##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the three months ended June 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to  to
 Commission File No. 0-20600
 
 ZOLTEK COMPANIES, INC.
  Missouri
    
    43-1311101(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)3101 McKelvey Road, St. Louis, Missouri
    
    63044(Address of principal executive offices)
    
    (Zip Code)
  þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




---



##### 



ZOLTEK COMPANIES, INC.
INDEX
  
 PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheet  June 30, 2008 and September 30, 2007Condensed Consolidated Statements of Operations  Three and Nine Months Ended June 30, 2008 and 2007Condensed Consolidated Statement of Changes in Shareholders Equity  Nine Months Ended June 30, 2008Condensed Consolidated Statements of Cash Flows  Nine Months Ended June 30, 2008 and 2007Condensed Consolidated Statements of Comprehensive Income  Three and Nine Months Ended June 30, 2008 and 2007Notes to Condensed Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 4. Submission of Matters to a Vote of Security HoldersItem 6. ExhibitsSIGNATURESEXHIBIT INDEXCertificationsSection 1350 Certifications
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 ZOLTEK COMPANIES, INC.
 
 CONDENSED
CONSOLIDATED BALANCE SHEET
 June 30,
    
    
    September 30,2008
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    41,569
    
    
    $
    121,761Restricted cash
    
    
    23,500
    
    
    
    13,815Accounts receivable, less allowance for doubtful accounts of $776 and
$729 respectively
    
    
    44,055
    
    
    
    37,495Inventories
    
    
    47,389
    
    
    
    27,941Other current assets
    
    
    12,833
    
    
    
    10,858Total current assets
    
    
    169,346
    
    
    
    211,870Property and equipment, net
    
    
    298,278
    
    
    
    190,123Other assets
    
    
    1,782
    
    
    
    1,606Total assets
    
    $
    469,406
    
    
    $
    403,599Liabilities and Shareholders EquityCurrent liabilities:Construction
payables
    
    $
    11,218
    
    
    $
    4,859Current maturities of long-term debt
    
    $
    12,518
    
    
    $
    13,813Trade accounts payable
    
    
    15,166
    
    
    
    12,394Legal liabilities
    
    
    23,987
    
    
    
    24,543Accrued expenses and other liabilities
    
    
    12,353
    
    
    
    8,305Total current liabilities
    
    
    75,242
    
    
    
    63,914Long-term debt, less current maturities
    
    
    4,178
    
    
    
    6,851Hungarian grant, long-term
    
    
    12,800
    
    
    
    7,969Deferred tax liabilities
    
    
    4,597
    
    
    
    4,046Other long-term liabilities
    
    
    61
    
    
    
    52Total liabilities
    
    
    96,878
    
    
    
    82,832Commitments and contingencies (see Note 8)Shareholders equity:Preferred stock, $.01 par value, 1,000,000 shares authorized,
no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, 50,000,000 shares authorized, 34,246,127 and
33,653,735 shares issued and outstanding at June 30, 2008 and
September 30, 2007, respectively
    
    
    342
    
    
    
    337Additional paid-in capital
    
    
    489,682
    
    
    
    476,205Accumulated deficit
    
    
    (154,793
    )
    
    
    (164,024
    )Accumulated other comprehensive income
    
    
    37,297
    
    
    
    8,249Total shareholders equity
    
    
    372,528
    
    
    
    320,767Total liabilities and shareholders equity
    
    $
    469,406
    
    
    $
    403,599
  3




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##### Table of Contents



ZOLTEK COMPANIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 Three months ended June 30,
    
    
    Nine months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    $
    44,950
    
    
    $
    40,274
    
    
    $
    134,603
    
    
    $
    107,301Cost of sales
    
    
    31,320
    
    
    
    28,334
    
    
    
    96,181
    
    
    
    76,922Gross profit
    
    
    13,630
    
    
    
    11,940
    
    
    
    38,422
    
    
    
    30,379Application and development costs
    
    
    1,982
    
    
    
    1,985
    
    
    
    5,939
    
    
    
    5,397Selling, general and administrative expenses
    
    
    4,377
    
    
    
    3,262
    
    
    
    12,103
    
    
    
    9,414Operating income from continuing operations
    
    
    7,271
    
    
    
    6,693
    
    
    
    20,380
    
    
    
    15,568Other (expense) income:Interest expense, excluding amortization of financing fees,
debt discount, warrants and conversion feature
    
    
    (288
    )
    
    
    (428
    )
    
    
    (1,340
    )
    
    
    (1,959
    )Amortization of financing fees and debt discount
    
    
    (1,648
    )
    
    
    (394
    )
    
    
    (5,045
    )
    
    
    (6,374
    )Warrant issuance expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,362
    )Loss on value of warrants and conversion feature
    
    
    
    
    
    
    (242
    )
    
    
    
    
    
    
    (314
    )Interest income
    
    
    543
    
    
    
    244
    
    
    
    2,581
    
    
    
    898Loss on currency translation
    
    
    (2,081
    )
    
    
    (319
    )
    
    
    (2,011
    )
    
    
    (1,014
    )Other, net
    
    
    (23
    )
    
    
    (225
    )
    
    
    (460
    )
    
    
    (270
    )Income from continuing operations before income taxes
    
    
    3,774
    
    
    
    5,329
    
    
    
    14,105
    
    
    
    173Income tax expense
    
    
    1,465
    
    
    
    309
    
    
    
    4,874
    
    
    
    804Net income (loss) from continuing operations
    
    
    2,309
    
    
    
    5,020
    
    
    
    9,231
    
    
    
    (631
    )Discontinued operations:Loss from discontinued operations, net of taxes
    
    
    
    
    
    
    (24
    )
    
    
    
    
    
    
    (42
    )Net income (loss)
    
    $
    2,309
    
    
    $
    4,996
    
    
    $
    9,231
    
    
    $
    (673
    )Net loss per share:Basic and diluted income (loss) per share:Continuing operations
    
    $
    0.07
    
    
    $
    0.17
    
    
    $
    0.27
    
    
    $
    (0.02
    )Discontinued operations
    
    
    0.00
    
    
    
    (0.00
    )
    
    
    0.00
    
    
    
    (0.00
    )Total
    
    $
    0.07
    
    
    $
    0.17
    
    
    $
    0.27
    
    
    $
    (0.02
    )Weighted average common shares outstanding  basic
    
    
    34,201,210
    
    
    
    29,353,104
    
    
    
    33,950,871
    
    
    
    27,526,435Weighted average common shares outstanding  diluted
    
    
    34,214,902
    
    
    
    30,007,104
    
    
    
    34,040,008
    
    
    
