
liabilities on its balance sheet at the fair value of each instrument. In
subsequent periods the change in fair value of these instruments will result
in an adjustment to this liability with the corresponding gain or loss being
recorded in the statement of operations. At the date of their respective
conversion of the instrument or exercise of the warrants the corresponding
liability will be reclassified to equity. In addition, the Company recorded
individually immaterial adjustments to property and equipment, net and other
assets that increased other expenses by $0.1 million in the quarter ended
March 31, 2004 and to accounts receivable, net that increased other expenses
by $0.2 million in the quarter ended September 30, 2004.

                                     21

<PAGE>
<PAGE>

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 Company has
developed and is implementing a strategy to manufacture and sell carbon
fibers into commercial applications at costs competitive with other
materials. In addition, through its technical fibers segment the Company is
the leading supplier of carbon fibers to the aircraft brake industry, and
manufactures and markets oxidized acrylic fibers, an intermediate product of
the carbon fiber manufacturing process, for fire and heat resistance
applications.

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 were slower to
develop than anticipated. From 1998 to mid-2003 total carbon fiber usage did
not grow significantly and aerospace applications actually declined. This
situation resulted in substantial overcapacity and destructive pricing in
the industry. Much of the new carbon fiber business was captured by the
aerospace fibers as certain manufacturers sold their aerospace-grade fibers
on the commercial markets at prices that did not cover their total costs,
undermining the Company's commercialization strategy.

The carbon fiber market conditions began to change during the second quarter
of fiscal 2004. Two major aerospace programs, the Airbus A-380 and the
Boeing 7E7, have absorbed virtually all of the aerospace fiber capacity, and
resulted in the divergence of the aerospace and commercial markets for
carbon fibers. Since the beginning of fiscal 2004, the Company has entered
into several significant supply relationships with carbon fibers customers.
Increasing sales of carbon fiber products during fiscal 2004 and the first
six months of fiscal 2005 confirmed this shift. The divergence of the two
markets was accelerated by the strength in the development of the carbon
fiber wind turbine blade market. Currently Zoltek believes it is in a unique
position of having installed capacity, the technical capability to increase
the scale of its productive capacity with relatively short lead times and
the fiber quality that can attract current available and future new
business.

The recent increase in the demand for carbon fibers relates to several
different applications including aerospace. During the second quarter of
fiscal 2005, the Company experienced growth in customer demand in the carbon
and technical fiber business units, as combined net sales of these segments
increased $4.5 million and $2.0 million, respectively, over the second
quarter of fiscal 2004 and first quarter of fiscal 2005.

The Company has specifically targeted three significant and emerging
applications: wind energy, flame retardant bedding and home furnishings, and
automotive. Development of the use of carbon fibers is continuing in each of
these targeted market segments.

With the new orders in place and indications for additional significant
orders, the Company has restarted its major carbon fiber manufacturing
facility in Abilene, Texas which had been temporarily idled. The Company has
begun operation of manufacturing lines with aggregate rated capacity of 4
million pounds per year as of April and expects to begin operation of
another manufacturing line with aggregate rated capacity of 1 million pounds
per year by the end of the third quarter of fiscal 2005. The two Hungarian
carbon fiber manufacturing lines currently are fully operational.
Maintaining the excess capacity has been costly, but the Company believed it
has been necessary to assure customers of adequate supply and encourage them
to shift to carbon fibers from other materials. With the reactivation of the
Abilene plant, unused capacity costs are expected to continue to decline
and, ultimately, be fully absorbed in ongoing production as all the carbon
fiber lines start operating in fiscal 2005. In October of 2004 the Company
moved its prepreg operations from San Diego to Salt Lake City. The Company
plans to bring the capacity back on line during fiscal 2005, up until this
time the Company will incur unused capacity cost related to this facility.

In order to meet demand for carbon fibers for wind energy and other
commercial carbon fiber applications, Zoltek has undertaken a three-phase
capacity expansion program. First, Zoltek has initiated the start-up of the
five installed lines at its Abilene, Texas facility and activated sufficient
precursor capacity to support all of the Company's carbon fiber capacity,
which are scheduled to be fully operational in fiscal 2005. Second, Zoltek
plans to add two new carbon fiber lines and add sufficient precursor
capacity at the Company's Hungarian facility by the end of fiscal 2005. The
third phase of the expansion program calls for a doubling of the carbon
fiber and precursor capacity levels after the second phase, to be
operational in 2006.

During the fourth quarter of fiscal 2004, the Company discontinued the nylon
fiber operation and the acrylic textile business. These divisions were
deemed not to be part of the long-term strategy of the Company and not
expected to be profitable in the foreseeable future due to the continued
pricing pressure from competitive manufacturers. The wind-down of these
product lines was substantially completed by February 1, 2005. The Company
will utilize a portion of the acrylic fiber capacity to supply precursor for
its growing carbon fiber manufacturing operations. The results from
operations of these two divisions have been reclassified to discontinued
operations for fiscal 2005 and 2004.

                                     22

<PAGE>
<PAGE>

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

THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------
2004 (RESTATED-SEE NOTE 2)
--------------------------

The Company's sales increased by 37%, or $4.3 million, to $15.8 million in
the second quarter of fiscal 2005 from $11.5 million in the second quarter
of fiscal 2004. Carbon fiber sales increased 74%, or $3.5 million, to $8.2
million in the second quarter of fiscal 2005 from $4.7 million in the second
quarter of fiscal 2004 as production and sales of wind energy orders
continued and the Company experienced a general increase in the overall
demand for carbon fiber from prior years. Technical fiber sales increased
27%, or $1.0 million, to $4.7 million in the second quarter of fiscal 2005
from $3.7 million in the second quarter of fiscal 2004. Technical fiber
sales increased as demand improved not only in the aircraft brake customers
but also for the flame-retardant market. Sales of the continuing components
of the specialty products business segment decreased 9%, or $0.3 million, to
$2.9 million in the second quarter of fiscal 2005 from $3.2 million in the
second quarter of fiscal 2004 as demand for Netlon and Mavibond decreased
from the past year.

The Company's cost of sales (excluding available unused capacity costs)
increased by 56%, or $5.4 million, to $14.9 million in the second quarter of
fiscal 2005 from $9.5 million in the second quarter of fiscal 2004. Carbon
fiber cost of sales increased by $4.8 million, or 130%, to $8.5 million in
the second quarter of fiscal 2005 from $3.7 million in the second quarter of
fiscal 2004 as carbon fiber sales increased by $3.5 million. The increase in
carbon fiber cost of sales was a reflection of increased sales along with
$1.3 million of costs which management estimates was attributable to
start-up and post start-up operating inefficiency of the installed carbon
fiber lines at its Abilene facility. The Company expects that the efficiency
of the manufacturing operation will improve during the rest of fiscal 2005.
Technical fiber cost of sales increased $0.6 million, or 18%, to $3.9
million in the second quarter of fiscal 2005 from $3.3 million in the second
quarter of fiscal 2004 as technical fiber sales for the same period by $1.0
million. The increase in technical fiber cost of sales was a reflection of
the increase in sales. The cost of sales of the specialty products segment
was flat compared to the second quarter of fiscal 2004 at $2.5 million as
sales decreased by $0.3 million. The reduced margin relates to the increase
in raw material costs for the specialty products segment.

