<PAGE>

                                UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, DC 20549


                                  FORM 10-Q


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




For the quarter ended December 31, 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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange
Act.
Large Accelerated Filer     Accelerated Filer  x  Non-accelerated Filer
                        ---                   ---                       ---

Indicate by check mark whether the Registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes     No  x
    ---    ---

Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: As of February 1,
2006, 21,355,250 shares of Common Stock, $.01 par value, were outstanding.


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PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

<TABLE>
                                                   ZOLTEK COMPANIES, INC.

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

                                                         (Unaudited)

<CAPTION>
                                                                                              DECEMBER 31,     SEPTEMBER 30,
ASSETS                                                                                            2005             2005
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>              <C>
Current assets:
     Cash and cash equivalents.................................................................$      360       $      255
     Accounts receivable, less allowance for doubtful accounts of $644 and
       $718, respectively......................................................................    10,051           11,101
     Inventories...............................................................................    25,879           24,753
     Other current assets......................................................................     3,418            3,195
                                                                                               ----------       ----------
          Total current assets.................................................................    39,708           39,304
Property and equipment, net....................................................................    89,821           88,018
Other assets...................................................................................     3,305            3,107
                                                                                               ----------       ----------
          Total assets.........................................................................$  132,834       $  130,429
                                                                                               ==========       ==========


LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------------------
Current liabilities:
     Current maturities of long-term debt......................................................$    2,414       $      374
     Trade accounts payable....................................................................     9,678           13,267
     Notes payable.............................................................................       185              442
     Accrued expenses and other liabilities....................................................     4,794            6,149
                                                                                               ----------       ----------
     Total current liabilities.................................................................    17,071           20,232
Other long-term liabilities....................................................................       115              107
Value of warrants and conversion feature associated with convertible debentures................    15,296           29,024
Long-term debt, less current maturities........................................................    44,882           40,421
                                                                                               ----------       ----------
     Total liabilities.........................................................................    77,364           89,784
                                                                                               ----------       ----------
Commitments and contingencies (Notes 2 and 9)

Shareholders' equity:
     Preferred stock, $.01 par value, 1,000,000 shares authorized,
       no shares issued or outstanding.........................................................         -                -
     Common stock, $.01 par value, 50,000,000 shares authorized,
      19,936,184 and 19,213,384 shares issued and outstanding, respectively....................       196              189
     Additional paid-in capital................................................................   159,358          148,982
     Accumulated deficit.......................................................................   (89,417)         (95,705)
     Accumulated other comprehensive loss......................................................   (14,667)         (12,821)
                                                                                               ----------       ----------
          Total shareholders' equity...........................................................    55,470           40,645
                                                                                               ----------       ----------
          Total liabilities and shareholders' equity ..........................................$  132,834       $  130,429
                                                                                               ==========       ==========


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


                                     2

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<TABLE>
                                                   ZOLTEK COMPANIES, INC.

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


<CAPTION>
                                                                                             THREE MONTHS ENDED DECEMBER 31,
                                                                                             -------------------------------
                                                                                                    2005           2004
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>            <C>
Net sales........................................................................................$  16,721      $  12,243
Cost of sales, excluding available unused capacity costs.........................................   13,966         11,212
Available unused capacity costs..................................................................        -            525
Application and development costs................................................................    1,078            828
Selling, general and administrative expenses.....................................................    2,557          1,074
                                                                                                 ---------      ---------
     Operating loss from continuing operations...................................................     (880)        (1,396)
Other income (expense):
     Interest expense, excluding amortization of financing fees, debt discount and
        beneficial conversion feature............................................................     (786)        (1,107)
     Amortization of financing fees and debt discount............................................   (1,992)        (1,815)
     Gain (loss) on value of warrants and conversion feature ....................................   10,022        (25,518)
     Interest income.............................................................................        -             67
     Other, net..................................................................................      (12)           546
                                                                                                 ---------      ---------
         Income (loss) from continuing operations before income taxes............................    6,352        (29,223)
Income tax expense...............................................................................       97            115
                                                                                                 ---------      ---------
Net income (loss) from continuing operations.....................................................    6,255        (29,338)
Discontinued operations:
     Operating income (loss), net of taxes.......................................................       33           (591)
                                                                                                 ---------      ---------
         Net income (loss) on discontinued operations............................................       33           (591)
                                                                                                 ---------      ---------
Net income (loss)................................................................................$   6,288      $ (29,929)
                                                                                                 =========      =========
Net income (loss) per share:
     Basic income (loss) per share:
         Continuing operations...................................................................$    0.31      $   (1.78)
         Discontinued operations.................................................................     0.01          (0.04)
                                                                                                 ---------      ---------
              Total..............................................................................$    0.32      $   (1.82)
                                                                                                 =========      =========


     Diluted (income) loss per share:
         Continuing operations...................................................................$    0.03      $   (1.78)
         Discontinued operations.................................................................     0.01          (0.04)
                                                                                                 ---------      ---------
              Total..............................................................................$    0.04      $   (1.82)
                                                                                                 =========      =========


Weighted average common shares outstanding - Basic...............................................   19,918         16,446
Weighted average common shares outstanding - Diluted.............................................   22,385         16,446




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

                                     3

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<PAGE>

<TABLE>
                                                       ZOLTEK COMPANIES, INC.

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

<CAPTION>
                                                            Add'l                Accumulated Other                       Total
                                                Common     Paid-In   Accumulated   Comprehensive   Comprehensive     Shareholders'
                                                Stock      Capital     Deficit          Loss       Income (Loss)         Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>          <C>         <C>            <C>          <C>                  <C>
Balance, September 30, 2005..................$       189  $ 148,982   $ (95,705)     $ (12,821)                        $  40,645
Convertible debt converted...................          7      6,849           -              -                             6,856
Unamortized value of convertible debt
  discount at time of conversion.............          -     (2,502)          -              -                            (2,502)
Issuance cost related to convertible debt
  conversions................................          -       (241)          -              -                              (241)
Value of conversion feature at time of
  conversion.................................          -      3,695           -              -                             3,695
Value of warrants issued in connection with
  convertible debt... .......................          -      2,485           -              -                             2,485
Stock option compensation expense............          -         68           -              -                                68
Exercise of stock options....................          -         22           -              -                                22
Net income...................................          -          -       6,288              -       $  6,288              6,288
Foreign currency translation adjustment......          -          -           -         (1,846)        (1,846)            (1,846)
                                                                                                     --------
     Comprehensive income ...................          -          -           -              -       $  4,442                  -
                                             -----------  ---------   ---------      ---------       ========          ---------
Balance, December 31, 2005...................$       196  $ 159,358   $ (89,417)     $ (14,667)                        $  55,470
                                             ===========  =========   =========      =========                         =========


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


                                     4

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<TABLE>
                                                   ZOLTEK COMPANIES, INC.

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

<CAPTION>
                                                                                             THREE MONTHS ENDED DECEMBER 31,
                                                                                             -------------------------------
                                                                                                  2005             2004
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>              <C>
Cash flows from operating activities:
      Net income (loss)........................................................................$   6,288        $ (29,929)
      Adjustments to reconcile net income (loss) to net cash used in operating activities:
           (Income) loss from discontinued operations..........................................      (33)             591
           Depreciation and amortization.......................................................    1,467            1,289
           Amortization of financing fees, debt discount and beneficial conversion feature.....    1,992            1,815
           (Gain) loss on value of warrants and conversion feature.............................  (10,022)          25,518
           Foreign currency transaction losses.................................................        -              149
           Other, net..........................................................................       66              (44)
           Changes in assets and liabilities:
                 Decrease (increase) in accounts receivable....................................      697             (471)
                 Increase in inventories.......................................................   (1,759)          (3,133)
                 Decrease (increase) in prepaid expenses and other assets......................     (362)             131
                 Increase (decrease) in trade accounts payable.................................   (2,755)           1,353
                 Increase (decrease) in accrued expenses and other liabilities.................   (1,242)             807
                 Increase (decrease) in other long-term liabilities............................        8             (187)
                                                                                               ---------        ---------
                      Total adjustments........................................................  (11,943)          27,818
                                                                                               ---------        ---------
      Net cash used in continuing operations...................................................   (5,655)          (2,111)
      Net cash used in discontinued operations.................................................      (94)          (1,089)
                                                                                               ---------        ---------
      Net cash used in operating activities....................................................   (5,749)          (3,200)
                                                                                               ---------        ---------

Cash flows from investing activities:
           Purchases of property and equipment.................................................   (5,013)          (2,497)
           Proceeds from sale of property and equipment........................................        -              146
                                                                                               ---------        ---------
      Net cash used in investing activities....................................................   (5,013)          (2,301)
                                                                                               ---------        ---------

Cash flows from financing activities:
           Proceeds from exercise of stock options.............................................       22               91
           Proceeds from issuance of convertible debt..........................................   15,000           20,000
           Payment of financing fees...........................................................     (637)            (984)
           Repayment of notes payable and long-term debt.......................................   (3,479)         (13,458)
                                                                                               ---------        ---------
Net cash provided by financing activities......................................................   10,906            5,649
Effect of exchange rate changes on cash........................................................      (39)              15
                                                                                               ---------        ---------
Net increase in cash...........................................................................      105              163
Cash and cash equivalents at beginning of period...............................................      255              267
                                                                                               ---------        ---------
Cash and cash equivalents at end of period.....................................................$     360        $     430
                                                                                               =========        =========

Supplemental disclosures of cash flow information:
Net cash paid during the period for:
     Interest..................................................................................$   1,128        $     466
     Income taxes..............................................................................$       -        $       -
Non-cash conversion of convertible securities..................................................$   6,856        $       -




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


                                     5

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                           ZOLTEK COMPANIES, INC.