    27,526,435
  4




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##### Table of Contents



ZOLTEK COMPANIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
 Addl
    
    
    
    
    
    
    Accumulated OtherCommon
    
    
    Paid-In
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Total ShareholdersStock
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    EquityBalance, September 30, 2007
    
    $
    337
    
    
    $
    476,205
    
    
    $
    (164,024
    )
    
    $
    8,249
    
    
    $
    320,767Convertible debt converted
    
    
    5
    
    
    
    8,472
    
    
    
    
    
    
    
    
    
    
    
    8,477Stock option compensation expense
    
    
    
    
    
    
    1,757
    
    
    
    
    
    
    
    
    
    
    
    1,757Restricted stock issued
    
    
    
    
    
    
    1,751
    
    
    
    
    
    
    
    
    
    
    
    1,751Warrants exercised
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    150Exercise of stock options
    
    
    
    
    
    
    1,347
    
    
    
    
    
    
    
    
    
    
    
    1,347Net income
    
    
    
    
    
    
    
    
    
    
    9,231
    
    
    
    
    
    
    
    9,231Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,048
    
    
    
    29,048Balance, June 30, 2008
    
    $
    342
    
    
    $
    489,682
    
    
    $
    (154,793
    )
    
    $
    37,297
    
    
    $
    372,528
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 Three months ended June 30,
    
    
    Nine months ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    2,309
    
    
    $
    4,996
    
    
    $
    9,231
    
    
    $
    (673
    )Foreign currency translation adjustments
    
    
    15,773
    
    
    
    2,362
    
    
    
    29,048
    
    
    
    16,932Comprehensive income
    
    $
    18,082
    
    
    $
    7,358
    
    
    $
    38,279
    
    
    $
    16,259
  5




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##### Table of Contents



ZOLTEK COMPANIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 Nine months ended June 30,2008
    
    
    2007Cash flows from operating activities:Net income (loss)
    
    $
    9,231
    
    
    $
    (673
    )Net loss from discontinued operations
    
    
    
    
    
    
    42Net income (loss) from continuing operations
    
    
    9,231
    
    
    
    (631
    )Adjustments to reconcile net income (loss) to net cash from operating activities:Depreciation and amortization
    
    
    11,459
    
    
    
    7,189Amortization of financing fees and debt discount
    
    
    5,045
    
    
    
    6,374Deferred taxes
    
    
    1,989
    
    
    
    Warrant issue expense
    
    
    
    
    
    
    6,362Loss on value of warrants and conversion feature
    
    
    
    
    
    
    314Foreign currency transaction losses
    
    
    1,518
    
    
    
    628Stock option compensation expense
    
    
    3,507
    
    
    
    888Changes in assets and liabilities:Increase in accounts receivable
    
    
    (1,962
    )
    
    
    (4,178
    )Increase in inventories
    
    
    (16,269
    )
    
    
    (5,172
    )Increase in other current assets and other assets
    
    
    (3,933
    )
    
    
    (1,663
    )Increase in
trade accounts and construction payables
    
    
    6,256
    
    
    
    3,484Increase (decrease) in accrued expenses and other liabilities
    
    
    4,513
    
    
    
    (5,915
    )Increase in other long-term liabilities
    
    
    
    
    
    
    237Net cash provided by continuing operations
    
    
    21,354
    
    
    
    7,917Net cash provided by discontinued operations
    
    
    
    
    
    
    1,905Net cash provided by operating activities
    
    
    21,354
    
    
    
    9,822Cash flows from investing activities:Purchases of property and equipment
    
    
    (57,130
    )
    
    
    (42,788
    )Purchase of Mexico facility
    
    
    (35,000
    )
    
    
    Proceeds received from Hungarian grant
    
    
    3,253
    
    
    
    7,547Change in cash restricted for letters of credit
    
    
    (9,685
    )
    
    
    (7,181
    )Net cash used in investing activities
    
    
    (98,562
    )
    
    
    (42,422
    )Cash flows from financing activities:Proceeds from exercise of stock options and warrants
    
    
    1,497
    
    
    
    13,642Net
borrowings under related party note payable
    
    
    
    
    
    
    10,000Proceeds from issuance of convertible debt
    
    
    
    
    
    
    7,494Payment of financing fees
    
    
    
    
    
    
    (875
    )Repayment (borrowings) of notes payable and long-term debt
    
    
    (4,525
    )
    
    
    3,176Net cash (used in) provided by financing activities
    
    
    (3,028
    )
    
    
    33,437Effect of exchange rate changes on cash and cash equivalents
    
    
    44
    
    
    
    (139
    )Net (decrease) increase in cash and cash equivalents
    
    
    (80,192
    )
    
    
    698Cash and cash equivalents at beginning of period
    
    
    121,761
    
    
    
    10,802Cash and cash equivalents at end of period
    
    $
    41,569
    
    
    $
    11,500Supplemental disclosures of cash flow information:Non-cash conversion of convertible debentures
    
    $
    8,477
    
    
    $
    29,760Net cash paid during the period for income taxes
    
    $
    2,494
    
    
    $
    452Net cash paid during the period for interest
    
    $
    1,229
    
    
    $
    4,218
  6




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##### Table of Contents



ZOLTEK COMPANIES, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. ORGANIZATION AND BASIS OF PRESENTATION
  Basis of Presentation
   2. INVENTORIES
  June 30,
    
    
    September 30,2008
    
    
    2007Raw materials
    
    $
    7,320
    
    
    $
    7,941Work-in-process
    
    
    14,285
    
    
    
    11,832Finished goods
    
    
    25,142
    
    
    
    7,632Supplies and other
    
    
    642
    
    
    
    536$
    47,389
    
    
    $
    27,941
  3. SEGMENT INFORMATION
  7




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##### Table of Contents



Three months ended June 30, 2008Carbon
    
    Technical
    
    Corporate/Fibers
    
    Fibers
    
    Other
    
    TotalNet sales
    
    $
    37,689
    
    
    $
    6,487
    
    
    $
    774
    
    
    $
    44,950Cost of sales
    
    
    25,121
    
    
    
    5,323
    
    
    
    876
    
    
    
    31,320Gross profit
    
    
    12,568
    
    
    
    1,164
    
    
    
    (102
    )
    
    
    13,630Operating income (loss)
    
    
    9,931
    
    
    
    651
    
    
    
    (3,311
    )
    
    
    7,271Depreciation and amortization expense
    
    
    3,670
    
    
    
    375
    
    
    
    252
    
    
    
    4,297Capital expenditures
    
    
    31,959
    
    
    
    439
    
    
    
    27
    
    
    