The Company continued to incur costs related to the unused productive
capacity for carbon fibers at the Abilene, Texas facility and prepreg
operation. These costs included depreciation and other overhead associated
with the unused capacity. These costs, which were separately identified on
the income statement, were approximately $0.5 million during the second
quarter of fiscal 2005 and $1.3 million in the second quarter of fiscal
2004. The Company believes it has been necessary to maintain available
capacity to encourage development of significant new large-scale
applications. With the increased orders in fiscal 2004 and fiscal 2005,
unused capacity costs are expected to continue to decrease significantly and
to be fully absorbed in ongoing operations by the end of the fiscal third
quarter 2005 for its Abilene, Texas facility and by the end of fiscal 2005
for its prepreg operation. See additional discussion of the Abilene facility
under "--Liquidity and Capital Resources."

Application and market development costs were $0.8 million in the second
quarter of fiscal 2005 and $0.8 million in the second quarter of fiscal
2004. 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 $1.6 million in the second
quarter of fiscal 2005 compared to $1.3 million in the second quarter of
fiscal 2004. The increase relates to staffing of management positions that
have been filled to meet the new demands of the growing sales and production
volume.

Operating loss was $2.0 million in the second quarter of fiscal 2005
compared to a loss of $1.3 million in the second quarter of fiscal 2004, an
increase of $0.7 million which included $1.3 million of costs which
management estimates was attributable to the start-up and post start-up
operating inefficiency of the installed carbon fiber lines at its Abilene
facility. Carbon fiber operating loss was flat at a loss of $1.4 million in
the second quarter of fiscal 2004 as sales increases were offset by
increased costs. The operating income in technical fibers increased from
$0.3 million in the second quarter of fiscal 2004 to $0.4 million in the
second quarter of fiscal 2005 as sales of technical fibers in our core
aircraft brake business increased over 2004. Corporate headquarters
operating loss increased by $0.3 million to a loss of $0.8 million in the
second quarter of fiscal 2005. Specialty products operating results
decreased from income of $0.3 million in the second quarter of fiscal 2004
to an $0.2 million loss in the second quarter of fiscal 2005. The increase
in the Company's total operating loss was a result of start-up cost of the
Company's Abilene, Texas facility carbon fiber lines and precursor lines in
Hungary that did not produce enough product to cover the fixed costs.

Interest expense was approximately $1.1 million in the second quarter of
fiscal 2005 compared to $0.8 million in the second quarter of fiscal 2004.
The increase in interest resulted from higher debt levels after the
Company's refinancing transactions (see "--Liquidity and Capital
Resources"). Due to the limited variable rate debt, the impact from the
increase in interest rate was immaterial.

                                     23

<PAGE>
<PAGE>

Amortization of financing fees and debt discount which are non-cash expenses
was approximately $2.6 million in the second quarter of fiscal 2005 compared
to $0.4 million in the second quarter of fiscal 2004. The increase in
amortization resulted from the Company's refinancing transactions as the
Company wrote off the unamortized portion of deferred financing expense of
$0.4 million, incurred a prepayment fee of $0.3 million to payoff an
existing mortgage note and additional convertible debt issuances (see
"--Liquidity and Capital Resources").

Loss on value of warrants and conversion feature and discount write-off, a
non-cash item, decreased $14.7 million from a loss of $5.6 million in fiscal
2004 to a gain of $9.1 million in fiscal 2005 (see "--Liquidity --
Financing"). The decrease in the loss was attributable to a decrease in our
stock price during the second quarter of 2005 compared to 2004 when the
stock price was appreciating.

Other income/expense, net, was an expense of $1.0 million in the second
quarter of fiscal 2005 compared to an expense of $0.3 million for the second
quarter of fiscal 2004. The increase in the foreign currency transactional
loss during the three months ended March 31, 2005 on the Company's
intercompany debt at its Hungarian subsidiary was attributable to the debt
being denominated in Forints but will be repaid in U.S. Dollars. The money
was loaned at Forint to U.S. Dollar as of December 31, 2004 and the loan was
revalued at a rate of approximately 180 to 1 compared to a rate of 191 to 1
as of March 31, 2005 which caused a loss of $1.0 million.

Income tax expense was $0.1 million for the second quarter of fiscal 2005
compared to an income tax expense 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 in both the second
quarters of fiscal 2005 and 2004 due to uncertainties in the Company's
ability to utilize net operating loss carryforward in the future. The
expense for 2005 relates to local taxes for the Hungarian facility.

The foregoing resulted in income from continuing operations of $2.2 million
for the second quarter of fiscal 2005 compared to a loss from continuing
operations of $8.5 million for the second quarter of fiscal 2004. Similarly,
the Company reported a income from continuing operations per share of $0.13
and a loss from continuing operations per share of $(0.52) on a basic basis
and a loss of $(0.22) and $(0.52) on a diluted basis for the second quarter
of fiscal 2005 and 2004, respectively. The weighted average common shares
outstanding basic were 17.8 million for the second quarter of fiscal 2005
and 16.3 million for the corresponding period of fiscal 2004 and 20.8
million and 16.3 million diluted for the second quarter of fiscal 2005 and
2004.

The loss from discontinued operations of $0.1 million for the second quarter
of fiscal 2005 decreased $1.1 million compared to the second quarter of
fiscal 2004. The significant decrease in sales was offset by a significant
decrease in cost during 2005 as the Company sold off its prior existing
inventory balance during fiscal 2005 compared to full operations in the
prior year. The Company reported a loss per share on discontinued operations
of $(0.01) and $(0.07) on a basic and diluted basis for the second quarter
of fiscal 2005 and 2004, respectively.