      CONDENSED 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 2005 Annual
Report on Form 10-K, which includes consolidated financial statements and
notes thereto for the fiscal year ended September 30, 2005. In the opinion
of management, all normal recurring adjustments and estimates considered
necessary for a fair statement have been included.

In the fourth quarter of fiscal 2005, the Company formally adopted a plan to
discontinue and exit its CMC business. This division, a legacy business
acquired in connection with the purchase of the Company's Hungarian
subsidiary, was not part of the long-term strategy of the Company. This
business 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 (see Note 4).

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.

Liquidity and Basis of Presentation
-----------------------------------

Due to the timing of development of markets for carbon fiber products in
each of the past five fiscal years, the Company has incurred significant
operating losses and the Company's operations have used cash in excess of
cash generated by operating activities. As a result, the Company has
executed refinancing arrangements and incurred borrowings under credit
facilities and issued 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.

Management will seek to fund the Company's near-term operating needs from
anticipated sales increases related to expected increases in production
capacity at existing facilities, sale of excess inventories, and continued
active management of the Company's working capital. There can be no
assurance that the Company will realize such anticipated sales increases
from improvements in its production capacity from its existing facilities,
or that the Company will be able to generate sufficient cash flows from
operating activities to fund its various obligations in the ordinary course
of business. Should the Company be unable to generate sufficient cash flows,
it may be required to seek additional debt or equity capital. There can be
no assurance that such capital will be available, or if available, that it
will be available on terms acceptable to the Company. The Company's ability
to obtain additional debt and/or equity financing will depend on numerous
factors, including the Company's operating performance with respect to
meeting planned production capacity growth targets, the existence of
sufficient demand for the Company's products and overall financial market
conditions.

In September 2005, Zoltek entered into an agreement for a new convertible
debenture-financing package of up to $50.0 million in a private placement
with a group of institutional investors. In order to match the cash needs to
support the Company's planned expansion, the financing agreement provides
for the funding to occur in four separate closings of $5.0 million, $15.0
million, $20.0 million and $10.0 million, respectively, of which the first
two tranches and half of the third tranche have been drawn down. The
agreement provides for Zoltek to draw down the remaining financing over the
next nine months subject to satisfaction of certain conditions, including
registration of the shares related to the prior closings.

In December 2005, the Company extended the expiration of its credit facility
with a U.S. bank to January 1, 2007. The credit facility consists of a term
loan of $0.3 million and a revolving credit loan with maximum available
borrowings of $5.5 million of which $1.7 million and $5.5 million was
available as of September 30, 2005 and December 31, 2005, respectively. The
Company anticipates it will require the remaining proceeds of the $50.0
million financing package or other significant financing in fiscal 2006 to
support its previously announced capacity expansion program. The Company
believes this is sufficient to fund near-term liquidity needs but there can
be no assurances that changed circumstances or unforeseen events could lead
to the need for additional borrowings.

                                     6

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The Company believes the $50.0 million financing package mentioned above, of
which $30.0 million has been drawn, along with the availability under the
Company's credit facility is sufficient to fund Zoltek's operations during
2006.

2.   FINANCING

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 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 financial results for the three months ended December 31,
2005 and 2004 (amounts in thousands).

<TABLE>
<CAPTION>
                                                                             THREE MONTHS ENDED DECEMBER 31, 2005
                                                                             ------------------------------------
                                                                                          CONVERSION
                                                                            WARRANTS       FEATURES         TOTAL
                                                                            --------       --------         -----
<S>                                                                        <C>            <C>             <C>
         January 2004 issuance - mark to market ...........................$     800      $       -       $     800
         March 2004 issuance - mark to market .............................      373              -             373
         October 2004 issuance - mark to market ...........................    2,066          1,946           4,012
         February 2005 issuance - mark to market ..........................    1,723          3,114           4,837
                                                                           ---------      ---------       ---------
                  Gain on value of warrants and
                    conversion feature.....................................$   4,962      $   5,060       $  10,022
                                                                           =========      =========       =========
<CAPTION>
                                                                             THREE MONTHS ENDED DECEMBER 31, 2004
                                                                             ------------------------------------
                                                                                          CONVERSION
                                                                            WARRANTS       FEATURES         TOTAL
                                                                            --------       --------         -----
<S>                                                                        <C>            <C>             <C>
         January 2004 issuance - mark to market ...........................$  (1,816)     $  (7,125)      $  (8,941)
         March 2004 issuance - mark to market .............................   (1,249)        (4,903)         (6,152)
         October 2004 issuance - mark to market ...........................   (2,398)        (8,026)        (10,424)
                                                                           ---------      ---------       ---------
                   Loss on value of warrants and
                     conversion feature....................................$  (5,463)     $ (20,055)      $ (25,518)
                                                                           =========      =========       =========
</TABLE>

Fiscal 2006 Financing Activity
------------------------------

During the quarter ended December 31, 2005, the investors converted $6.9
million principal amount of the convertible debt issued in the October 2004
transaction into 721,633 shares of common stock, which was recorded into
equity. The Company also recorded into equity the fair market value of the
conversion feature at the time of conversion of the debt issued in the
October 2004 issuance, which was valued at $3.7 million and offset by a
reduction to equity of $2.5 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 $0.2 million related to these
issuances into additional paid-in capital.

Subsequent to the first quarter of fiscal 2006, during January 2006, the
investors converted $13.1 million principal amount of convertible debt
issued in the October 2004 transaction into 1,378,947 shares of common
stock. The October 2004 issuances have been fully converted into the
Company's common stock.

The Company received an additional $10 million of funding in February 2006
under the previously announced September 2005 convertible financing facility
of up to $50 million. Zoltek now has received a total of $30 million under
this arrangement. The recently issued convertible notes, which are secured
by certain assets of the Company's Hungarian operations, are convertible
into Zoltek common stock at a conversion price of $13.07 per share. They
mature 42 months from the closing date and bear interest at a fixed rate

                                     7

<PAGE>
<PAGE>

of 7.5% per annum. Zoltek also issued to the investors five-year warrants to
purchase an aggregate of up to 267,789 shares of common stock at an exercise
price of $15.16 per share.

Fiscal 2005 Financing Activity
------------------------------

In September 2005, Zoltek entered into an agreement for a new financing; a
convertible debenture package of up to $50 million in a private placement
with a group of institutional investors. In order to match the cash needs to
support the Company's planned expansion, the financing arrangements provide
for the funding to occur in five separate closings of $5.0 million, drawn
down on September 30, 2005, $15.0 million, drawn down in December 2005,
$10.0 million drawn down in February 2006, and $10.0 million and $10.0
million, respectively, at future times. The agreement provides for Zoltek to
draw down the remaining financing over the next nine months subject to
satisfaction of various conditions including the registration of the shares
related to the prior drawdowns. The borrowings incurred at each closing will
mature 42 months from that closing and bear interest at a fixed rate of 7.5%
per annum. The convertible debentures issued at the first and second
closings are convertible into Zoltek common stock of 400,000 and 1,200,000
shares, respectively, which correlate to a conversion price of $12.50 per
share. Debentures assumable at the third and fourth closings will be
convertible into Zoltek common stock at a conversion price equal to the
market price at the time of the applicable closing. This financing is
collateralized by the carbon fiber assets of the Company's Hungarian
subsidiary.

In the first two closings, the debentures were issued with five-year
warrants that give holders the right to purchase up to a total of 560,000
shares of Zoltek common stock at an exercise price of $14.50 per share. In
the third and fourth closings, the amount and number of attached warrants
will vary according to Zoltek's share price at the time of the closing. As
part of the new financing agreement, Zoltek reduced the conversion price on
its outstanding convertible debt in the aggregate principal amount of $20.0
million issued in October 2004 from $12.00 to $9.50, with the requirement
that conversion take place within 30 days of the second closing. Further,
Zoltek also has agreed to reduce the conversion price on its outstanding
convertible debt in the aggregate principal amount of $20.0 million issued
February 2005 based on the market price of Zoltek's common stock on the
nine-month anniversary of the second closing. The adjusted conversion price
will equal 90% of the market price of the common stock, but will not be less
than $12.50 nor exceed $20.00.

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 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.

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. The repayment of the $6.0 million mortgage note 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 were initially convertible into 1,666,666
shares of common stock at a conversion price of $12.00 per share. In
connection with the September 2005 issuance the conversion price was
adjusted to $9.50 per share, resulting in the potential issuance of
2,105,263 shares upon conversion. 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. These
convertible debentures have been converted into the Company's common stock.

                                     8

<PAGE>
<PAGE>

Fiscal 2004 Financing Activity
------------------------------

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. These
convertible debentures have been converted into the Company's stock.

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. These convertible debentures have
been converted into the Company's stock.

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. This mortgage has been repaid.