    32,425
 Three months ended June 30, 2007Carbon
    
    Technical
    
    Corporate/Fibers
    
    Fibers
    
    Other
    
    TotalNet sales
    
    $
    28,903
    
    
    $
    10,642
    
    
    $
    729
    
    
    $
    40,274Cost of sales
    
    
    19,636
    
    
    
    8,185
    
    
    
    513
    
    
    
    28,334Gross profit
    
    
    9,267
    
    
    
    2,457
    
    
    
    216
    
    
    
    11,940Operating income (loss)
    
    
    7,384
    
    
    
    2,043
    
    
    
    (2,734
    )
    
    
    6,693Depreciation and amortization expense
    
    
    1,888
    
    
    
    480
    
    
    
    329
    
    
    
    2,697Capital expenditures
    
    
    12,285
    
    
    
    
    
    
    
    233
    
    
    
    12,518
 Nine months ended June 30, 2008Carbon
    
    Technical
    
    Corporate/Fibers
    
    Fibers
    
    Other
    
    TotalNet sales
    
    $
    113,666
    
    
    $
    18,084
    
    
    $
    2,853
    
    
    $
    134,603Cost of sales
    
    
    79,552
    
    
    
    14,120
    
    
    
    2,509
    
    
    
    96,181Gross profit
    
    
    34,112
    
    
    
    3,964
    
    
    
    344
    
    
    
    38,422Operating income (loss)
    
    
    28,091
    
    
    
    1,593
    
    
    
    (9,304
    )
    
    
    20,380Depreciation and amortization expense
    
    
    9,200
    
    
    
    1,384
    
    
    
    875
    
    
    
    11,459Capital expenditures
    
    
    53,598
    
    
    
    1,062
    
    
    
    2,470
    
    
    
    57,130
 Nine months ended June 30, 2007Carbon
    
    Technical
    
    Corporate/Fibers
    
    Fibers
    
    Other
    
    TotalNet sales
    
    $
    79,098
    
    
    $
    26,219
    
    
    $
    1,984
    
    
    $
    107,301Cost of sales
    
    
    56,694
    
    
    
    19,101
    
    
    
    1,127
    
    
    
    76,922Gross profit
    
    
    22,404
    
    
    
    7,118
    
    
    
    857
    
    
    
    30,379Operating income (loss)
    
    
    16,006
    
    
    
    6,026
    
    
    
    (6,464
    )
    
    
    15,568Depreciation and amortization expense
    
    
    4,891
    
    
    
    1,289
    
    
    
    1,009
    
    
    
    7,189Capital expenditures
    
    
    37,951
    
    
    
    2,752
    
    
    
    2,085
    
    
    
    42,788
 Total AssetsCarbon
    
    Technical
    
    Corporate/Fibers
    
    Fibers
    
    Other
    
    TotalJune 30, 2008
    
    $
    351,910
    
    
    $
    37,706
    
    
    $
    79,790
    
    
    $
    469,406September 30, 2007
    
    
    217,662
    
    
    
    36,833
    
    
    
    149,104
    
    
    
    403,599
 4. FINANCING
 Bond Related to SP Systems Case
  8




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##### Table of Contents



Hungarian Government Grant
   Fiscal 2007 Financing Activity
  Convertible Debt
  Three months ended
    
    
    Three months ended
    
    
    Three months endedDecember 31, 2007
    
    
    March 31, 2008
    
    
    June 30, 2008Number
    
    
    
    
    
    
    
    
    
    
    Number
    
    
    
    
    
    
    
    
    
    
    Numberof Shares
    
    
    Conversion
    
    
    Principal
    
    
    of Shares
    
    
    Conversion
    
    
    Principal
    
    
    of Shares
    
    
    Conversion
    
    
    PrincipalIssuance
    
    Converted
    
    
    Price
    
    
    Converted
    
    
    Converted
    
    
    Price
    
    
    Converted
    
    
    Converted
    
    
    Price
    
    
    ConvertedFebruary 2003
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    September 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    May 2006
    
    
    54,879
    
    
    
    25.51
    
    
    
    1,399,963
    
    
    
    75,338
    
    
    
    25.51
    
    
    
    1,921,872
    
    
    
    70,561
    
    
    
    25.51
    
    
    
    1,800,011July 2006
    
    
    9,820
    
    
    
    25.51
    
    
    
    250,508
    
    
    
    9,820
    
    
    
    25.51
    
    
    
    250,508
    
    
    
    9,820
    
    
    
    25.51
    
    
    
    250,508October 2006
    
    
    47,040
    
    
    
    25.51
    
    
    
    1,199,990
    
    
    
    26,133
    
    
    
    25.51
    
    
    
    666,653
    
    
    
    29,378
    
    
    
    25.51
    
    
    
    749,432111,739
    
    
    
    
    
    
    $
    2,850,461
    
    
    
    111,291
    
    
    
    
    
    
    $
    2,839,033
    
    
    
    109,759
    
    
    
    
    
    
    $
    2,799,951
 Three months ended
    
    
    Three months ended
    
    
    Three months endedDecember 31, 2006
    
    
    March 31, 2007
    
    
    June 30, 2007Number
    
    
    
    
    
    
    
    
    
    
    Number
    
    
    
    
    
    
    
    
    
    
    Numberof Shares
    
    
    Conversion
    
    
    Principal
    
    
    of Shares
    
    
    Conversion
    
    
    Principal
    
    
    of Shares
    
    
    Conversion
    
    
    PrincipalIssuance
    
    Converted
    
    
    Price
    
    
    Converted
    
    
    Converted
    
    
    Price
    
    
    Converted
    
    
    Converted
    
    
    Price
    
    
    ConvertedFebruary 2003
    
    
    342,858
    
    
    $
    3.50
    
    
    $
    1,200,003
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    71,430
    
    
    $
    3.50
    
    
    $
    250,005
 9




---



##### Table of Contents



Three months ended
    
    
    Three months ended
    
    
    Three months endedDecember 31, 2006
    
    
    March 31, 2007
    
    
    June 30, 2007Number
    
    
    
    
    
    
    
    
    
    
    Number
    
    
    
    
    
    
    
    
    
    
    Numberof Shares
    
    
    Conversion
    
    
    Principal
    
    
    of Shares
    
    
    Conversion
    
    
    Principal
    
    
    of Shares
    
    
    Conversion
    
    
    PrincipalIssuance
    
    Converted
    
    
    Price
    
    
    Converted
    
    
    Converted
    
    
    Price
    
    
    Converted
    
    
    Converted
    
    
    Price
    
    
    ConvertedSeptember 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196,121
    
    
    
    12.50
    
    
    
    2,451,513
    
    
    
    
    
    
    
    
    
    
    
    December 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,251,143
    
    
    