SIX MONTHS ENDED MARCH 31, 2005 COMPARED TO SIX MONTHS ENDED MARCH 31, 2004
---------------------------------------------------------------------------
(RESTATED-SEE NOTE 2)
---------------------

The Company's sales increased by 48%, or $9.6 million, to $29.3 million in
fiscal 2005 from $19.7 million in fiscal 2004. Carbon fiber sales increased
96%, or $7.5 million, to $15.3 million in fiscal 2005 from $7.8 million in
fiscal 2004 as production and sales of wind energy orders continued and the
Company experienced a general increase in the overall demand for carbon
fiber from prior years. Technical fiber sales increased 29%, or $1.9
million, to $8.4 million in fiscal 2005 from $6.5 million in fiscal 2004.
Technical fiber sales increased as demand improved not only in the aircraft
brake customers but also for the flame-retardant market. Sales of the
continuing components of the specialty products business segment increased
2%, or $0.2 million, to $5.6 million in fiscal 2005 from $5.4 million in
fiscal 2004 as the sales of the Mavibond division, which produces filtration
media, increased due to higher demand from Eastern European customers and
the strengthening Hungarian forint compared to fiscal 2004.

The Company's cost of sales (excluding available unused capacity costs)
increased by 65%, or $10.8 million, to $27.3 million in fiscal 2005 from
$16.5 million in fiscal 2004. Carbon fiber cost of sales increased by $8.8
million, or 132%, to $15.5 million for the first six months of fiscal 2005
from $6.7 million for the first six months of fiscal 2004. The increase in
carbon fiber cost of sales was a reflection of increased sales along with
$3.2 million of the cost of sales which management estimates were
attributable to start-up and post start-up operating inefficiency of the
installed carbon fiber lines at its Abilene facility. The Company expects
that the efficiency of the manufacturing operation will improve during the
rest of fiscal 2005. Technical fiber cost of sales increased $1.4 million,
or 25%, to $6.9 million for the first six months of fiscal 2005 from $5.5
million for the first six months of fiscal 2004. The increase in technical
fiber cost of sales was a reflection of the increase in sales. The cost of
sales of the specialty products segment increased $0.5 million to $4.8
million compared to the first six months of fiscal 2004 as sales were flat.
The reduced margin related to the increase in raw materials for the
specialty products segment.

The Company continued to incur costs related to the unused productive
capacity for carbon fibers at the Abilene, Texas facility and prepreg
operation. These costs included depreciation and other overhead associated
with the unused capacity. These costs, which were separately identified on
the statement of operations, were approximately $1.0 million during the
first six months of fiscal 2005


                                     24

<PAGE>
<PAGE>

and $2.7 million during the first six months of fiscal 2004. The Company
believes it has been necessary to maintain available capacity to encourage
development of significant new large-scale applications. With the increased
orders in fiscal 2004 and during fiscal 2005, unused capacity costs are
expected to continue to decrease significantly during the fiscal year and to
be fully absorbed in ongoing operations by the end of the fiscal third
quarter 2005 for its Abilene, Texas facility and by the end of fiscal 2005
for its prepreg operation. See additional discussion of the Abilene facility
under "--Liquidity and Capital Resources."

Application and market development costs were $1.7 million in the first six
months of fiscal 2005 and $1.5 million in the first six months of fiscal
2004. 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. As a significant amount of the
Company's research and development is performed in Hungary, the
strengthening of the Hungarian Forint by 20% from 224 to 1 to 186 to 1
against the U.S. Dollar compared to the first six months of fiscal 2004
caused a slight increase in cost.

Selling, general and administrative expenses were $3.0 million in the first
six months of fiscal 2005 compared to $2.9 million in the first six months
of fiscal 2004. The increase related to staffing of management positions
that have been filled to meet the new demands of the growing sales and
production volume offset by the continuing cost reduction plan at its
Hungarian facility.

Operating loss was $3.7 million in the first six months of fiscal 2005
compared to a loss of $4.0 million in the first six months of fiscal 2004,
an improvement of $0.3 million. Carbon fiber operating loss improved from a
loss of $3.3 million in the first six months of fiscal 2004 to a loss of
$3.0 million in the corresponding period of fiscal 2005 as continued
increases in sales has decreased operating losses. These losses also
included $3.2 million of costs which management estimates were attributable
to the start-up and post start-up operating inefficiency of the installed
carbon fiber lines at its Abilene facility. The operating income in
technical fibers increased from $0.4 million in the first six months of
fiscal 2004 to $0.7 million in the first six months of fiscal 2005 as sales
of technical fibers in our core aircraft brake business increased over 2004.
Corporate headquarters operating loss increased by $0.1 million to a loss of
$1.4 million in the first six months of fiscal 2005 due to higher
administrative cost. Specialty products operating results decreased from
income of $0.2 million in the first six months of fiscal 2004 to income of
$0.1 million in the corresponding period of fiscal 2005. The decrease in the
Company's total operating loss was a result of improvement in the carbon
fibers and technical fibers business units as sales have increased and were
offset by the start-up cost inefficiencies of the Abilene, Texas facility
and the Hungarian precursor lines.

Interest expense was approximately $2.2 million in the first six months of
fiscal 2005 compared to $1.4 million in the first six months of fiscal 2004.
The increase in interest resulted from higher debt levels after the
Company's refinancing transactions (see "--Liquidity and Capital
Resources"). Due to the limited variable rate debt, the impact from the
increase in interest rate was immaterial.

Amortization of financing fees which are non-cash expenses, was
approximately $4.4 million in the first six months of fiscal 2005 compared
to $0.5 million in the corresponding period of fiscal 2004. The increase in
amortization resulted from the Company's refinancing transactions as the
Company wrote off the unamortized portion of deferred financing expense of
$0.4 million, incurred a prepayment fee of $0.3 million to payoff an
existing mortgage note and issued additional convertible debt (see
"--Liquidity and Capital Resources").

Loss on value of warrants and conversion feature, which is a non-cash item,
increased $10.8 million from a loss of $5.6 million in fiscal 2004 to a loss
of $16.4 million in fiscal 2005 (see "--Liquidity -- Financing"). The
increase in the loss is attributable to the significant increase in our
stock price during first six months of 2005 compared to 2004.

Other income/expense, net, was a loss of $0.4 million in the first six
months of fiscal 2005 compared to a loss of $0.2 million for the first six
months of fiscal 2004. The increase in the foreign currency transactional
loss during the six months ended March 31, 2005 on the Company's
intercompany debt at its Hungarian subsidiary, was attributable to the debt
being denominated in Forints but being payable in U.S. Dollars. The money
was loaned at Forint to U.S. Dollar as of December 31, 2004 and the loan was
revalued based on the exchange rate at March 31, 2005.

Income tax expense was $0.2 million for the first six months of fiscal 2005
compared to an income tax expense of $0.2 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 in both six-month periods
of fiscal 2005 and 2004 due to uncertainties in the Company's ability to
utilize net operating loss carryforward in the future. The expense for 2005
related to local taxes for the Hungarian facility.