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   JANUARY      MARCH      OCTOBER    FEBRUARY  (1)SEPTEMBER (1)DECEMBER
                                               2003        2004        2004        2004        2005        2005        2005
                                               ----        ----        ----        ----        ----        ----        ----
<S>                                          <C>         <C>         <C>         <C>         <C>         <C>         <C>
Amount of debenture (millions).............  $8.1        $7.0        $5.75       $20.0       $20.0       $5.0        $15.0
Per share conversion price on debenture....  $3.25       $5.40       $6.25       $12.00      $20.00      $12.50      $12.50
Interest rate..............................  7.5%        6.0%        6.0%        7.0%        7.5%        7.5%        7.5%
Term of debenture..........................  60 months   30 months   30 months   42 months   42 months   42 months   42 months
Warrants issued............................  405,000     323,995     230,000     500,000     457,142     140,000     420,000
Term of warrants...........................  60 months   48 months   48 months   72 months   48 months   60 months   60 months
Per share exercise price of warrants.......  $5.00       $5.40       $7.50       $13.00      $17.50      $14.50      $14.50
Fair value per warrant at issuance.........  $0.93       $2.27       $5.43       $6.02       $10.47      $9.34       $5.92
Value per share conversion feature at
  issuance.................................  $3.11       $1.78       $5.06       $4.31       $10.47      $9.91       $10.72
Stock price on date of agreement...........  $1.58       $5.40       $9.53       $9.60       $16.68      $13.15      $8.80
Stock volatility at issuance...............  100%        50%         61%         75%         84%         205%        96%
Dividend yield.............................  0.0%        0.0%        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%       4.25%       4.28%

--------------------------------
(1)    The warrants issued in connection with the February 2003, September
       2005 and December 2005 convertible issuances 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 features do not require derivative accounting.
       The September 2005 issuance does have a beneficial conversion
       feature; however, the February 2003 and December 2005 issuances have
       no beneficial conversion feature.
</TABLE>

                                     9

<PAGE>
<PAGE>

Earnings Per Share
------------------

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

<TABLE>
<CAPTION>
                                                                                THREE MONTHS ENDED
                                                                                 DECEMBER 31, 2005
                                                                                 -----------------
<S>                                                                                 <C>
         Numerators:
         Income from continuing operations..........................................$    6,255
         Impact of convertible debt and warrants:
                  Add:  interest expense............................................       604
                  Add:  amortization of financing fees and debt discount............        64
                  Less: gain on value of conversion feature and warrants............    (6,233)
                                                                                    ----------
         Income from continuing operations..........................................       690
         Income from discontinued operations........................................        33
                                                                                    ----------
         Net income.................................................................$      723
                                                                                    ==========

         Denominators:
         Average shares outstanding - basic.........................................    19,918
         Impact of convertible debt, warrants and stock options.....................     2,467
                                                                                    ----------
         Average shares outstanding - diluted.......................................    22,385
                                                                                    ==========

         Earnings per share - basic:
                  Continuing operations.............................................$     0.31
                  Discontinued operations...........................................      0.01
                                                                                    ----------
         Basic earnings per share...................................................$     0.32
                                                                                    ==========

         Earnings per share - diluted:
                  Continuing operations.............................................$     0.03
                  Discontinued operations...........................................      0.01
                                                                                    ----------
         Diluted earnings per share.................................................$     0.04
                                                                                    ==========
</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, interest expense, amortization of debt discount and
amortization of deferred financing cost on the Company's convertible
debentures and warrants, which have a dilutive impact. The Company does have
outstanding warrants and convertible debt at December 31, 2005 and 2004
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. Had these securities been dilutive, an additional 4.2 million
shares for the quarter ended December 31, 2005 would have been included in
the Company's diluted earnings per share calculation. If the results of the
Company reflected a net income in the first quarter of fiscal 2005, an
additional 6.9 million shares would be included in calculating the diluted
earnings per share. The additional shares relate to issuance of convertible
debt of 6.4 million, warrants of 1.5 million of which 0.3 million would be
dilutive using the treasury stock method and stock options of 1.1 million of
which 0.2 million would be dilutive using the treasury stock method.

3.   DEBT

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

US Operations - The Company's current credit facility with its U.S. Bank is
described above under "--Liquidity and Basis of Presentation." No financial
covenants apply to the credit facility from the U.S. bank, which mature on
January 1, 2007. Total borrowings under the U.S. credit facility, including
the revolving line of credit and term loan, were $0.9 million at December
31, 2005 leaving an availability of $4.9 million.

                                     10

<PAGE>
<PAGE>

Hungarian Operations - The Company's Hungarian subsidiary has a credit
facility with a Hungarian bank. Total borrowings under this credit facility
were $2.5 million at December 31, 2005. Due to the fiscal 2004 refinancing
(see "--2004 Financing Activity"), 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
December 31, 2005 (see "--2004 Financing Activity" and "--2005 Financing
Activity").

Long-term debt consists of the following (amounts in thousands):

<TABLE>
<CAPTION>
                                                                                           December 31,  September 30,
                                                                                               2005          2005
                                                                                             --------      --------
<S>                                                                                          <C>          <C>
     Note payable with interest at 9%, payable in monthly installments of
         principal and interest of $15 to maturity in January 2007...........................$  1,420     $   1,442

     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 ................   1,897         1,865

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

     Revolving credit agreement, maturing in January 2007, bearing interest at prime
         plus 2.0% (prime rate at December 31, 2005 was 7.25%)...............................     621         3,788

     Term loan, $0.3 million payable in quarterly installments of $0.1 million in 2006,
          bearing interest at prime plus 2.0% (prime rate at December 31, 2005
          was 7.25%).........................................................................     300           300

     Convertible debentures due April 2008 bearing interest at 7%............................  13,144        20,000

     Convertible debentures due August 2008 bearing interest at LIBOR plus 4%................  20,000        20,000

     Convertible debentures due March 2009 bearing interest at 7.5%..........................  20,000         5,000

     Facilities with Hungarian banks (interest rate of 5.5% to 10.6%)........................   2,466         2,766
                                                                                             --------      --------

         Total debt..........................................................................  67,648        62,961

         Less:  Conversion feature and debt discount associated with warrants................ (20,352)      (22,166)
         Less:  amounts payable within one year..............................................  (2,414)         (374)
                                                                                             --------     ---------
     Total long-term debt ...................................................................$ 44,882     $  40,421
                                                                                             ========     =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                               DECEMBER 31, 2005                        SEPTEMBER 30, 2005
                                                               -----------------                        ------------------
                                                                   CONVERSION                               CONVERSION
                                                        WARRANTS    FEATURES      TOTAL          WARRANTS    FEATURES       TOTAL
                                                        --------    --------      -----          --------    --------       -----
<S>                                                    <C>         <C>          <C>             <C>         <C>          <C>
January 2004 issuance  ................................$   1,017   $       -    $  1,107        $   1,818   $        -   $    1,818
March 2004 issuance  ..................................      494           -         494              867            -          867
October 2004 issuance..................................    2,967       5,492       8,459            5,033       11,141       16,174
February 2005 issuance.................................    1,914       3,412       5,326            3,637        6,526       10,163
                                                       ---------   ---------    --------        ---------   ----------   ----------
         Totals........................................$   6,392   $   8,904    $ 15,296        $  11,353   $   17,667   $   29,024
                                                       =========   =========    ========        =========   ==========   ==========
</TABLE>


4.   DISCONTINUED OPERATIONS

In the fourth quarter of fiscal 2004, the Company formally adopted a plan to
discontinue and exit two businesses of its Zoltek Rt. Operations, which
manufacture textile acrylic and nylon fibers and yarns. In the fourth
quarter of fiscal 2005, the Company formally adopted a plan to discontinue
the CMC business of its Zoltek Rt. operations. These businesses 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 businesses had been included in the
Specialty Products segment (see Note 7). Certain information with respect

                                     11

<PAGE>
<PAGE>
to the discontinued operations of the textile acrylic, nylon fibers and CMC
divisions for the quarters ended December 31, 2005 and 2004 is summarized as
follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                                     THREE MONTHS ENDED DECEMBER 31,
                                                                                     -------------------------------
                                                                                        2005                2004
                                                                                     -----------         -----------
<S>                                                                                  <C>                  <C>
         Net sales.................................................................  $       447          $   2,552
         Cost of sales.............................................................          363              2,505
                                                                                     -----------          ---------
              Gross profit.........................................................           84                 47
         Selling, general and administrative expenses..............................          (27)              (966)
                                                                                     -----------          ---------
              Income (loss) from operations........................................           57               (919)
         Other income (expense)....................................................          (24)               328
                                                                                     -----------          ---------
         Income (loss) from discontinued operations................................  $        33          $    (591)
                                                                                     ===========          =========
</TABLE>

5.   STOCK COMPENSATION EXPENSE

On October 1, 2005, the Company adopted the provisions of SFAS No. 123-R
"Share-Based Payment" using the modified prospective method. SFAS No. 123-R
requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments based upon the grant date fair
value of those awards. Under the modified prosepective method of adopting
SFAS No. 123-R, the Company recognized compensation cost for all share-based
payments granted after October 1, 2005, plus any awards granted to employees
prior to October 1, 2005 that remain unvested at that time. Under this
method of adoption, no restatement of prior periods is made.

Prior to October 1, 2005 the Company recognized the cost of employee
services received in exchange for equity instruments in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
Employees" (ABP 25). APB 25 required the use of the intrinsic value method,
which measures compensation cost as the excess, if any, of the quoted market
price of the stock over the amount the employee must pay for the stock.
Compensation expense for substantially all of the Company's equity based
awards was measured under APB 25 on the date the shares were granted. Under
APB 25, no compensation expense was recognized for stock options.

During the fiscal first quarter of 2006 the Company recorded into selling
and general administrative expense and into its corporate headquarters
segment $0.07 million for the cost of employee services received in exchange
for equity instruments based on the grant-date fair value of those
instruments in accordance with the provisions of SFAS No. 123-R. There was
no capitalized stock-based employee compensation cost as of December 31,
2005. There were no recognized tax benefits during the quarter ended
December 31, 2005.