    12.50
    
    
    
    15,639,288
    
    
    
    
    
    
    
    
    
    
    
    February 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    768,673
    
    
    
    13.07
    
    
    
    10,046,556
    
    
    
    
    
    
    
    
    
    
    
    May 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    July 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    October 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    342,858
    
    
    
    
    
    
    $
    1,200,003
    
    
    
    2,215,937
    
    
    
    
    
    
    
    28,137,357
    
    
    $
    71,430
    
    
    
    
    
    
    $
    250,005
 As of June 30, 2008Number of Shares
    
    
    Conversion
    
    
    PrincipalIssuance
    
    Issuable on Conversion
    
    
    Price
    
    
    OutstandingMay 2006
    
    
    423,363
    
    
    $
    25.51
    
    
    $
    10,800,000July 2006
    
    
    68,540
    
    
    
    25.51
    
    
    
    1,748,455October 2006
    
    
    203,882
    
    
    
    25.51
    
    
    
    5,201,030695,785
    
    
    
    
    
    
    $
    17,749,485
   Outstanding Convertible Debt Issuances
 May 2006(1)
    
    July 2006(1)
    
    October 2006(1)Original principal amount of debentures (millions)
    
    
    $20.0
    
    
    
    $2.5
    
    
    
    $7.5Per share conversion price on debenture
    
    
    $25.51
    
    
    
    $25.51
    
    
    
    $25.51Interest rate
    
    
    7.5%
    
    
    
    7.5%
    
    
    
    7.5%Term of debenture
    
    
    42 months
    
    
    42 months
    
    
    42 monthsWarrants issued
    
    
    274,406
    
    
    
    34,370
    
    
    
    102,835Term of warrants
    
    
    60 months
    
    
    60 months
    
    
    60 monthsPer share exercise price of warrants
    
    
    $28.06
    
    
    
    $28.06
    
    
    
    $28.06Fair value per warrant at issuance
    
    
    $26.03
    
    
    
    $23.89
    
    
    
    $22.13Value per share of conversion feature at issuance
    
    
    $18.80
    
    
    
    $19.21
    
    
    
    $19.57Stock price on date of agreement
    
    
    $32.25
    
    
    
    $29.28
    
    
    
    $26.81Stock volatility at issuance
    
    
    106%
    
    
    
    111%
    
    
    
    117%Dividend yield
    
    
    0.0%
    
    
    
    0.0%
    
    
    
    0.0%Risk-free interest rate at issuance
    
    
    4.88%
    
    
    
    4.88%
    
    
    
    4.65%Principal shares converted
        
    Partial
        
    Partial
        
    PartialWarrants exercised
        
    No
        
    No
        
    Partial
 
 (1)
    
    The May 2006, July 2006 and October 2006 issuances had a beneficial conversion
feature. 10




---



##### Table of Contents



Warrant and Conversion Features
   Three months ended June 30, 2007
    
    
    Six months ended June 30, 2007Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    Features
    
    
    Total
    
    
    Warrants
    
    
    Features
    
    
    TotalJanuary 2004 issuance  mark to market
    
    $
    (242
    )
    
    $
    
    
    
    $
    (242
    )
    
    $
    (314
    )
    
    $
    
    
    
    $
    (314
    )Loss on value of warrants and
conversion feature
    
    $
    (242
    )
    
    $
    
    
    
    $
    (242
    )
    
    $
    (314
    )
    
    $
    
    
    
    $
    (314
    )Amortization of Financing Fees and Debt DiscountAt the time of issuance of convertible debt securities with warrants, the Company recorded the
fair value associated with the warrants using the Black-Scholes option-pricing model. This fair
value discount was recorded as a reduction in the carrying value of the convertible debt security
that is accreted to its face value over the life of the convertible security and expensed into the
Companys income statement. If the convertible security is converted prior to the redemption date,
the unamortized debt discount associated with the valuation of the warrants is recorded as a
reduction to additional paid-in capital at the time of conversion.The February 2005, February 2006, May 2006, July 2006 and October 2006 issuances were
considered to have a beneficial conversion feature because the adjusted conversion price after
allocating a portion of the proceeds to the warrants, as discussed above, was less than the
Companys market price of common stock at date of issue. The beneficial conversion is recorded as a
reduction in the carrying value of the convertible debt security and is accreted to its face value
over the life of the convertible security and expensed into the Companys income statement. If the
convertible security is converted prior to the redemption date, the unamortized balance is recorded
in expense at the time of conversion.See the table below for impact of amortization of financing fees and debt discount on the
financial results for the three and nine months ended June 30, 2008 and 2007 (amounts in
thousands).Three months ended June 30, 2008
    
    
    Nine months ended June 30, 2008Conversion
    
    
    
    
    
    
    ConversionWarrants
    
    
    Feature
    
    
    Total
    
    
    Warrants
    
    
    Feature
    
    
    TotalMay 2006 issuance
    
    $
    487
    
    
    $
    719
    
    
    $
    1,206
    
    
    $
    1,450
    
    
    $
    2,140
    
    
    $
    3,590July 2006 issuance
    
    
    55
    
    
    
    67
    
    
    
    122
    
    
    
    175
    
    
    
    213
    
    
    
    388October 2006 issuance
    
    
    91
    
    
    
    105
    
    
    
    196
    
    
    
    305
    
    
    
    352
    
    
    
    657$
    633
    
    
    $
    891
    
    
    
    1524
    
    
    $
    1,930
    
    
    $
    2,705
    
    
    
    4,635Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    410Total
    
    
    
    
    
    
    
    
    
    $
    1,648
    
    
    
    
    
    
    
    
    
    
    $
    5,045Three months ended June 30, 2007
    
    
    Nine months ended June 30, 2007Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    Feature
    
    
    Total
    
    
    Warrants
    
    
    Feature
    
    
    TotalSeptember 2005 issuance
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    158
    
    
    $
    
    
    
    $
    158December 2005 issuance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    285
    
    
    
    
    
    
    
    285February 2006 issuance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,830
    
    
    
    1,882
    
    
    
    3,712May 2006 issuance
    
    
    61
    
    
    
    89
    
    
    
    150
    
    
    
    369
    
    
    
    537
    
    
    
    906July 2006 issuance
    
    
    7
    
    
    
    8
    
    
    
    15
    
    
    
    82
    
    
    
    99
    
    
    
    181October 2006 issuance
    
    
    20
    
    
    
    23
    
    
    
    43
    
    
    
    162
    
    
    
    187
    
    
    
    349
 11




---



##### Table of Contents



Three months ended June 30, 2007
    
    
    Nine months ended June 30, 2007Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    Feature
    