The foregoing resulted in a loss from continuing operations of $27.4 million
for the first six months of fiscal 2005 compared to a loss of $11.8 million
for the first six months of fiscal 2004. Similarly, the Company reported a
loss per share of $(1.60) and $(0.72) on a basic and $(1.65) and $(0.72) on
a diluted basis for the six-month periods of fiscal 2005 and 2004,
respectively. The weighted average common shares outstanding were 17.1
million basic and 18.1 million diluted for the first six months of fiscal
2005 and 16.3 million basic and diluted for the corresponding period of
fiscal 2004.

                                     25

<PAGE>
<PAGE>

The loss from discontinued operations of $0.5 million for the first six
months of fiscal 2005 compared to a loss of $1.6 million in fiscal 2004. The
significant decrease in sales was offset by a significant decrease in cost
during 2005 as the Company sold off its prior existing inventory balance
during fiscal 2005. The Company reported a loss per share on discontinued
operations of $(0.03) and $(0.10) on a basic and diluted basis for the first
six months of fiscal 2005 and 2004, respectively.

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

Management will seek to fund its near-term operations from the sale of
excess inventories, continued aggressive management of the Company's working
capital and existing borrowing capacity under the Company's revolving credit
facility. As the demand for carbon fiber continues to increase, the Company
will need additional financing to execute its capacity expansion program.
Based upon these forecasts, borrowing capacity, and the completion of the
transaction discussed in "Fiscal 2005 Refinancing" below, the Company
believes it has sufficient cash flows to continue operations for at least
the next 12 months.

Due to the timing of development of markets for carbon fiber products, the
Company's operating activities have used cash in each of the past four
fiscal years and the first six months of the current fiscal year. As a
result, the Company has executed refinancing arrangements and incurred
borrowings under credit facilities, multiple convertible debenture
facilities, as well as 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.

The Company anticipates it will require further financing in 2006 to support
its previously announced capacity expansion program.

WARRANT AND CONVERSION FEATURES
-------------------------------

In January, March and October of 2004 and February 2005, the Company issued
convertible notes and warrants which would require the Company to register
the resale of the shares of common stock upon conversion or exercise of
these securities. The Company accounts for the fair value of these
outstanding warrants to purchase common stock and conversion feature of its
convertible notes in accordance with SFAS No. 133 "Accounting For Derivative
Instruments And Hedging Activities" and EITF Issue No. 00-19 "Accounting For
Derivative Financial Instruments Indexed To And Potentially Settled In A
Company's Own Stock;" which requires the Company to bifurcate and separately
account for the conversion feature and warrants as embedded derivatives
contained in the Company's convertible notes. Pursuant to SFAS No. 133, the
Company bifurcated the fair value of the conversion feature from the
convertible notes, since the conversion feature were determined to not be
clearly and closely related to the debt host. In addition, since the
effective registration of the securities underlying the conversion feature
and warrants is an event outside of the control of the Company, pursuant to
EITF Issue No. 00-19, the Company recorded the fair value of the conversion
feature and warrants as long-term liabilities as it was assumed that the
Company would be required to net-cash settle the underlying securities. The
Company is required to carry these embedded derivatives on its balance sheet
at fair value and unrealized changes in the values of these embedded
derivatives are reflected in the consolidated statement of operation as
"Gain (loss) on value of warrants and conversion feature." See table below
for impact on the quarterly and six-month financial results ended March 31,
2005 and 2004.

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED MARCH 31, 2005         SIX MONTHS ENDED MARCH 31, 2005
                                                    ---------------------------------         -------------------------------
                                                               CONVERSION                                CONVERSION
                                                    WARRANTS    FEATURES      TOTAL          WARRANTS     FEATURES       TOTAL
                                                    --------    --------      -----          --------     --------       -----

<S>                                                 <C>        <C>          <C>             <C>         <C>            <C>
January 2004 issuance - mark to market ............ $    783   $  (1,003)   $   (220)       $  (1,032)  $   (8,164)    $ (9,196)
March 2004 issuance - mark to market ..............      522        (778)       (256)            (727)      (5,684)      (6,411)
October 2004 issuance - mark to market ............    1,005       3,604       4,609           (1,392)      (4,422)      (5,814)
February 2005 issuance - mark to market ...........    1,637       3,358       4,995            1,637        3,358        4,995
                                                    --------   ---------    --------        ---------   ----------     --------
         Totals.................................... $  3,947   $   5,181    $  9,128        $  (1,514)  $  (14,912)    $(16,426)
                                                    ========   =========    ========        =========   ==========     ========


<CAPTION>
                                                THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 2004
                                                ------------------------------------------------
                                                             (RESTATED-SEE NOTE 2)

                                                                     CONVERSION
                                                         WARRANTS     FEATURES     TOTAL
                                                         --------     --------     -----
<S>                                                       <C>         <C>         <C>
January 2004 issuance - mark to market .................  (1,144)     (4,430)     (5,574)
</TABLE>

Fiscal 2005 Refinancing
-----------------------

In February 2005, the Company issued convertible debentures in the aggregate
principal amount of $20.0 million to institutional private equity investors.
The convertible debentures have a stated maturity of 42 months and bear
interest at a variable rate of six-month LIBOR plus 4% which was 7.5% at
March 2005, and are presently convertible into 1,000,000 shares of common
stock at a


                                     26

<PAGE>
<PAGE>

conversion price of $20.00 per share. The Company also issued to the
investors four-year warrants to purchase an aggregate of 457,142 shares of
common stock of the Company at an exercise price of $17.50 per share. The
fair value of the debt discount associated with the warrants and conversion
feature of the debt at the time of issuance was $15.3 million and will be
amortized over the life of the convertible debt. Proceeds from issuance of
these convertible debentures were used to repay mortgage debt of $6.0
million and the balance to expand the capacity of carbon fiber operations to
meet demand.

During the quarter ended March 31, 2005, the investors converted $13.0
million of convertible debt issued in the January and March 2004 transaction
into 2,230,011 shares of common stock which was recorded into equity. The
Company also recorded into equity at the time of conversion the fair market
value of the conversion feature at the time of conversion of the debt issued
in the January and March 2004 issuances, which was valued at $24.5 million
which was offset by a reduction to equity of $5.5 million for the
unamortized portion of the debt discount. Also, at the time of conversion
the Company wrote off the unamortized deferred financing cost of
$0.4 million related to these issuances into additional paid-in capital.

The repayment of the $6.0 million mortgage note described above had a stated
maturity of three years and bore interest at a rate of LIBOR plus 11% with a
LIBOR floor of 2%. The Company paid a prepayment fee of $0.3 million, which
was expensed to the Company's statement of operations at the repayment date.
The Company also wrote off the unamortized amount of the deferred financing
cost related to the original issuances of the note of $0.4 million.