During the fiscal first quarter of 2005 had the cost of employee services
received in exchange for equity instruments been recognized based on the
grant-date fair value of those instruments in accordance with the provisions
of SFAS No. 123-R, the Company's net income and earnings per share would
have been impacted as shown in the following table (amounts in thousands).

<TABLE>
<CAPTION>
                                                                                THREE MONTHS ENDED DECEMBER 31,
                                                                                            2004
                                                                                        -----------
<S>                                                                                     <C>
         Reported net loss..............................................................$   (29,929)
         Total stock-based employee compensation expense determined under
           fair value based method for all awards, net of tax effects...................        (51)
                                                                                        -----------
         Pro forma net loss.............................................................$   (29,980)
                                                                                        ===========
         Reported basic and diluted loss per share......................................$     (1.82)
                                                                                        ===========
         Pro forma basic and diluted loss per share.....................................$     (1.82)
                                                                                        ===========
</TABLE>

The historical pro-forma impact of applying the fair value method prescribed
by SFAS No. 123-R is not representative of the impact that may be expected
in the future due to changes resulting from additional grants in future
years and changes in assumptions such as volatility, interest rates and
expected life used to estimate fair value of the grants in future years.

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>
                                                                                       THREE MONTHS ENDED DECEMBER 31,
                                                                                       -------------------------------
         ASSUMPTIONS                                                                        2005              2004
         -----------                                                                    -----------        ----------
<S>                                                                                        <C>               <C>
         Expected life of option.....................................................      6 years           6 years
         Risk-free interest rate.....................................................        4.29%             4.25%
         Volatility of stock.........................................................          96%               77%
         Cancellation experience.....................................................          79%               79%
         Expected dividend yield.....................................................           --                --
</TABLE>

                                     12

<PAGE>
<PAGE>

The Company uses historical volatility for a period of time that is
comparable to the expected life of the option. However, the Company only
calculates the volatility of the Company's stock back to November 2003, the
date the Company received its first large order for carbon fiber, as that is
when the Company considers its business to have changed from a research and
development company to an operational company. Management believes this is a
better measurement of the Company's stock volatility moving forward.

In 1992, the Company adopted a Long-term Incentive Plan that authorizes the
Compensation Committee of the Board of Directors (the "Committee") to grant
key employees and officers of the Company incentive or nonqualified stock
options, stock appreciation rights, performance shares, restricted shares
and performance units. The Committee determines the prices and terms at
which awards may be granted along with the duration of the restriction
periods and performance targets. Currently 1,500,000 shares of common stock
may be issued pursuant to awards under the plan of which 1,051,667 are
currently outstanding. Outstanding stock options expire 10 years from the
date of grant or upon termination of employment. Options granted in 1998 and
prior vest 100% five years from the date of grant. Options granted in 1999
and thereafter primarily vest 100% three years from date of grant. All
options were issued at an option price equal to the market price on the date
of grant.

In 1992, the Company adopted a Directors Stock Option Plan under which
options to purchase 7,500 shares of common stock at the then fair market
value are currently issued to each non-employee director annually. In
addition, newly elected non-employee directors receive options to purchase
7,500 shares of common stock, at the then fair market value. The options
expire from 2005 through 2015, respectively.

Presented below is a summary of stock option plans activity for the first
quarter of fiscal 2006:

<TABLE>
<CAPTION>
                                                                                                                         AGGREGATE
                                                                                                            WTD. AVG.    INTRINSIC
                                             WTD. AVG.       WTD. AVG.        WTD. AVG.                     REMAINING      VALUE
                                              OPTIONS     EXERCISE PRICE    EXERCISABLE   EXERCISE PRICE      LIFE         (000)
                                             ---------    --------------    -----------   --------------    ---------    ---------
<S>                                          <C>            <C>               <C>          <C>              <C>          <C>
         Balance, September 30, 2005         1,051,667      $    8.37         812,028      $     8.85                      3,783
             Granted.......................          -
             Exercised.....................     (8,667)          2.21                                                         57
             Cancelled.....................     (2,000)          2.07                                                         13
                                           -----------
         Balance, December 31, 2005          1,041,000      $    8.44         849,750      $     8.60         5.21         2,110
</TABLE>

As of December 31, 2005 the Company had $0.5 million of total unrecognized
compensation expense related to stock option plans that will be recognized
over the weighted average period of 1.9 years.

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
formally adopted a plan to discontinue and exit two businesses of its Zoltek
Rt. Operations, which manufacture textile acrylic and nylon fibers and
yarns. In the fourth quarter of fiscal 2005, the Company formally adopted a
plan to discontinue the CMC business of its Zoltek Rt. Operations. These
businesses were previously part of the Specialty Products segment.

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 carbon fibers used to manufacture 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 manufactures and markets
thermoplastic compounds and continuously extruded netting products and is
located in Hungary. In the fourth quarters of fiscal 2004 and fiscal 2005,
the Company discontinued businesses that were 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.

Management evaluates the performance of its operating segments on the basis
of operating income (loss) contribution to the Company. The following table
presents financial information on the Company's operating segments as of and
for the first quarter ended December 31, 2005 and 2004 and balance sheet at
December 31, 2005 and September 30, 2005 (amounts in thousands):

<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED DECEMBER 31, 2005
                                                                           ------------------------------------
                                                           Carbon        Technical     Specialty       Corporate
                                                           Fibers         Fibers        Products     Headquarters        Total
                                                        ------------   -----------   -------------   --------------  -------------
<S>                                                     <C>            <C>           <C>             <C>             <C>
Net sales............................................   $     10,758   $     4,515   $     1,448     $         -     $    16,721
Cost of sales, excluding available unused capacity...          8,970         3,830         1,166               -          13,966
Available unused capacity expenses...................              -             -             -               -               -
Operating income (loss)..............................            413           364          (286)         (1,371)           (880)
Depreciation and amortization expense................          1,104           223           107              33           1,467
Capital expenditures.................................          3,877         1,136             -               -           5,013

<CAPTION>
                                                                           THREE MONTHS ENDED DECEMBER 31, 2004
                                                                           ------------------------------------
                                                           Carbon        Technical     Specialty       Corporate
                                                           Fibers         Fibers        Products     Headquarters        Total
                                                        ------------   -----------   -------------   --------------  -------------
<S>                                                     <C>            <C>           <C>             <C>             <C>
Net sales............................................   $      7,052   $     3,778   $     1,413     $         -     $    12,243
Cost of sales, excluding available unused capacity...          7,075         2,969         1,168               -          11,212
Available unused capacity expenses...................            525             -             -               -             525
Operating income (loss)..............................         (1,682)          357           534            (605)         (1,396)
Depreciation and amortization expense................            892           239           129              29           1,289
Capital expenditures.................................          2,151           160           175              11           2,497

<CAPTION>
                                                                                       TOTAL ASSETS
                                                                                       ------------
                                                           Carbon        Technical     Specialty       Corporate
                                                           Fibers         Fibers        Products     Headquarters        Total
                                                        ------------   -----------   -------------   --------------  -------------
<S>                                                     <C>            <C>           <C>             <C>             <C>
December 31, 2005....................................   $     96,251   $    22,429   $    10,044     $     4,110     $   132,834
September 30, 2005...................................         93,386        22,662        10,654           3,727         130,429
</TABLE>

                                     13

<PAGE>
<PAGE>

7.   INVENTORIES

Inventories consist of the following (amounts in thousands):

<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,    SEPTEMBER 30,
                                                                                            2005            2005
                                                                                        ------------    -------------
<S>                                                                                      <C>              <C>
         Raw materials.................................................................  $  13,260        $  11,872
         Work-in-process...............................................................        722              430
         Finished goods................................................................     10,994           11,638
         Supplies, spares and other....................................................        903              813
                                                                                         ---------        ---------
                                                                                         $  25,879        $  24,753
                                                                                         =========        =========
</TABLE>

8.   NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123-R "Accounting for Stock-Based
Compensation", 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 years ending after June 15, 2005. The Company adopted
SFAS No. 123-R as of October 1, 2005 (see Note 5).

EITF Issue No. 05-2 "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock" which is effective
for new instruments entered into and instruments modified in reporting
periods beginning after June 29, 2005. All the Company's current debt
issuances have already complied with EITF Issue No. 05-2. Accordingly, the
adoption will have no material impact on the Company's financial statements.

EITF Issue No. 05-8, "Income Tax Consequences of Issuing Convertible Debt
with a Beneficial Conversion Feature" will be effective for financial
statements beginning in the first interim or annual reporting period
beginning after December 15, 2005. The Company does have convertible debt
with beneficial conversion features and is currently evaluating the effect
of this interpretation on the Company's financial statements when
implemented.

9.   COMMITMENTS AND CONTINGENCIES

Leases
------

Land at the carbon fibers manufacturing facility in Missouri is leased under
an operating lease that expires in December 2065, with a renewal option for
24 years expiring in December 2089. The lease requires annual rental
payments of $57,991 through October 2010, no further rental payments are
required through initial term of lease.

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 claimed 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, demanded $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

                                     14

<PAGE>
<PAGE>

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.

The Company is 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 stealthy aircraft. A
preliminary court decision has been favorable for the Company, but the
Company cannot predict the timing or the outcome of this litigation or the
impact on the Company's financial condition and results of operations.