    
    Total
    
    
    Warrants
    
    
    Feature
    
    
    Total$
    88
    
    
    $
    120
    
    
    
    208
    
    
    $
    2,886
    
    
    $
    2,705
    
    
    
    5,591Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    
    
    
    
    
    
    
    
    783Total
    
    
    
    
    
    
    
    
    
    $
    394
    
    
    
    
    
    
    
    
    
    
    $
    6,374
  June 30, 2008ConversionWarrants
    
    
    Feature
    
    
    TotalMay 2006 issuance
    
    $
    2,277
    
    
    $
    3,363
    
    
    $
    5,640July 2006 issuance
    
    
    337
    
    
    
    407
    
    
    
    744October 2006 issuance
    
    
    492
    
    
    
    566
    
    
    
    1,058$
    3,106
    
    
    $
    4,336
    
    
    
    7,442Debt acquisition cost and financing fees
    
    
    
    
    
    
    
    
    
    
    522Total
    
    
    
    
    
    
    
    
    
    $
    7,964
 September 30, 2007ConversionWarrants
    
    
    Feature
    
    
    TotalMay 2006 issuance
    
    $
    4,728
    
    
    $
    6,981
    
    
    $
    11,709July 2006 issuance
    
    
    403
    
    
    
    485
    
    
    
    888October 2006 issuance
    
    
    1,236
    
    
    
    1,422
    
    
    
    2,658$
    6,367
    
    
    $
    8,888
    
    
    
    15,255Debt acquisition cost and financing fees
    
    
    
    
    
    
    
    
    
    
    985Total
    
    
    
    
    
    
    
    
    
    $
    16,240
 Earnings Per Share
   Three months ended
    
    
    Nine months endedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerators:Net income (loss)
    
    $
    2,309
    
    
    $
    4,996
    
    
    $
    9,231
    
    
    $
    (673
    )Denominators:Average shares outstanding  basic
    
    
    34,201
    
    
    
    29,353
    
    
    
    33,951
    
    
    
    27,526Impact of convertible debt, warrants and stock options
    
    
    14
    
    
    
    654
    
    
    
    89
    
    
    
    Average shares outstanding  diluted
    
    
    34,215
    
    
    
    30,007
    
    
    
    34,040
    
    
    
    27,526Income (loss) per share  basic:Continuing operations
    
    $
    0.07
    
    
    $
    0.17
    
    
    $
    0.27
    
    
    $
    (0.02
    )Discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Basic income (loss) per share
    
    $
    0.07
    
    
    $
    0.17
    
    
    $
    0.27
    
    
    $
    (0.02
    )Income (loss) per share  diluted:Continuing operations
    
    $
    0.07
    
    
    $
    0.17
    
    
    $
    0.27
    
    
    $
    (0.02
    )Discontinued operations
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Diluted income (loss) per share
    
    $
    0.07
    
    
    $
    0.17
    
    
    $
    0.27
    
    
    $
    (0.02
    )
 5. DEBT
 12




---



##### Table of Contents



Credit Facilities
    June 30,
    
    
    September 30,2008
    
    
    2007Note payable with interest at 7%, payable in eleven monthly installments of
principal and interest of $15 to maturity in January 2009
    
    $
    1,210
    
    
    $
    1,272Non-interest bearing note payable (discounted at 8%) to the City of Abilene, Texas
to be repaid from real estate and personal property tax abatements
    
    
    
    
    
    
    2,030Facilities with Hungarian banks (interest rate of 5.5% to 10.6%)
    
    
    5,178
    
    
    
    6,417Convertible debentures final payment due November 2009 bearing interest at 8.8%
    
    
    10,800
    
    
    
    16,200Convertible debentures final payment due April 2010 bearing interest at 7.5%
    
    
    1,750
    
    
    
    2,505Convertible debentures final payment due January 2010 bearing interest at 7.5%
    
    
    5,200
    
    
    
    7,495Total debt including current maturities
    
    
    24,138
    
    
    
    35,919Less: Debt discount associated with conversion feature and warrants
    
    
    (7,442
    )
    
    
    (15,255
    )Less: Amounts payable within one year, net of discount of $4,700 and $7,006
    
    
    (12,518
    )
    
    
    (13,813
    )Total long-term debt, less current maturities
    
    $
    4,178
    
    
    $
    6,851
 6. DISCONTINUED OPERATIONS
   Three months ended
    
    
    Six months endedJune 30, 2007
    
    
    June 30, 2007Net sales
    
    $
    242
    
    
    
    $
    1,748Cost of sales
    
    
    204
    
    
    
    
    1,557Gross profit
    
    
    38
    
    
    
    
    191Selling, general and administrative expenses
    
    
    11
    
    
    
    
    134Income from operations
    
    
    27
    
    
    
    
    57Other loss
    
    
    (51
    )
    
    
    
    (99
    )Income (loss) on discontinued operations
    
    $
    (24
    )
    
    
    $
    (42
    )
 7. STOCK OPTION COMPENSATION PLANS
 13




---



##### Table of Contents



Stock option awards
  Wtd. Avg.
    
    Options
    
    Wtd. Avg.Options
    
    Exercise Price
    
    Exercisable
    
    Exercise PriceBalance, September 30, 2007
    
    
    369,810
    
    
    $
    16.02
    
    
    
    264,800
    
    
    $
    17.23Granted
    
    
    222,500Cancelled
    
    
    (30,000
    )Exercised
    
    
    (167,723
    )Balance, June 30, 2008
    
    
    394,587
    
    
    
    25.46
    
    
    
    222,087
    
    
    
    23.40
  Options Outstanding
    
    Options ExercisableRange of
    
    
    
    
    
    Wtd. Avg.
    
    Wtd. Avg.
    