In October 2004, the Company issued convertible debentures in the aggregate
principal amount of $20.0 million to institutional private equity investors.
The convertible debentures have a stated maturity of 42 months and bear
interest at 7.5% per annum and are presently convertible into 1,666,666
shares of common stock at a conversion price of $12.00 per share. The
Company also issued to the investors six-year warrants to purchase an
aggregate of 500,000 shares of common stock of the Company at an exercise
price of $13.00 per share. The fair value of the debt discount associated
with the warrants and conversion feature of the debt at the time of issuance
was $10.2 million and will be amortized over the life of the convertible
debt. Proceeds from issuance of these convertible debentures were used to
reduce existing Hungarian bank debt by $12.0 million and the balance for
working capital purposes which allowed the Company to refinance the
remaining Hungarian bank debt to a three-year term loan for $3.0 million
with no financial covenants going forward.

In December 2004, the Company's U.S. bank extended the maturity and waived
the financial covenants of the Company's revolving credit loan, term loan
and mortgage on an existing property to January 1, 2006. The Company's U.S.
bank also increased the amount available under the revolving credit loan by
$0.5 million to $5.5 million and increased the term loan by $0.1 million to
$0.8 million. The principal of the term loan is payable on a quarterly basis
of $0.1 million with the remainder of the principal due at the maturity date
of January 1, 2006 and is therefore classified current. The mortgage is
payable on a monthly basis of $15,344 of principal and interest with the
remainder of the principal due at the maturity date of January 1, 2006 and
is therefore classified as current.

Fiscal 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 1,295,954 shares of common stock at
the date of issuance at a conversion 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. 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. The fair value of the debt discount
associated with the warrants and the conversion feature, at the time of
issuance, was $3.0 million and will be amortized over the life of the
convertible debt. Proceeds from the issuance of these convertible debentures
were used for working capital purposes. As previously discussed the
convertible debentures have been converted into the Company's stock during
the quarter ended March 31, 2005.

As part of the Company's January 2004 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 January 2004 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, in December 2003
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 bore
interest on the amount advanced and the notional amount of the letter of
credit at a rate per annum equal to LIBOR


                                     27

<PAGE>
<PAGE>

plus 11% with a LIBOR floor of 2%, the same interest rate as 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 was released. After converting
$250,000 into convertible debt as part of the January 2004 financing, the
remaining $1.15 million loan was repaid during the third quarter of fiscal
2004.

Also in January 2004, the Company 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 note provided for payment of 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. manufacturing facilities that produce carbon and technical
fibers. 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 was held in an
escrow account to be released when the Company completed certain
post-closing requirements. The Company completed these requirements during
the third quarter of fiscal 2004 and the $0.5 million was released from
escrow. As previously discussed, the mortgage note was repaid during the
quarter ended March 31, 2005.

In March 2004, the Company issued and sold convertible debentures in the
aggregate principal amount of $5.75 million to institutional private equity
investors and Mr. Dill ($750,000) who is member 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 have been converted into 895,908
shares of common stock at a conversion price of $6.25 per share for each
investor other than Mr. Dill and $7.82 per share for Mr. Dill. The Company
also issued to the investors five-year warrants to purchase an aggregate of
223,997 shares of common stock of the Company at an exercise price of $7.50
per share for each investor other than Mr. Dill whose warrants have an
exercise price of $7.82 per share. The fair value of the debt discount
associated with the warrants and conversion feature, at the time of
issuance, was $5.7 million and will be amortized over the life of the
convertible debt. Proceeds from the issuance of these convertible debentures
are being used for working capital and capital expenditures. As previously
discussed the convertible debentures have been converted into the Company's
stock during the quarter ended March 31, 2005.

                                     28

<PAGE>
<PAGE>

Each issuance of convertible debt is summarized in the table below which
sets forth the significant term of the debt, warrants and assumptions
associated with valuing the conversion feature and warrants:

<TABLE>
<CAPTION>
                                                (1)FEBRUARY 2003     JANUARY 2004    MARCH 2004      OCTOBER 2004    FEBRUARY 2005
                                                   -------------     ------------    ----------      ------------    -------------
<S>                                                  <C>               <C>            <C>              <C>              <C>
Amount of debenture (millions)...................    $8.1              $7.0           $5.75            $20.0            $20.0
Per share conversion price on debenture..........    $3.25             $5.40          $6.25            $12.00           $20.00
Interest rate....................................    7.5%              6.0%           6.0%             7.0%             7.5%
Term of debenture................................    60 months         30 months      30 months        42 months        42 months
Warrants issued..................................    405,000           323,995        230,000          500,000          457,142
Term of warrant..................................    60 months         48 months      48 months        72 months        48 months
Per share exercise price of warrants.............    $5.00             $5.40          $7.50            $13.00           $17.50
Fair value per warrant at issuance...............    $0.93             $2.27          $5.43            $6.02            $10.47
Value per share conversion feature at issuance...    $3.11             $1.78          $5.06            $4.31            $10.47
Stock price on date of agreement.................    $1.58             $5.40          $9.53            $9.60            $16.68
Stock volatility at issuance.....................    100%              50%            61%              75%              84%
Dividend yield...................................    0.0%              0.0%           0.0%             0.0%             0.0%
Risk free interest rate at issuance..............    3.0%              2.78%          2.44%            3.71%            3.46%

<FN>
--------------------------------
(1)    The warrants issued in connection with the February 2003 convertible
       issuance meet the criteria of EITF 00-19 for equity classification as
       they do not contain similar registration rights obligations with
       respect to the underlying shares. The conversion feature on the
       related debt does not require derivative accounting and no beneficial
       conversion feature exists on this issuance.
</TABLE>

Earnings Per Share (Restated-See Note 2)
----------------------------------------

The following is the diluted impact of the convertible debt and warrants on
earnings (loss) per share:

<TABLE>
<CAPTION>
                                                                                         THREE MONTHS ENDED
                                                                                           MARCH 31, 2005
                                                                                           --------------
<S>                                                                                          <C>
         Numerators:
         Income (loss) from continuing operations..........................................  $   2,240
         Impact of convertible debt and warrants:
                  Add: interest expense....................................................        548
                  Add: amortization of financing fees and debt discount....................      1,824
                  Less: gain on value of conversion feature and warrants...................     (9,272)
                                                                                             ---------
         Loss from continuing operations...................................................     (4,660)
         Loss from discontinued operations.................................................        (94)
                                                                                             ---------
         Net loss .........................................................................  $  (4,754)
                                                                                             =========

         Denominators:
         Average shares outstanding - basic................................................     17,783
         Impact of convertible debt and warrants...........................................      3,019
                                                                                             ---------
         Average shares outstanding - diluted..............................................     20,802
                                                                                             =========

<CAPTION>
                                                                                         THREE MONTHS ENDED
                                                                                           MARCH 31, 2005
                                                                                           --------------
<S>                                                                                          <C>
         Earnings (loss) per share - basic:
                  Continuing operations....................................................  $   0.13
                  Discontinued operations..................................................     (0.01)
                                                                                             --------
         Basic earnings (loss) per share...................................................  $   0.12
                                                                                             ========