In September 2004, the Company was named a defendant in a civil action filed
by a former investment banker that was retained by the Company to obtain
equity investors, alleging breach by the Company of its obligations under
the agreement signed by the parties. The investment banker alleges it is
owed commission from the equity investment 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. A non-jury
trial was held and we are awaiting the judge's ruling. The Company cannot
predict the timing or the outcome of this litigation or the impact on the
Company's financial condition and results of operations.

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

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, results of operations or financial
condition of the Company. There can be no assurance, that compliance with
future national or local environmental laws, regulations and enforcement
policies will not have a material adverse effect on the business, 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 and all of its carbon fibers and technical fibers. The
primary source of raw material for the precursor is ACN (acrylonitrile),
which is a commodity product with multiple sources.

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 three months ended December 31, 2005, the Company reported sales of
$2.9 million, to a wind turbine 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.

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

GENERAL
-------

The Company's mission is to commercialize the use of carbon fibers as a
low-cost but high performance reinforcement for composites used as the
primary building material in everyday commercial products. The 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.

                                     15

<PAGE>
<PAGE>

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 and
Hungarian facilities. 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 in fiscal 2004. Two major
aerospace programs, the Airbus A-380 and the Boeing 787, have absorbed
virtually all of the aerospace fiber capacity, and resulted in the
divergence of the aerospace and commercial markets for carbon fibers. The
divergence of the two markets was accelerated by the strength in the
development of the carbon fiber wind turbine blade market. Increasing sales
of carbon fiber products during fiscal 2005 confirmed this shift. Since the
beginning of fiscal 2005, the Company announced long-term supply
arrangements with the two largest manufacturers of wind turbines. The
Company expects that these supply arrangements will generate $80 to $100
million of sales over the next three years. Currently Zoltek believes it is
in a unique position of having the 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.

In order to meet demand for carbon fibers for wind energy and other
commercial carbon fiber applications, Zoltek undertook a three-phase
capacity expansion program. First, in fiscal 2005 Zoltek 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. Second, Zoltek has added two new carbon fiber lines
and added sufficient precursor capacity to supply them at the Company's
Hungarian facility. These lines began to operate at targeted production
rates toward end of the first quarter of 2006. The third phase of the
expansion program calls for a doubling of the carbon fiber and precursor
capacity levels and is expected to be operational by December 31, 2006. The
Company expects that a $50.0 million convertible debt-financing package
entered into in September 2005, of which $30.0 million has been funded to
date, will provide a substantial portion of the capital resources for the
planned capacity increase in fiscal 2006. The Company has specifically
targeted several significant and emerging applications: wind energy, oil and
gas, construction, alternate energy and automotive. Development of the use
of carbon fibers is continuing in each of these targeted market segments.

Maintaining the excess capacity had been costly, but the Company believed it
was necessary to assure customers of adequate supply and encourage them to
shift to carbon fibers from other materials. With the new orders in place
and indications for additional significant orders, the Company restarted its
major carbon fiber manufacturing facility in Abilene, Texas, which had been
temporarily idled. The reactivation of the Abilene facility has been more
difficult and costly than expected. As of September 30, 2005, all of the
production lines at the Company's Abilene facility were operational,
however, the facility had not reached its targeted production level. Since
late November 2005 the carbon fiber lines at this facility have demonstrated
significant operational improvement and the Company believes the lines
should reach desired production rates during the second quarter of fiscal
2006. The improvements in operation in December 2005 have already had a
positive impact on the Company's financial results.

During the fourth quarter of fiscal 2004, the Company discontinued the nylon
fiber operation and the acrylic textile business. During the fourth quarter
of fiscal 2005, the Company discontinued the CMC operation. These divisions,
which were part of the Company's specialty products segment, 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 nylon fiber and acrylic
textile product lines was substantially completed by February 1, 2005, and
the CMC operation was shut down at September 30, 2005. The Company is
utilizing 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.

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

THREE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO THE THREE MONTHS ENDED
-----------------------------------------------------------------------
DECEMBER 31, 2004
-----------------

The Company's sales increased 37%, or $4.5 million, to $16.7 million in the
first quarter of fiscal 2006 from $12.2 million in the first quarter fiscal
2005. Carbon fiber sales increased 52%, or $3.7 million, to $10.8 million in
the first quarter of fiscal 2006 from $7.1 million in the first quarter
fiscal 2005 as production and sales of wind energy orders continued and the
demand for the Company's milled and chopped products for the deep sea oil
business significantly increased from prior years. The Company's sales were
constrained by production capacity, which will be significantly increased in
later quarters as the newly added capacity in Hungary comes on line and as
the Abilene facility production continues to improve. Technical fiber sales
increased 18%, or $0.7 million, to $4.5 million in the first quarter of
fiscal 2006 from $3.8 million in the first quarter fiscal 2005. Technical
fiber sales increased as the

                                     16

<PAGE>
<PAGE>

Company had a significant increase in orders from its European aircraft
brake customers. Sales of the continuing components of the specialty
products business segment were flat at $1.5 million in the first quarter of
fiscal 2006.

The Company's cost of sales (including available unused capacity costs)
increased by 25%, or $2.8 million, to $14.0 million in the first quarter of
fiscal 2006 from $11.2 million in the first quarter of fiscal 2005. Carbon
fiber cost of sales increased by 26%, or $1.9 million, to $9.0 million for
the first quarter of fiscal 2006 from $7.1 million for the first quarter of
fiscal 2005. The 26% increase in carbon fiber cost of sales resulted from
the increased sales of 52% discussed above, offset by the improvement in
reducing cost related to the start-up operating inefficiencies of the
installed carbon fiber lines at its Abilene, Texas facility. The Company
expects that the efficiency of the manufacturing operation will continue to
improve during the second quarter of fiscal 2006. Technical fiber cost of
sales increased $0.8 million, or 26%, to $3.8 million for the first quarter
of fiscal 2006 from $3.0 million for the first quarter of fiscal 2005. The
cost of sales of the specialty products segment was flat for the first
quarter of fiscal 2006 compared to the first quarter of fiscal 2005 at $1.2
million

During the first quarter of fiscal 2005, the Company incurred 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
$0.5 million during the first quarter of fiscal 2005. During the first
quarter of fiscal 2006, the increased orders and increased efficiency rates
resulted in the unused capacity costs being fully absorbed into cost of
sales. See additional discussion of the Abilene facility under "--Liquidity
and Capital Resources."

Application and market development costs were $1.1 million in the first
quarter of fiscal 2006 and $0.8 million in the first quarter of fiscal 2005.
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. The increase in the first quarter of fiscal
2006 related to application development of the towpreg product at the
Company's prepreg facility in Utah.

Selling, general and administrative expenses were $2.5 million in the first
quarter of fiscal 2006 compared to $1.1 million in the first quarter of
fiscal 2005. The increase related to staffing of management positions that
have been filled to meet the new demands of the growing sales and production
volume and costs related to becoming compliant with the Sarbanes-Oxley Act's
requirements.

Operating loss was $0.9 million in the first quarter of fiscal 2006 compared
to a loss of $1.4 million in the first quarter of fiscal 2005, a decrease of
$0.5 million. Carbon fiber operations went from a loss of $1.7 million in
the first quarter of fiscal 2005 to a profit of $0.4 million in the first
quarter of fiscal 2006. The improvement in operating income in the carbon
fiber operation in fiscal 2006 related to the increase in production and
sales over the first quarter of fiscal 2005 as the Company's Abilene
facility production efficiency continued to increase. The operating income
in technical fibers was flat at $0.4 million as the increase in sales was
offset by an increase in operating cost to produce. Specialty products
reported an operating loss of $0.3 million during the first quarter of
fiscal 2006 compared to income $0.5 million in the first quarter of fiscal
2005 as the remaining operating divisions had to absorb general
administrative cost that was not reduced when the Company discontinued some
divisions within the specialty products segment. Corporate headquarters
operating loss increased by $0.8 million to a loss of $1.4 million in the
first quarter of fiscal 2006 due to staffing of management positions that
have been filled to meet the new demands of the growing sales and production
volume and costs related to becoming compliant with the Sarbanes-Oxley Act's
requirements. The decrease in the Company's total operating loss was
principally a result of the increase in sales and production and the
increase in efficiencies of the Abilene, Texas facility.

Interest expense was approximately $0.8 million in the first quarter of
fiscal 2006 compared to $1.1 million in the corresponding period of fiscal
2005. The decrease in interest resulted from consistent debt levels from
prior fiscal year offset by the capitalization of interest cost of $0.3
million related to the expansion of the Company's carbon fiber lines (see
"--Liquidity and Capital Resources"). Due to the limited variable rate debt,
the impact of the increase in interest rates was immaterial.

Amortization of financing fees, which are non-cash expenses, was
approximately $2.0 million in the first quarter of fiscal 2006 compared to
$1.8 million in the first quarter of fiscal 2005. The increase in
amortization resulted from the Company issuing additional convertible debt
during fiscal 2005 and 2006 (see "--Liquidity and Capital Resources").

Gain or loss on value of warrants and conversion feature, which is a
non-cash item, was a gain of $10.0 million in the first quarter of fiscal
2006 compared to a loss of $25.5 million in the first quarter of fiscal 2005
(see "--Liquidity--Financing"). The income during the first quarter of
fiscal 2006 was attributable to the decrease in the market price of the
Company's common stock during the quarter.

Other income/expense, net, was expense of $0.01 million in the first quarter
of fiscal 2006 compared to income of $0.5 million for the first quarter
fiscal 2005. The increase was due to in the foreign currency transactional
loss during the first quarter of fiscal 2006 which

                                     17

<PAGE>
<PAGE>

was due to the Hungarian Forint becoming weaker during the quarter compared
to the Euro and Pound in which the Company buys most of its raw material.