    
    
    
    
    Wtd. Avg.Exercise Prices
    
    Number
    
    Remaining Life
    
    Exercise Price
    
    Number
    
    Exercise Price$
    1.33-2.80
    
    
    2,000
    
    
    4 years
    
    $
    2.07
    
    
    
    2,000
    
    
    $
    2.076.25-9.25
    
    
    36,587
    
    
    6 years
    
    
    8.58
    
    
    
    36,587
    
    
    
    8.589.60-24.12
    
    
    91,000
    
    
    8 years
    
    
    17.68
    
    
    
    56,000
    
    
    
    14.3026.22-29.70
    
    
    175,000
    
    
    9 years
    
    
    29.20
    
    
    
    37,500
    
    
    
    28.5430.00-39.00
    
    
    90,000
    
    
    9 years
    
    
    33.43
    
    
    
    90,000
    
    
    
    33.431.33-39.00
    
    
    394,587
    
    
    8 years
    
    
    25.46
    
    
    
    222,087
    
    
    
    23.40
  Assumptions
    
    Fiscal 2008
    
    Fiscal 2007Expected life of option
    
    4 & 7.5 years
    
    3 & 7.5 yearsRisk-free interest rate
    
    
    1.8
    %
    
    
    4.9
    %Volatility of stock
    
    
    66
    %
    
    
    68
    %Forfeiture experience
    
    
    30
    %
    
    
    30
    %
  Restricted stock awards.
 14




---



##### Table of Contents



SharesBalance, September 30, 2007
    
    
    0Granted
    
    
    67,500Balance, June 30, 2008
    
    
    67,500
    8. COMMITMENTS AND CONTINGENCIES
 Legal
    15




---



##### Table of Contents



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




---



##### Table of Contents



10. NEW ACCOUNTING PRONOUNCEMENTS
    * * *
 Special Note Regarding Forward-Looking Statements
  * * *
 17




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 General
         18




---



##### Table of Contents



Results of Operations
 Three months ended June 30, 2008 compared to three months ended June 30, 2007
     19




---



##### Table of Contents



20




---



##### Table of Contents



Nine months ended June 30, 2008 compared to nine months ended June 30, 2007
       21




---



##### Table of Contents



Liquidity and Capital Resources
  22




---



##### Table of Contents



Cash Provided By (Used In) Continuing Operating Activities
  Cash Provided By Discontinued Operating Activities
  Cash Used In Investing Activities
     Cash Provided By Financing Activities
  23




---



##### Table of Contents



Future Contractual Obligations
  Less thanTotal
    
    
    1 year
    
    
    1-3 yearsConvertible debentures (a)
    
    $
    17,749
    
    
    $
    10,830
    
    
    $
    6,919Long-term debt, including current maturities (a)
    
    
    6,388
    
    
    
    6,388
    
    
    
    Total debt
    
    
    24,137
    
    
    
    17,218
    
    
    
    6,919Operating leases
    
    
    163
    
    
    
    40
    
    
    
    123Total debt and operating leases
    
    
    24,300
    
    
    
    17,258
    
    
    
    7,042Contractual interest payments (b)
    
    
    1,590
    
    
    
    1,314
    
    
    
    276Accrued litigation cost (c)
    
    
    23,987
    
    
    
    23,987
    
    
    
    Purchase obligations (d)
    
    
    1,706
    
    
    
    1,706
    
    
    
    Total contractual obligations
    
    $
    51,583
    
    
    $
    44,265
    
    
    $
    7,318
 
 (a)
    
    Convertible debentures and long-term debt are presented on the balance sheet net of debt
discount of $7.4 million.(b)
    
    Amounts represent the expected cash payment for interest on our debt.(c)
    
    Amount includes $18.1 million accrued for potential damages and litigation cost related to SP
Systems case and $5.9 million related to the investment banker case and other pending
litigation. See Note 8 to the condensed consolidated financial statements.(d)
    
    Purchase obligations include agreements to purchase goods or services that are enforceable
and legally binding and that specify all significant terms, including fixed or minimum
quantities to be purchased, fixed, minimum or variable price provisions, and the approximate
timing of the transactions. Purchase obligations exclude agreements that are cancelable at any
time without penalty.  Conversion
    
    
    
    
    
    
    Less thanprice
    
    
    Total
    
    
    1 year
    
    
    1-3 yearsTotal contractual obligations
    
    
    
    
    
    $
    51,583
    
    
    $
    44,265
    
    
    $
    7,318May 2006 issuance
    
    $
    25.51
    
    
    
    (10,800
    )
    
    
    (7,200
    )
    
    
    (3,600
    )July and October 2006 issuance
    
    $
    25.51
    
    
    
    (6,949
    )
    
    
    (3,630
    )
    
    
    (3,319
    )Interest payments
    
    
    
    
    
    
    (1,590
    )
    
    
    (1,314
    )
    
    
    (276
    )Total contractual obligations assuming
conversion on June 30, 2008
    
    
    
    
    
    $
    32,244
    
    
    $
    32,121
    
    
    $
    123
  Bond Related to SP Systems Case
   24




---



##### Table of Contents



Hungarian Government Grant
   Fiscal 2007 Financing Activity
  Convertible Debt
  Three months ended
    
    
    Three months ended
    
    
    Three months endedDecember 31, 2007
    
    
    March 31, 2008
    
    
    June 30, 2008Number
    
    
    
    
    
    
    
    
    
    
    Number
    
    
    
    
    
    
    
    
    
    
    Numberof Shares
    
    
    Conversion
    
    
    Principal
    
    
    of Shares
    
    
    Conversion
    
    
    Principal
    
    
    of Shares
    
    
    Conversion
    
    
    PrincipalIssuance
    
    Converted
    
    
    Price
    
    
    Converted
    
    
    Converted
    
    
    Price
    
    
    Converted
    
    
    Converted
    
    
    Price
    
    
    ConvertedFebruary 2003
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    September 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    May 2006
    
    
    54,879
    
    
    
    25.51
    
    
    
    1,399,963
    
    
    
    75,338
    
    
    
    25.51
    
    
    
    1,921,872
    
    
    
    70,561
    
    
    
    25.51
    
    
    
    1,800,011July 2006
    
    
    9,820
    
    
    
    25.51
    
    
    
    250,508
    
    
    
    9,820
    
    
    
    25.51
    
    
    
    250,508
    
    
    
    9,820
    
    
    
    25.51
    
    
    
    250,508October 2006
    
    
    47,040
    
    
    
    25.51
    
    
    
    1,199,990
    
    
    
    26,133
    
    
    
    25.51
    
    
    
    666,653
    
    
    
    29,378
    
    
    
    25.51
    
    
    
    749,432111,739
    
    
    
    
    
    
    $
    2,850,461
    
    
    
    111,291
    
    
    
    
    
    
    $
    2,839,033
    
    
    
    109,759
    
    
    
    
    
    
    $
    2,799,951
 Three months ended
    
    
    Three months ended
    
    
    Three months endedDecember 31, 2006
    
    
    March 31, 2007
    
    
    June 30, 2007Number
    
    
    
    
    
    
    
    
    
    
    Number
    
    
    
    
    
    
    
    
    
    
    Numberof Shares
    
    
    Conversion
    
    
    Principal
    
    
    of Shares
    
    
    Conversion
    
    
    Principal
    
    
    of Shares
    
    
    Conversion
    
    
    PrincipalIssuance
    
    Converted
    
    
    Price
    
    
    Converted
    
    
    Converted
    
    
    Price
    
    
    Converted
    
    
    Converted
    
    
    Price
    
    
    ConvertedFebruary 2003
    
    
    342,858
    
    
    $
    3.50
    
    
    $
    1,200,003
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    71,430
    
    
    $
    3.50
    
    
    $
    250,005September 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196,121
    