         Loss per share - diluted:
                  Continuing operations....................................................  $  (0.22)
                  Discontinued operations..................................................     (0.01)
                                                                                             --------
         Diluted loss per share............................................................  $  (0.23)
                                                                                             ========
</TABLE>

                                     29

<PAGE>
<PAGE>

<TABLE>
<CAPTION>
                                                                                          SIX MONTHS ENDED
                                                                                           MARCH 31, 2005
                                                                                           --------------
<S>                                                                                          <C>
         Numerators:
         Loss from continuing operations...................................................  $ (27,350)
         Impact of convertible debt:
                  Add: interest expense....................................................        198
                  Add: amortization of financing fees and debt discount....................        669
                  Less: gain on value of conversion feature................................     (3,358)
                                                                                             ---------
         Loss from continuing operations...................................................    (29,841)
         Loss from discontinued operations.................................................       (467)
                                                                                             ---------
         Net loss .........................................................................  $ (30,308)
                                                                                             =========

         Denominators:
         Average shares outstanding - basic................................................     17,107
         Impact of convertible debt........................................................      1,000
                                                                                             ---------
         Average shares outstanding - diluted..............................................     18,107
                                                                                             =========

         Loss per share - basic:
                  Continuing operations....................................................  $   (1.60)
                  Discontinued operations..................................................      (0.03)
                                                                                             ---------
         Basic loss per share..............................................................  $   (1.63)
                                                                                             =========

         Loss per share - diluted:
                  Continuing operations....................................................  $   (1.65)
                  Discontinued operations..................................................      (0.03)
                                                                                             ---------
         Diluted loss per share............................................................  $   (1.68)
                                                                                             =========
</TABLE>

In accordance with SFAS No. 128, Earnings per Share, the Company has
adjusted the numerator in the diluted earnings per share calculation for the
mark to market gain (loss), interest expense, amortization of debt discount
and amortization of deferred financing cost on the Company's convertible
debentures and warrants. The Company does have outstanding stock options,
warrants and convertible debt outstanding at March 31, 2005 which are not
included in the determination of diluted earnings per share presented above
because the impact of these potential additional shares is anti-dilutive
after including the convertible debt. Had these securities been dilutive, an
additional 2.6 million shares for the quarter ended March 31, 2005 and 4.6
million shares for the six months ended March 31, 2005, would have been
included in the Company's diluted earnings per share calculation. Diluted
earnings per share is not presented for the three and six months ended March
31, 2004 because the impact of these potential additional shares is
anti-dilutive. Had these securities been dilutive, an additional 4.8 million
shares for the quarter ended March 31, 2004 and 4.6 million shares for the
six months ended March 31, 2004 would have been included in the Company's
diluted earnings per share calculation.

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

US Operations - The Company's current credit facility with its U.S. bank is
described above under "--Fiscal 2005 Refinancing." No financial covenants
apply to the credit facility from the U.S. bank, which mature on January 1,
2006. Total borrowings under the U.S. credit facility, including the
revolving line of credit and term loan, were $0.5 million at March 31, 2005
and are classified as current on the consolidated balance sheet.

Hungarian Operations - The Company's Hungarian subsidiary has a credit
facility with a Hungarian bank. Total borrowings under this credit facility
were $2.9 million at March 31, 2005. Due to the fiscal 2005 refinancing (see
"--Refinancing"), the credit facility is a term loan with interest payments
over the next three years and repayment of principal at the maturity date on
December 31, 2007.

The Company's convertible debt issuances in fiscal 2004 and 2005 have
restrictive covenants related to minimum cash balances, dividends and use of
proceeds. The Company was in compliance with all restrictive covenants at
March 31, 2005.

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.
The Company resumed manufacturing at this facility during fiscal 2004. Given
that these assets were previously idled and did not generate significant
cash flow in 2004, the Company performed an impairment test and found that
no impairment existed at September 30, 2004. No triggering event occurred in
the second quarter of 2005 that required the Company to perform an
additional analysis at March 31, 2005.

                                     30

<PAGE>
<PAGE>

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

The $4.0 million increase in cash used in continuing operations was the
result of higher working capital requirements in fiscal 2005 and cash
consumed due start-up inefficiencies cost from the Abilene and Hungarian
manufacturing facilities. The $4.0 million increase in working capital
requirements was attributable to increased inventory and receivable levels
as sales and manufacturing activities have increased in the current year.
The Company also reduced payable levels for the first six months of fiscal
2005 after completion of the Company's recent financing transaction which
also contributed to use of cash in continuing operating activities for the
six-month period in fiscal 2005. The Company anticipates improving future
cash flows from operations as it gains operating efficiency at the Abilene
and Hungarian manufacturing facilities.

Cash Used by Discontinued Operating Activities
----------------------------------------------

Net cash used by discontinued operating activities was $0.6 million for the
six months of fiscal 2005. The cash flow used by discontinued operating
activities during the six months ended March 31, 2004 was primarily related
to the net loss of $0.5 million plus increases in net operating assets of
$0.1 million. The increase in net operating assets consisted of a decrease
in receivables and inventory of $1.5 million and $1.0 million, respectively,
offset by decreases in payables of $2.4 million. The decrease in receivables
and inventory related to the discontinuation of the textile acrylic division
as the sales and inventory purchases decreased significantly for the
quarter.

Net cash provided by discontinued operating activities was $0.9 million for
the six months of fiscal 2004. The cash flow used by discontinued operating
activities during the six months ended March 31, 2004 was primarily related
to the net loss of $1.6 million plus decreases in net operating assets of
$0.7 million. The decrease in net operating assets consisted of a decrease
in receivables and inventory of $1.0 million and $0.5 million, respectively,
offset by decrease in payable of $0.8 million. The decrease in receivables
related to the discontinuation of the textile acrylic division as the sales
and inventory purchases decreased significantly from the prior period.

Inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
                                                                                           MARCH 31,    SEPTEMBER 30,
                                                                                             2005           2004
                                                                                           ---------    -------------
<S>                                                                                       <C>             <C>
         Raw materials................................................................... $  10,120       $   5,462
         Work-in-process.................................................................     1,058           1,177
         Finished goods..................................................................    16,866          18,317
         Other...........................................................................     1,491             946
                                                                                          ---------       ---------
                                                                                          $  29,535       $  25,902
                                                                                          =========       =========
</TABLE>

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

Net cash used for continuing investing activities for the six months ended
March 31, 2005 was $5.6 million which primarily consisted of capital
expenditures. These expenditures related to the expansion of the Company's
precursor facility and carbon fiber operations to meet the additional demand
for carbon fiber products.