Income tax expense was $0.1 million for the first quarter of fiscal 2006
compared to $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 fiscal quarters of 2006 and 2005 due to
uncertainties in the Company's ability to utilize net operating loss
carryforwards in the future. The expenses for the quarters relates to local
taxes for the Hungarian facility.

The foregoing resulted in income from continuing operations of $6.3 million
for the first quarter of fiscal 2006 compared to a loss of $29.9 million for
the first quarter of fiscal 2005. Similarly, the Company reported income
from continuing operations per share of $0.31 and $0.03 on a basic and
diluted basis, respectively, for the first quarter of fiscal 2006 and a loss
from continuing operations per share of $(1.78) on a basic and diluted
basis, respectively, for the first quarter of fiscal 2005. The weighted
average common shares outstanding were 19.9 million basic and 22.4 million
diluted for fiscal 2006 and 16.4 million basic and diluted for the first
quarter of fiscal 2005.

The income from discontinued operations of $0.03 million for the first
quarter of fiscal 2006 compares to a loss of $0.6 million for the first
quarter of fiscal 2005. The significant decrease in sales was offset by a
significant decrease in cost during the first quarter of fiscal 2006 as the
Company sold off its prior existing inventory balance of its acrylic fiber
business and CMC division. The Company reported income from discontinued
operations per share of $0.01 on a basic and diluted basis for fiscal 2006
and a loss per share of $(0.04) on a basic and diluted basis for the first
quarter of 2005.


                                     18

<PAGE>
<PAGE>

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

Due to the timing of development of markets for carbon fiber products in
each of the past five fiscal years, the Company has incurred significant
operating losses and the Company's operations have used cash in excess of
cash generated by operating activities. As a result, the Company has
executed refinancing arrangements and incurred borrowings under credit
facilities, issued 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.

Management will seek to fund the Company's near-term operating needs from
anticipated sales increases related to expected increases in production
capacity at existing facilities, sale of excess inventories, and continued
active management of the Company's working capital. There can be no
assurance that the Company will realize such anticipated sales increases
from improvements in its production capacity from its existing facilities,
or that the Company will be able to generate sufficient cash flows from
operating activities to fund its various obligations in the ordinary course
of business. Should the Company be unable to generate sufficient cash flows,
it may be required to seek additional debt or equity capital. There can be
no assurance that such capital will be available, or if available, that it
will be available on terms acceptable to the Company. The Company's ability
to obtain additional debt and/or equity financing will depend on numerous
factors, including the Company's operating performance with respect to
meeting planned production capacity growth targets, the existence of
sufficient demand for the Company's products and overall financial market
conditions.

In September 2005, Zoltek entered into an agreement for a new convertible
debenture financing package of up to $50.0 million in a private placement
with a group of institutional investors. In order to match the cash needs to
support the Company's planned expansion, the financing agreement provides
for the funding to occur in four separate closings of $5.0 million, $15.0
million, $20.0 million and $10.0 million, respectively, of which the first
two tranches and half of the third tranche have been drawn down. The
agreement provides for Zoltek to draw down the remaining financing over the
next nine months subject to satisfaction of certain conditions, including
registration of the shares related to the prior closings.

In December 2005, the Company extended the expiration of its credit facility
with a U.S. bank to January 1, 2007. The credit facility consists of a term
loan of $0.3 million and a revolving credit loan with maximum available
borrowings of $5.5 million of which $1.7 million and $5.5 million was
available as of September 30, 2005 and December 31, 2005, respectively. The
Company anticipates it will require the remaining proceeds of the $50.0
million financing package or other significant financing in fiscal 2006 to
support its previously announced capacity expansion program. The Company
believes this is sufficient to fund near-term liquidity needs but there can
be no assurance that changes in circumstances or unforeseen events could
lead to the need for additional borrowings.

The Company believes the $50.0 million financing package mentioned above, of
which $30.0 million has been drawn, along with the availability under the
Company's credit facility is sufficient to fund Zoltek's operations during
2006.

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 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 financial results ended December 31, 2005 and
2004 (amounts in thousands).


                                     19

<PAGE>
<PAGE>

<TABLE>
<CAPTION>
                                                                             THREE MONTHS ENDED DECEMBER 31, 2005
                                                                             ------------------------------------
                                                                                          CONVERSION
                                                                            WARRANTS       FEATURES         TOTAL
                                                                            --------       --------         -----
<S>                                                                        <C>            <C>             <C>
         January 2004 issuance - mark to market ...........................$     800      $       -       $     800
         March 2004 issuance - mark to market .............................      373              -             373
         October 2004 issuance - mark to market ...........................    2,066          1,946           4,012
         February 2005 issuance - mark to market ..........................    1,723          3,114           4,837
                                                                           ---------      ---------       ---------
                  Gain  on value of warrants and
                    conversion feature.....................................$   4,962      $   5,060       $  10,022
                                                                           =========      =========       =========

<CAPTION>
                                                                             THREE MONTHS ENDED DECEMBER 31, 2004
                                                                             ------------------------------------
                                                                                          CONVERSION
                                                                            WARRANTS       FEATURES         TOTAL
                                                                            --------       --------         -----
<S>                                                                        <C>            <C>             <C>
         January 2004 issuance - mark to market ...........................$  (1,816)     $  (7,125)      $  (8,941)
         March 2004 issuance - mark to market .............................   (1,249)        (4,903)         (6,152)
         October 2004 issuance - mark to market ...........................   (2,398)        (8,026)        (10,424)
                                                                           ---------      ---------       ---------
                   Loss on value of warrants and
                     conversion feature....................................$  (5,463)     $ (20,055)      $ (25,518)
                                                                           =========      =========       =========
</TABLE>

Fiscal 2006 Financing Activity
------------------------------

During the quarter ended December 31, 2005, the investors converted $6.9
million of convertible debt issued in the October 2004 transaction into
721,633 shares of common stock, which was recorded into equity. The Company
also recorded into equity the fair market value of the conversion feature at
the time of conversion of the debt issued in October issuances, which was
valued at $3.7 million and offset by a reduction to equity of $2.5 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
$0.2 million related to these issuances into additional paid-in capital.

During January 2006, the investors converted $13.1 million of convertible
debt issued in the October 2004 transaction into 1,378,947 shares of common
stock. The October 2004 issuances have been fully converted into the
Company's common stock.

The Company received an additional $10 million of funding in February 2006
under the previously announced September 2005 convertible financing facility
of up to $50 million. Zoltek now has received a total of $30 million under
this arrangement. The recently issued convertible notes, which are secured
by certain assets of the Company's Hungarian operations, are convertible
into Zoltek common stock at a conversion price of $13.07 per share. They
mature 42 months from the closing date and bear interest at a fixed rate of
7.5% per annum. Zoltek also issued to the investors five-year warrants to
purchase an aggregate of up to 267,789 shares of common stock at an exercise
price of $15.16 per share.

Fiscal 2005 Financing Activity
------------------------------

In September 2005, Zoltek entered into an agreement for a new financing; a
convertible debenture package of up to $50 million in a private placement
with a group of institutional investors. In order to match the cash needs to
support the Company's planned expansion, the financing agreement provides
for the funding to occur in five separate closings of $5.0 million drawn
down on September 30, 2005, $15.0 million drawn down in December 2005, $10.0
million drawn down in February 2006, $10.0 million and $10.0 million. The
agreement provides for Zoltek to draw down the remaining financing over the
next nine months subject to the satisfaction of various conditions,
including registration of the shares related to the prior draw downs. The
borrowings incurred at each closing will mature 42 months from that closing
and bear interest at a fixed rate of 7.5% per annum. The convertible
debentures issued at the first and second closings are convertible into
Zoltek common stock of 400,000 and 1,200,000 shares, respectively, which
correlates to a conversion price of $12.50 per share. Debentures issuable at
the subsequent closings will be convertible into Zoltek common stock at a
conversion price equal to the market price at the time of the applicable
closing. This financing is collateralized by the carbon fiber assets of the
Company's Hungarian subsidiary.

In the first two closings, the debentures were issued with five-year
warrants that give holders the right to purchase up to a total of 560,000
shares of Zoltek common stock at an exercise price of $14.50 per share. In
the third and fourth closings, the amount and number of attached warrants
will vary according to Zoltek's share price at the time of the closing. As
part of the new financing agreement, Zoltek has reduced the conversion price
on its outstanding convertible debt in the aggregate principal amount of
$20.0 million issued in October 2004 from $12.00 to $9.50, with the
requirement that conversion take place within 30 days of the second closing.
Further, Zoltek also has agreed to reduce the conversion price on its
outstanding convertible debt in the aggregate principal amount of $20.0
million issued February 2005 based on the market price of Zoltek's common
stock on the nine-month anniversary of

                                     20

<PAGE>
<PAGE>

the second closing. The adjusted conversion price will equal 90% of the
market price of the common stock, but will not be less than $12.50 nor
exceed $20.00.

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 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.

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. The repayment of the $6.0 million mortgage note 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 were initially convertible into 1,666,666
shares of common stock at a conversion price of $12.00 per share. In
connection with the September 2005 issuance the conversion price was
adjusted to $9.50 per share, resulting in the potential issuance of
2,105,263 shares upon conversion. 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. These
convertible debentures have been converted into the Company's common stock.

Fiscal 2004 Financing Activity
------------------------------

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. These
convertible debentures have been converted into the Company's stock.

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. These convertible debentures have
been converted into the Company's stock.