    
    
    12.50
    
    
    
    2,451,513
    
    
    
    
    
    
    
    
    
    
    
    December 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,251,143
    
    
    
    12.50
    
    
    
    15,639,288
    
    
    
    
    
    
    
    
    
    
    
    February 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    768,673
    
    
    
    13.07
    
    
    
    10,046,556
    
    
    
    
    
    
    
    
    
    
    
    May 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    July 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    October 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    342,858
    
    
    
    
    
    
    $
    1,200,003
    
    
    
    2,215,937
    
    
    
    
    
    
    $
    28,137,357
    
    
    
    71,430
    
    
    
    
    
    
    $
    250,005
 25




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##### Table of Contents



As of June 30, 2008Number of Shares
    
    
    Conversion
    
    
    PrincipalIssuance
    
    Issuable on Conversion
    
    
    Price
    
    
    OutstandingMay 2006
    
    
    423,363
    
    
    $
    25.51
    
    
    $
    10,800,000July 2006
    
    
    68,540
    
    
    
    25.51
    
    
    
    1,748,455October 2006
    
    
    203,882
    
    
    
    25.51
    
    
    
    5,201,030695,785
    
    
    
    
    
    
    $
    17,749,485
   Outstanding Convertible Debt Issuances
 May 2006(1)
    
    July 2006(1)
    
    October 2006(1)Original principal amount of debentures (millions)
    
    
    $20.0
    
    
    
    $2.5
    
    
    
    $7.5Per share conversion price on debenture
    
    
    $25.51
    
    
    
    $25.51
    
    
    
    $25.51Interest rate
    
    
    7.5%
    
    
    
    7.5%
    
    
    
    7.5%Term of debenture
    
    
    42 months
    
    
    42 months
    
    
    42 monthsWarrants issued
    
    
    274,406
    
    
    
    34,370
    
    
    
    102,835Term of warrants
    
    
    60 months
    
    
    60 months
    
    
    60 monthsPer share exercise price of warrants
    
    
    $28.06
    
    
    
    $28.06
    
    
    
    $28.06Fair value per warrant at issuance
    
    
    $26.03
    
    
    
    $23.89
    
    
    
    $22.13Value per share of conversion feature at issuance
    
    
    $18.80
    
    
    
    $19.21
    
    
    
    $19.57Stock price on date of agreement
    
    
    $32.25
    
    
    
    $29.28
    
    
    
    $26.81Stock volatility at issuance
    
    
    106%
    
    
    
    111%
    
    
    
    117%Dividend yield
    
    
    0.0%
    
    
    
    0.0%
    
    
    
    0.0%Risk-free interest rate at issuance
    
    
    4.88%
    
    
    
    4.88%
    
    
    
    4.65%Principal shares converted
    
    
    Partial
    
    
    Partial
    
    
    PartialWarrants exercised
    
    
    No
    
    
    No
    
    
    Partial
 
 (1)
    
    The May 2006, July 2006 and October 2006 issuances had a beneficial conversion
feature. 26




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##### Table of Contents



Warrant and Conversion Features
   Three months ended June 30, 2007
    
    
    Six months ended June 30, 2007Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    Features
    
    
    Total
    
    
    Warrants
    
    
    Features
    
    
    TotalJanuary 2004 issuance  mark to market
    
    $
    (242
    )
    
    $
    
    
    
    $
    (242
    )
    
    $
    (314
    )
    
    $
    
    
    
    $
    (314
    )Loss on value of warrants and
conversion feature
    
    $
    (242
    )
    
    $
    
    
    
    $
    (242
    )
    
    $
    (314
    )
    
    $
    
    
    
    $
    (314
    )Amortization of Financing Fees and Debt DiscountAt the time of issuance of convertible debt securities with warrants, the Company recorded the
fair value associated with the warrants using the Black-Scholes option-pricing model. This fair
value discount was recorded as a reduction in the carrying value of the convertible debt security
that is accreted to its face value over the life of the convertible security and expensed into the
Companys income statement. If the convertible security is converted prior to the redemption date,
the unamortized debt discount associated with the valuation of the warrants is recorded as a
reduction to additional paid-in capital at the time of conversion.The February 2005, February 2006, May 2006, July 2006 and October 2006 issuances were
considered to have a beneficial conversion feature because the adjusted conversion price after
allocating a portion of the proceeds to the warrants, as discussed above, was less than the
Companys market price of common stock at date of issue. The beneficial conversion is recorded as a
reduction in the carrying value of the convertible debt security and is accreted to its face value
over the life of the convertible security and expensed into the Companys income statement. If the
convertible security is converted prior to the redemption date, the unamortized balance is recorded
in expense at the time of conversion.See the table below for impact of amortization of financing fees and debt discount on the
financial results for the three and nine months ended June 30, 2008 and 2007 (amounts in
thousands).Three months ended June 30, 2008
    
    
    Nine months ended June 30, 2008Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    Feature
    
    
    Total
    
    
    Warrants
    
    
    Feature
    
    
    TotalMay 2006 issuance
    
    $
    487
    
    
    $
    719
    
    
    $
    1,206
    
    
    $
    1,450
    
    
    $
    2,140
    
    
    $
    3,590July 2006 issuance
    
    
    55
    
    
    
    67
    
    
    
    122
    
    
    
    175
    
    
    
    213
    
    
    
    388October 2006 issuance
    
    
    91
    
    
    
    105
    
    
    
    196
    
    
    
    305
    
    
    
    352
    
    
    
    657$
    633
    
    
    $
    891
    
    
    
    1524
    
    
    $
    1,930
    
    
    $
    2,705
    
    
    
    4,635Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    410Total
    
    
    
    
    
    
    
    
    
    $
    1,648
    
    
    
    
    
    
    
    
    
    
    $
    5,045Three months ended June 30, 2007
    
    
    Nine months ended June 30, 2007Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    Feature
    
    
    Total
    
    
    Warrants
    
    
    Feature
    
    
    TotalSeptember 2005 issuance
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    158
    
    
    $
    
    
    
    $
    158December 2005 issuance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    285
    
    
    
    
    
    
    
    285February 2006 issuance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,830
    
    
    
    1,882
    
    
    
    3,712May 2006 issuance
    
    
    61
    
    
    
    89
    
    
    
    150
    
    
    
    369
    
    
    
    537
    
    
    
    906July 2006 issuance
    
    
    7
    
    
    
    8
    
    
    
    15
    
    
    
    82
    
    
    
    99
    
    
    
    181October 2006 issuance
    
    
    20
    
    
    