Net cash used for investing activities for the six months ended March 31,
2004 was $3.0 million which included capital expenditures primarily at the
Hungarian subsidiary related to expansion of its precursor facility.

Historically, cash used in investing activities has been expended for
equipment additions and the expansion of the Company's carbon fibers
production capacity. The Company expects capital expenditures to increase in
connection with the restart of the Abilene carbon fiber lines, the expansion
of its precursor facility in Hungary and the installation of additional
carbon fiber lines to meet the increased demand for carbon fiber. See "-2005
Refinancing" for information related to additional funding for expansion.

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

Net cash provided by financing activities was $15.1 million and $8.7 million
for the six months ended March 31, 2005 and 2004, respectively. The various
financing transactions for the second quarters of 2005 and 2004 are
described above.

                                     31

<PAGE>
<PAGE>

Future Contractual Obligations
------------------------------

A summary of significant contractual obligations is shown below. See Note 2
to the consolidated financial statements for discussion of the Company's
debt agreements.

<TABLE>
<CAPTION>
                                                                                  LESS THAN                    3-5       MORE THAN
                                                                       TOTAL       1 YEAR     1-3 YEARS      YEARS       5 YEARS
                                                                     --------     --------     ---------    ---------    ---------
<S>                                                                  <C>          <C>          <C>          <C>          <C>
         Convertible debentures..................................... $ 47,800     $      -     $  27,800    $  20,000
         Long-term debt, including current maturities...............    6,780        2,144         4,636            -    $       -
                                                                     --------     --------     ---------    ---------    ---------
              Total debt............................................   54,580        2,144        32,436       20,000            -
         Operating leases...........................................      381           58           174          115           34
                                                                     --------     --------     ---------    ---------    ---------
              Total debt and operating leases.......................   54,961        2,202        32,610       20,115           34
              Contractual interest payments(2)......................   14,257        3,943         9,814          500            -
         Purchase obligations(1)....................................    1,403        1,403             -            -            -
                                                                     --------     --------     ---------    ---------    ---------
              Total contractual obligations......................... $ 70,621     $  7,548     $  42,424    $  20,615    $      34
                                                                     ========     ========     =========    =========    =========
<FN>
--------------------------------
(1)   Represents purchase order requirements as of March 31, 2005
(2)   Variable rate interest payments are calculated using the rate as of March 31, 2005 of 7.5%
</TABLE>

The future contractual obligations and debt could be reduced by $61 million
in exchange for 5.1 million shares of common stock if all the convertible
debt was converted.

<TABLE>
<CAPTION>
                                                    Conversion                 Less than                    4-5        More than
                                                       price        Total        1 year     1-3 years      years        5 years
                                                    -----------   ---------    ---------    ---------     --------     ---------

<S>                                                 <C>           <C>          <C>          <C>           <C>           <C>
Total contractual obligation.......................               $  70,621    $   7,548    $  42,424     $ 20,615      $    34

February 2003 issuance............................. $   3.25         (7,800)           -       (7,800)           -            -
October 2004 issuance..............................    12.00        (20,000)           -      (20,000)           -            -
February 2005 issuance.............................    20.00        (20,000)           -            -      (20,000)           -
Interest payments..................................                 (13,206)      (3,546)      (9,160)        (500)           -
                                                                  ---------    ---------    ---------     --------      -------
     Total contractual obligations assuming
        conversion.................................               $   9,615    $   4,002    $   5,464     $    115      $    34
                                                                  =========    =========    =========     ========      =======
</TABLE>

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 in the amount of $0.3
million for breaches by the Company of its obligations under the guaranty
and the settlement agreement and, in addition, demands $0.5 million in
damages from Hardcore and the Company, jointly and severally, under the
terms of the settlement agreement. In October 2004, the Court of Common
Pleas for Cuyahoga County, Ohio ruled in favor of the former owner of
Hardcore Composites in the amount of $1.1 million. In prior periods, the
Company has accrued $1.1 million in respect of the possible liability in
this matter, which it believes is its maximum obligation under this
guaranty. The Company is vigorously defending this matter, has filed
counterclaims and filed an appeal that represents its only recourse
regarding this guaranty. Management believes that the ultimate resolution of
this litigation will not have a further material adverse effect on the
Company's results of operations, financial condition or cash flow. To date,
the Company has not made any payments of any portion of this obligation,
although it posted an appeal bond in the amount of $1.3 million. The Company
executed a guaranty of Hardcore Composite's lease obligations of
approximately $30,000 per month to the former owner. The lease of the
Hardcore Composites manufacturing facility expires March 31, 2008. Hardcore
no longer occupies the facility and, accordingly, in connection with the
ongoing litigation with the former owner, Zoltek is asserting that Zoltek
has no further ongoing guarantee obligation with respect to the lease. The
Company also is the obligee on aggregate original value of unsecured
promissory notes of $9.3 million in connection with the sale of Hardcore,
for which a full valuation allowance has been recorded. A full valuation
allowance is appropriate in light of Hardcore's current financial condition
which, among other relevant factors, make the collection of the promissory
notes doubtful.


                                     32

<PAGE>
<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS

In October 2004, the government passed the "American Jobs Creation Act,"
which allows companies to repatriate cash balances from their controlled
foreign subsidiaries at a reduced tax rate and created a new deduction for
U.S. manufacturers related to qualified production activities for income tax
purposes. The Company is still considering the implications and evaluating
whether the Company will repatriate funds from its Hungarian subsidiary.

In December 2004, the FASB issued interpretation No. 123-R "Accounting for
Stock-Based Compensation" (SFAS No. 123-R), which addressed the requirement
for expensing the cost of employee services received in exchange for an
award of equity instrument. SFAS No. 123-R will apply to all equity
instruments awarded, modified or repurchased for fiscal year ends beginning
after June 15, 2005, which would be October 1, 2005 for the Company. The
Company is currently evaluating the effect of this interpretation on the
Company's financial statements when implemented.

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 facility. 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. The Company does not
believe such risk is material because a significant amount of the Company's
current debt is at fixed rates. However, the February 2005 convertible debt
issuance of $20.0 million bears interest at a variable rate and the Company
plans to address the risk issue. At March 31, 2005, the Company did not have
any interest rate swap agreements outstanding. However, a one percent
increase in the weighted average interest rate of the Company's variable
rate debt would result in a $0.3 million increase in interest expense based
on the debt levels at March 31, 2005.

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
$35.4 million and $35.4 million at March 31, 2005 and September 30, 2004,
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
March 31, 2005 and September 30, 2004 amounted to $3.5 million and $3.5
million, respectively. As of March 2005, the Company has a long-term loan
with its Zoltek Rt. subsidiary of $17.1 million. The loan will be repaid in
U.S. Dollars over time. The Company could realize gain or loss on the loan
as the value of the Forint increases or decreases against the U.S. Dollar.
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.