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

                                     21

<PAGE>
<PAGE>

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. This mortgage has been repaid.

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   JANUARY     MARCH       OCTOBER    FEBRUARY  (1)SEPTEMBER (1)DECEMBER
                                               2003        2004        2004        2004        2005        2005         2005
                                               ----        ----        ----        ----        ----        ----         ----
<S>                                          <C>         <C>         <C>         <C>         <C>         <C>          <C>
Amount of debenture (millions).............  $8.1        $7.0        $5.75       $20.0       $20.0       $5.0         $15.0
Per share conversion price on debenture....  $3.25       $5.40       $6.25       $12.00      $20.00      $12.50       $12.50
Interest rate..............................  7.5%        6.0%        6.0%        7.0%        7.5%        7.5%         7.5%
Term of debenture..........................  60 months   30 months   30 months   42 months   42 months   42 months    42 months
Warrants issued............................  405,000     323,995     230,000     500,000     457,142     140,000      420,000
Term of warrant............................  60 months   48 months   48 months   72 months   48 months   60 months    60 months
Per share exercise price of warrants.......  $5.00       $5.40       $7.50       $13.00      $17.50      $14.50       $14.50
Fair value per warrant at issuance.........  $0.93       $2.27       $5.43       $6.02       $10.47      $9.34        $5.92
Value per share conversion feature at
  issuance.................................  $3.11       $1.78       $5.06       $4.31       $10.47      $9.91        $10.72
Stock price on date of agreement...........  $1.58       $5.40       $9.53       $9.60       $16.68      $13.15       $8.80
Stock volatility at issuance...............  100%        50%         61%         75%         84%         205%         96%
Dividend yield.............................  0.0%        0.0%        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%       4.25%        4.28%

--------------------------------
(1)    The warrants issued in connection with the February 2003, September
       2005 and December 2005 convertible issuances 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 features do not require derivative accounting.
       The September 2005 issuance does have a beneficial conversion
       feature; however, the February 2003 and December 2005 issuances have
       no beneficial conversion feature.
</TABLE>


                                     22

<PAGE>
<PAGE>

Earnings Per Share
------------------

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

<TABLE>
<CAPTION>
                                                                                THREE MONTHS ENDED
                                                                                 DECEMBER 31, 2005
                                                                                 -----------------
<S>                                                                                 <C>
         Numerators:
         Income from continuing operations..........................................$    6,255
         Impact of convertible debt and warrants:
                  Add:  interest expense............................................       604
                  Add:  amortization of financing fees and debt discount............        64
                  Less: gain on value of conversion feature and warrants............    (6,233)
                                                                                    ----------
         Income from continuing operations..........................................       690
         Income from discontinued operations........................................        33
                                                                                    ----------
         Net Income.................................................................$      723
                                                                                    ==========

         Denominators:
         Average shares outstanding - basic.........................................    19,918
         Impact of convertible debt, warrants and stock options.....................     2,467
                                                                                    ----------
         Average shares outstanding - diluted.......................................    22,385
                                                                                    ==========

         Earnings per share - basic:
                  Continuing operations.............................................$    0.31
                  Discontinued operations...........................................     0.01
                                                                                    ---------
         Basic earnings  per share..................................................$    0.32
                                                                                    =========

         Earning per share - diluted:
                  Continuing operations.............................................$    0.03
                  Discontinued operations...........................................     0.01
                                                                                    ---------
         Diluted earning  per share.................................................$    0.04
                                                                                    =========
</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, interest expense, amortization of debt discount and
amortization of deferred financing cost on the Company's convertible
debentures and warrants which have a dilutive impact. The Company does have
outstanding warrants and convertible debt at December 31, 2005 and 2004
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. Had these securities been dilutive, an additional 4.2 million
shares for the quarter ended December 31, 2005 would have been included in
the Company's diluted earnings per share calculation. If the results of the
Company reflected a net income in the first quarter of fiscal 2005, an
additional 6.9 million shares would be included in calculating the diluted
earnings per share. The additional shares relate to issuance of convertible
debt of 6.4 million, warrants of 1.5 million of which 0.3 million would be
dilutive using the treasury stock method and stock options of 1.1 million of
which 0.2 million would be dilutive using the treasury stock method.

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

US Operations - The Company's current credit facility with its U.S. Bank is
described above under "--Liquidity." No financial covenants apply to the
credit facility from the U.S. bank, which mature on January 1, 2007. Total
borrowings under the U.S. credit facility, including the revolving line of
credit and term loan, were $0.9 million at December 31, 2005 leaving an
availability of $4.9 million.

Hungarian Operations - The Company's Hungarian subsidiary has a credit
facility with a Hungarian bank. Total borrowings under this credit facility
were $2.4 million at December 31, 2005. Due to the fiscal 2004 refinancing
(see "--2004 Financing Activity"), 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
December 31, 2005 (see "--2004 Financing Activity" and "--2005 Financing
Activity").

                                     23

<PAGE>
<PAGE>

Cash Used In Continuing Operating Activities
--------------------------------------------

The $3.5 million increase in cash used in continuing operations in the first
quarter of fiscal 2006, was the result of a $3.7 million increase in working
capital which was primarily attributable to a decrease in payables and
accrued expenses as the Company utilized the proceeds from financing
received during the quarter to reduced its payables. Receivables decreased,
as the Company implemented new credit terms with a few of their key accounts
and a smaller increase in inventory as sales continue to improve. The
Company anticipates improving future cash flows from operations as it gains
operating efficiency at the Abilene and Hungarian manufacturing facilities
and a continued aggressive approach to selling milled and chopped inventory.

Cash Used in Discontinued Operating Activities
----------------------------------------------

Net cash used in discontinued operating activities was $0.1 million for the
first quarter of fiscal 2006. The cash flow used by discontinued operating
activities during the first quarter was primarily related to the net income
of $0.03 million plus decreases in net operating assets of $0.2 million. The
decrease in receivables and inventory related to the discontinuation of the
textile acrylic division as the sales and inventory purchases decreased
significantly from the prior year.

Cash Used in Investing Activities
---------------------------------

Net cash used in investing activities for the three months ended December
31, 2005 was $5.0 million which 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 in investing activities for the three months ended December
31, 2004 was $2.5 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 expansion of its precursor facility in Hungary and the
installation of eight additional carbon fiber lines to meet the increased
demand for carbon fiber.

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

Net cash provided by financing activities was $10.9 million and $5.7 million
for the three months ended December 31, 2005 and 2004, respectively. The
various financing transactions for the first quarters of fiscal 2006 and
2005 are described above.

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

A summary of significant contractual obligations is shown below. See Notes 2
and 3 to the consolidated financial statements for discussion of the
Company's debt agreements. The Company's financial commitments as of
December 31, 2005 included the following:

<TABLE>
<CAPTION>
                                                                                 LESS THAN                     3-5        MORE THAN
                                                                      TOTAL        1 YEAR       1-3 YEARS     YEARS        5 YEARS
                                                                   ----------     --------     ----------   ---------    ----------
<S>                                                                <C>            <C>          <C>          <C>         <C>
         Notes payable.............................................$      185     $    185
         Convertible debentures....................................    60,944            -     $   60,944
         Long-term debt, including current maturities..............     6,703        2,414          4,289   $       -    $        -
                                                                   ----------     --------     ----------   ---------    ----------
                  Total debt.......................................    67,832        2,599         65,233           -             -
         Operating leases..........................................       348           58            174         116             -
                                                                   ----------     --------     ----------   ---------    ----------
                  Total debt and operating leases..................    68,180        2,657         65,407         116             -
         Contractual interest payments.............................    13,086        4,910          8,176           -             -
         Lawsuit judgment..........................................     1,188        1,188              -           -             -
         Purchase obligations......................................     1,095        1,095              -           -             -
                                                                   ----------     --------     ----------   ---------    ----------
                  Total contractual obligations....................$   83,549     $  9,850     $   73,583   $     116    $        -
                                                                   ==========     ========     ==========   =========    ==========

</TABLE>


                                     24

<PAGE>
<PAGE>

The future contractual obligations and debt could be reduced by $73.2
million in exchange for 6.4 million shares of common stock if all the
convertible debt was converted.

<TABLE>
<CAPTION>
                                                  CONVERSION                 LESS THAN                     3-5       MORE THAN
                                                     PRICE         TOTAL       1 YEAR      1-3 YEARS      YEARS       5 YEARS
                                                   --------     ----------   ----------   ----------    --------     ---------
<S>                                                <C>          <C>          <C>          <C>           <C>          <C>
Total contractual obligation.......................             $  83,549    $   9,850    $  73,583     $    116     $       -
February 2003 issuance.............................$   3.25        (7,800)           -       (7,800)           -             -
October 2004 issuance..............................    9.50       (13,100)           -      (13,100)           -             -
February 2005 issuance.............................   20.00       (20,000)           -      (20,000)           -             -
September 2005 issuance............................   12.50        (5,000)           -      (20,000)           -             -
December 2005 issuance.............................   12.50       (15,000)           -      (15,000)           -             -
Interest payments..................................               (12,338)      (4,532)      (7,806)           -             -
                                                                ----------   ----------   ----------    --------     ---------
     Total contractual obligations assuming
      conversion...................................             $  10,311    $   5,318    $   4,877     $    116     $       -
                                                                =========    =========    =========     ========     =========
</TABLE>

During January 2006, the investors converted $13.1 million of convertible
debt issued in the October 2004 transaction into 1,378,947 shares of common
stock. The October 2004 issuances have been fully converted into the
Company's common stock.