    23
    
    
    
    43
    
    
    
    162
    
    
    
    187
    
    
    
    349
 27




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##### Table of Contents



Three months ended June 30, 2007
    
    
    Nine months ended June 30, 2007Conversion
    
    
    
    
    
    
    
    
    
    
    ConversionWarrants
    
    
    Feature
    
    
    Total
    
    
    Warrants
    
    
    Feature
    
    
    Total$
    88
    
    
    $
    120
    
    
    
    208
    
    
    $
    2,886
    
    
    $
    2,705
    
    
    
    5,591Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    
    
    
    
    
    
    
    
    783Total
    
    
    
    
    
    
    
    
    
    $
    394
    
    
    
    
    
    
    
    
    
    
    $
    6,374
  June 30, 2008ConversionWarrants
    
    
    Feature
    
    
    TotalMay 2006 issuance
    
    $
    2,277
    
    
    $
    3,363
    
    
    $
    5,640July 2006 issuance
    
    
    337
    
    
    
    407
    
    
    
    744October 2006 issuance
    
    
    492
    
    
    
    566
    
    
    
    1,058$
    3,106
    
    
    $
    4,336
    
    
    
    7,442Debt acquisition cost and financing fees
    
    
    
    
    
    
    
    
    
    
    522Total
    
    
    
    
    
    
    
    
    
    $
    7,964September 30, 2007ConversionWarrants
    
    
    Feature
    
    
    TotalMay 2006 issuance
    
    $
    4,728
    
    
    $
    6,981
    
    
    $
    11,709July 2006 issuance
    
    
    403
    
    
    
    485
    
    
    
    888October 2006 issuance
    
    
    1,236
    
    
    
    1,422
    
    
    
    2,658$
    6,367
    
    
    $
    8,888
    
    
    
    15,255Debt acquisition cost and financing fees
    
    
    
    
    
    
    
    
    
    
    985Total
    
    
    
    
    
    
    
    
    
    $
    16,240
 Legal
    28




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##### Table of Contents



NEW ACCOUNTING PRONOUNCEMENTS
    INTERNAL ACCOUNTING INVESTIGATION
   29




---



##### Table of Contents



30




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
    31




---



##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
    
    
    The Company did not maintain effective entity level controls and procedures to prevent
certain accounting entries from being recorded prior to formal documentation of the
arrangements being obtained. Specifically, the Company lacked effective policies and
procedures for the review of revenue associated with certain customers sales contracts.
Additionally, the Company lacked effective policies and procedures to insure use of an
appropriate measurement date for the valuation of certain share-based payments (i.e., stock
options).
    
    The Company did not maintain effective policies and procedures related to the assessment
of reserves for possible liability arising from certain litigation matters.
  Changes in Internal Control Over Financial Reporting
  32




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##### Table of Contents



Managements Remediation Initiatives and Interim Measures
   
    
    Periodic meetings involving senior management, accounting and financial reporting
personnel, and applicable department responsible for contract oversight to confirm
documented terms and conditions have not been altered; and
    
    Review by financial reporting department of all existing significant contracts (and
establish requirement of all future contracts) for accounting implications, and
preparation of and approval by Chief Financial Officer of memo summarizing proper
accounting treatment.
  
    
    Establish formal policies and procedures in the granting and allocation process to
ensure that the measurement date and the grant date are the same;
    
    Establish formal policies and procedures to develop inter-departmental communication
protocol whereby the share-based compensation administrator will timely notify
accounting personnel of grants, modifications to grants, or other relevant information
so that accounting can make the necessary fair value adjustments;
    
    A member of our financial reporting and human resources groups will be consulted in
respect to assisting the share-based compensation administrator in the oversight of
documentation and accounting for all stock option grants; and
    
    Enhance the knowledge base of our personnel including providing instruction to the
share-based compensation administrator, Vice-President-Human Resources, Compensation
Committee and Chief Executive Officer regarding the definition of measurement date
issues for subsequent administration and instruction regarding the requirements of FAS
123(R) so they can properly account for share-based compensation.
  
    
    Liability requirements as quantified by the accounting and financial reporting
departments will be reviewed by the Audit Committee and outside legal counsel on a
quarterly basis; and
    
    Outside accounting professionals, when deemed necessary, will be consulted to assist
with interpretation and clarification of accounting standards.
 33




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##### Table of Contents



ZOLTEK COMPANIES, INC.
 
 PART II.
    
    OTHER INFORMATION

Item 1.
    
    Legal ProceedingsSee Note 8 of the Notes to condensed consolidated financial statements for a
summary of the Companys current legal proceedings which is incorporated herein by
reference.

Item 1A.
    
    Governmental investigations or proceedings could materially affect us.As previously disclosed, in May 2008 the Audit Committee of our Board of
Directors commenced an accounting investigation, which included a review of the
circumstances and extent of two fund transfers initiated by our former Chief Financial
Officer from a subsidiary of the Company aggregating $250,000 that were not properly
authorized or recorded in the Companys financial records. On May 5, 2008, we filed a
Current Report on Form 8-K announcing that our previously issued financial statements
for the fiscal year ended September 30, 2007 and the quarter ended December 31, 2007
should not be relied upon because of errors in those financial statements resulting
from these unrecorded and unauthorized payments. Our Audit Committees investigation
has been completed. We have concluded that our previously issued financial statements,
as supplemented in our Form 10-K/A and Form 10-Q/A for the fiscal year 2008 and the
quarter ended December 31, 2007, respectively, can again be relied upon. Under a
separation agreement, our former Chief Financial Officer paid us $250,000, and we
released him from claims arising out of the payments in question. In addition, he
released us from claims arising out of his employment.On May 13, 2008, we received a letter from the staff of the Securities and
Exchange Commission (SEC) indicating that the staff was conducting a non-public,
fact-finding investigation and requested that we retain certain records and produce
information and documents related to the matters described above. We have cooperated
with the SEC staff in its investigation and have provided them with various
information and documents the staff requested. The investigation being conducted by
the SEC is ongoing. We have incurred, and will continue to incur, expenses for legal,
accounting and other services in connection with these investigations and these
matters have required, and will continue to require, our managements time and
attention. There can be no assurance that the SECs ongoing investigation will not
have a material adverse effect on our business, financial condition and results of
operations.
Item 6.
    
    Exhibits.
See Exhibit Index
 34




---



##### Table of Contents



SIGNATURE
  Zoltek Companies, Inc.
(Registrant)Date: August 11, 2008
    
    By:
    
    /s/ ZSOLT RUMY

Zsolt RumyChief Executive Officer andChief Financial Officer
 35




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description of Document31.1
    

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 36