                                    * * *

The forward-looking statements contained in this report are inherently
subject to risks and uncertainties. The Company's actual results could
differ materially from those in the forward-looking statements. Potential
risks and uncertainties consist of a number of factors, including the
Company's ability to re-activate its formerly idle manufacturing facilities
on a timely and cost-effective basis, to meet current order levels for
carbon fibers, successfully add new capacity for the production of carbon
fiber and precursor raw material, execute plans to exit its specialty
products business and reduce costs, achieve profitable operations, maintain
its Nasdaq National Market listing, raise new capital and increase its
borrowing at acceptable costs, manage changes in customers' forecasted
requirements 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, as
well as other matters discussed herein.

ITEM 4. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

The Company's management, under the supervision and with the participation
of the Company's management, including the Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Company's
disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities and Exchange Act of 1934, as amended (The
Exchange Act), as of the end of the period covered by this report. In
connection with the restatement of our previously issued consolidated
financial statements described below, management determined that material
weaknesses existed in the Company's internal control over financial
reporting


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as of the end of the period covered by this report. Because of these
material weaknesses, management concluded that the Company's disclosure
controls and procedures were not effective as of the end of the period
covered by this report.

RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

 As discussed in Note 2 to the consolidated financial statements, we have
restated our previously issued financial statements. Management evaluated
the materiality of the correction on its consolidated financial statements
using the guidelines of Staff Accounting Bulletin No. 99, "Materiality" and
concluded that the effects of the corrections were material to its 2004
annual consolidated financial statements as well as its interim consolidated
financial statements for the quarters ended March 31, 2004, June 30, 2004,
December 31, 2004 and March 31, 2005. Accordingly, management concluded that
it would restate its previously issued 2004 annual consolidated financial
statements as well as its interim consolidated financial statements for the
quarters ended March 31, 2004, June 30, 2004, December 31, 2004 and March
31, 2005.

MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL REPORTING

A material weakness is a control deficiency or combination of control
deficiencies that results in more than a remote likelihood that a material
misstatement of the annual or interim consolidated financial statements will
not be prevented or detected.

As of the end of the period covered by this report, the Company did not
maintain effective controls over the completeness and accuracy of its
accounting for its convertible debt and related amortization of financing
fees and debt discount and gain (loss) on value of warrants and conversion
feature. Specifically, the Company did not maintain effective controls over
the accounting for derivative liabilities in connection with its convertible
debt issued in January, March and October 2004 and February 2005.
Specifically, the Company did not have controls over the completeness and
accuracy of: (i) the beneficial conversion feature embedded in the Company's
convertible debt; or (ii) the common stock purchase warrants issued in
connection with the Company's convertible debt. This control deficiency
resulted in accounting errors in total liabilities, shareholders' equity,
interest expense, amortization expense, fair value gains and losses which
resulted in the restatement of the Company's 2004 annual consolidated
financial statements, as well as, the Company's interim consolidated
financial statements for the quarters ended March 31, 2004, June 30, 2004,
December 31, 2004 and March 31, 2005. In addition, this control deficiency
could result in a misstatement of total liabilities, shareholders' equity,
interest expense, amortization expense, fair value gains and losses that
would result in a material misstatement to the annual or interim
consolidated financial statements that would not be prevented or detected.
Accordingly, management determined that this control deficiency constitutes
a material weakness.

As of the end of the period covered by this report, the Company did not
maintain effective controls over the completeness and accuracy of its
earning per share disclosures. Specifically, the Company did not maintain
effective review and approval controls over the appropriate sequencing of
warrants and convertible debt instruments for determining diluted earnings
per share. This control deficiency resulted in the restatement of the
Company's interim consolidated financial statements for the quarter ended
March 31, 2005. Further, this control deficiency could result in a
misstatement of earnings per share that would result in a material
misstatement to the annual or interim consolidated financial statements that
would not be prevented or detected. Accordingly, management determined that
this control deficiency constitutes a material weakness.

MANAGEMENT'S REMEDIATION PLAN

The Company, under the supervision of its Chief Executive Officer and Chief
Financial Officer, is currently evaluating steps that it can take to
remediate the material weaknesses in its internal control over financial
reporting, including steps that can be taken in the process of documenting
and evaluating the applicable accounting treatment for non-routine or
complex transactions as they may arise.

CHANGES IN INTERNAL CONTROL

There were no changes in the Company's internal control over financial
reporting that occurred during the fiscal quarter covered by this report
that have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.


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                           ZOLTEK COMPANIES, INC.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

             See Note 10 of the Notes to Consolidated Financial Statements for
        a summary of the Company's current legal proceedings.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

             During the quarter ended March 31, 2005, the registrant issued
        an aggregate of 12,612 shares of its Common Stock to certain holders
        of its convertible debt securities in payment of an aggregate of
        $92,000 of interest due under such securities. Each of the holders
        of such convertible debt securities were "accredited investors," as
        defined in Rule 501 of Regulation D under the Securities Act of
        1933, as amended (the "Securities Act"), and the Common Stock issued
        has not been registered under the Securities Act and was issued
        without registration in reliance upon the exemption from securities
        registration under both Rule 506 of Regulation D and Section 4(2) of
        the Securities Act.

Item 5. Other Information.

             During the quarter ended March 31, 2005, the holders convertible
        debt issued in the January and March 2004 convertible debt
        transactions of the registrant converted an aggregate of $13 million
        of convertible debt into an aggregate of 2,230,011 shares of common
        stock, which was recorded into equity. The registrant also recorded
        into equity at the time of conversion the fair market value of the
        conversion feature at the time of conversion of the debt related to
        the January and March 2004 issuances, which was valued at $24.5
        million. Also, at the time of conversion the Company wrote off the
        unamortized deferred financing cost related to these issuances of
        $0.4 million into additional paid-in capital.

Item 6. Exhibits.

        Exhibit 31.1: Certification of Chief Executive Officer pursuant to
        Rule 13a-14(a) under the Securities Exchange Act of 1934, as
        amended.

        Exhibit 31.2: Certification of Chief Financial Officer pursuant to
        Rule 13a-14(a) under the Securities Exchange Act of 1934, as
        amended.

        Exhibit 32.1: Certification of Chief Executive Officer pursuant to
        18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
        Sarbanes-Oxley Act of 2002.

        Exhibit 32.2: Certification of Chief Financial Officer pursuant to
        18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
        Sarbanes-Oxley Act of 2002.

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                                  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: December 16, 2005                      By:    /s/ KEVIN SCHOTT
      -----------------                         --------------------------
                                                      Kevin Schott
                                                  Chief Financial Officer


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