As of February 1, 2006, the last reported sale price of the Company's common
stock was $14.13 per share.

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.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123-R "Accounting for Stock-Based
Compensation", 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 years ending after June 15, 2005. The Company adopted
SFAS No. 123-R as of October 1, 2005 (see Note 5).

EITF Issue No. 05-2 "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock" which is effective
for new instruments entered into and instruments modified in reporting
periods beginning after June 29, 2005. All the Company's current debt
issuances have already complied with EITF Issue No. 05-2. Accordingly, the
adoption will have no material impact on the Company's financial statements.

EITF Issue No. 05-8, "Income Tax Consequences of Issuing Convertible Debt
with a Beneficial Conversion Feature" will be effective for financial
statements beginning in the first interim or annual reporting period
beginning after December 15, 2005. The Company does have convertible debt
with beneficial conversion features and is currently evaluating the effect
of this interpretation on the Company's financial statements when
implemented.

                                     25

<PAGE>
<PAGE>

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 review whether some type of interest rate hedging strategy would be
viable to reduce the risk of the variable rate. At December 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 $0.2 million increase in
interest expense based on the debt levels at December 31, 2005.

                                    * * *

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

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation was
carried out by Zoltek management, under the supervision and with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of its 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")). The Company's disclosure
controls and procedures are designed to ensure that information required to
be disclosed in reports it files or submits under the Exchange Act are
recorded, processed, summarized and reported within the time period
specified in SEC rules and forms and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosures.

Based on the Company's evaluation and the identification of the material
weaknesses in internal control over financial reporting described below,
which were identified during management's assessment of internal controls
as of September 30, 2005, its Chief Executive Officer and Chief Financial
Officer concluded that, as of December 31, 2005, its disclosure controls and
procedures were ineffective.

INTERNAL CONTROL OVER FINANCIAL REPORTING

Zoltek management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act). The Company's internal control over
financial reporting is a process

                                     26

<PAGE>
<PAGE>

designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles
("GAAP"). Internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with GAAP, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company's assets that
could have a material effect on the interim or annual consolidated financial
statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of Zoltek management,
including the Company's Chief Executive Officer and Chief Financial Officer,
it conducted an assessment of the effectiveness of its internal control over
financial reporting as of September 30, 2005. In making this assessment, the
Company used the criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO").

A material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be
prevented or detected. In connection with the Company's assessment of its
internal control over financial reporting described above, it has identified
the following control deficiencies, which represent material weaknesses in
the Company's internal control over financial reporting as of December 31,
2005.

1)   The Company did not maintain an effective control environment because
     of the following material weaknesses.

     a)  The Company did not maintain a sufficient complement of personnel
         to maintain an appropriate accounting and financial reporting
         organizational structure to support the activities of the Company.
         Specifically, the Company did not maintain personnel with an
         appropriate level of accounting knowledge, experience and training
         in the selection, application and implementation of GAAP
         commensurate with the Company's financial reporting requirements.

     b)  The Company did not maintain an appropriate level of control
         consciousness as it relates to the establishment and maintenance of
         policies and procedures with respect to the primary components of
         information technology general controls. This resulted in either
         not having appropriate controls designed and in place or not
         achieving operating effectiveness over systems development,
         software change management, computer operations and security, which
         are referred to as "information technology general controls."
         Additionally, the Company lacked a sufficient complement of
         personnel with a level of knowledge and experience to maintain an
         appropriate information technology organizational structure.

     The control environment sets the tone of an organization, influences
     the control consciousness of its people, and is the foundation of all
     other components of internal control over financial reporting. These
     control environment material weaknesses contributed to the material
     weaknesses discussed in 2 through 10 below. Additionally, these control
     environment material weaknesses could result in a misstatement of
     significant accounts and disclosures, including those described in 2
     through 10 below, that would result in a material misstatement to the
     Company's interim or annual consolidated financial statements that
     would not be prevented or detected.

     Management has determined that each of the control deficiencies
     described in a and b above constitute a material weakness.

2)   The Company did not maintain effective controls over certain of its
     period-end financial reporting processes because of the following
     material weaknesses.

     a)  The Company did not maintain effective controls over the
         completeness, accuracy and validity of the period-end consolidation
         process. Specifically, effective controls were not designed and in
         place to ensure all required consolidation entries relating to
         substantially all financial statement accounts were identified,
         analyzed and approved prior to being recorded. This control
         deficiency resulted in audit adjustments to the Company's 2005
         annual consolidated financial statements and the interim
         consolidated financial statements for each of the 2005 quarters.

     b)  The Company did not maintain effective controls over the
         preparation and review of the interim and annual consolidated
         financial statements and disclosures. Specifically, effective
         controls were not designed and in place over the process related to
         (i) identifying and accumulating all required supporting
         information to ensure the completeness and accuracy of the
         consolidated financial statements and disclosures, and (ii) the
         performance of period-end financial analyses including

                                     27

<PAGE>
<PAGE>

         analytical reviews. This control deficiency resulted in audit
         adjustments to the Company's 2005 annual consolidated financial
         statements and the interim consolidated financial statements for
         each of the 2005 quarters.

     c)  The Company did not maintain effective controls over the
         completeness and accuracy of foreign currency translations related
         to the Company's investment in its Hungarian subsidiary.
         Specifically, the Company's controls over the translation of
         transactions and account balances denominated in foreign currencies
         were not effectively designed to ensure that the translated amounts
         were determined in accordance with generally accepted accounting
         principles. This control deficiency resulted in audit adjustments
         to the cumulative translation adjustment (a component of the
         accumulated other comprehensive loss) and other income and expense
         in the Company's 2005 annual consolidated financial statements and
         the interim consolidated financial statements for each of the 2005
         quarters.

     The control deficiencies described in a) through c) above could result
     in a misstatement of accounts or disclosures that would result in a
     material misstatement to the Company's interim or annual consolidated
     financial statements that would not be prevented or detected.

     Management has determined that each of the control deficiencies
     described in a through c above constitute a material weakness.

3)   The Company did not maintain effective controls over the preparation,
     review and approval of journal entries. Specifically, effective
     controls were not designed and in place to ensure the completeness and
     accuracy of supporting schedules and underlying data for routine
     journal entries and journal entries recorded as part of the Company's
     period-end closing and consolidation process. This control deficiency
     affects substantially all financial statement accounts and resulted in
     audit adjustments to the Company's 2005 annual consolidated financial
     statements and the interim consolidated financial statements for each
     of the 2005 quarters. Additionally, this control deficiency could
     result in a misstatement of substantially all financial statement
     accounts that would result in a material misstatement to the Company's
     interim or annual consolidated financial statements that would not be
     prevented or detected. Accordingly, management has determined that this
     control deficiency constitutes a material weakness.

4)   The Company did not maintain effective controls over the preparation,
     review and approval of certain account reconciliations. Specifically,
     the Company did not maintain effective controls over the completeness
     and accuracy of supporting schedules and underlying data supporting
     account reconciliations prepared for certain prepaid expenses and
     accrued liabilities. This control deficiency resulted in audit
     adjustments to the Company's 2005 annual consolidated financial
     statements and the interim consolidated financial statements for each
     of the 2005 quarters. Additionally, this control deficiency could
     result in a misstatement of the Company's prepaid expenses and accrued
     liabilities accounts that would result in a material misstatement to
     the Company's interim and annual consolidated financial statements that
     would not be prevented or detected. Accordingly, management has
     determined that this control deficiency constitutes a material
     weakness.

5)   The Company did not maintain effective controls over the determination
     of the allowance for doubtful accounts. Specifically, the Company did
     not maintain effective controls to ensure the accuracy and completeness
     of the allowance for doubtful accounts at its Hungarian subsidiary.
     This control deficiency resulted in audit adjustments to the Company's
     2005 annual consolidated financial statements and the interim
     consolidated financial statements for each of the 2005 quarters.
     Additionally, this control deficiency could result in a misstatement of
     the Company's allowance for doubtful accounts that would result in a
     material misstatement to the Company's interim or annual consolidated
     financial statements that would not be prevented or detected.
     Accordingly, management has determined that this control deficiency
     constitutes a material weakness.

6)   The Company did not maintain effective controls over the accounting for
     inventory because of the following material weaknesses.

     a)  The Company did not maintain effective controls over the
         completeness and accuracy of physical inventory quantities.
         Specifically, effective controls were not designed and in place to
         ensure that (i) the Company's perpetual inventory records were
         appropriately updated for the results of cycle counts performed and
         (ii) an accurate and complete physical inventory was achieved and
         that the Company's perpetual inventory records were appropriately
         updated for the results of the annual physical inventory. These
         control deficiencies resulted in audit adjustments to the Company's
         2005 annual consolidated financial statements and the interim
         consolidated financial statements for each of the 2005 quarters.

     b)  The Company did not maintain effective controls over the accuracy
         and valuation of inventory. Specifically, effective controls were
         not designed and in place to (i) ensure the proper determination
         and review of inventory costing and valuation at period-end, (ii)
         perform the proper analysis and review of inventory manufacturing
         variances for capitalization at period-end and (iii) ensure the
         proper determination and review of the lower of cost or market
         reserve at period-end. These control deficiencies resulted in audit
         adjustments to the Company's 2005 annual consolidated financial
         statements.

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     The control deficiencies described in a) and b) above could result in a
     misstatement of the Company's inventory and cost of goods sold accounts
     that would result in a material misstatement to the Company's interim
     or annual consolidated financial statements that would not be prevented
     or detected.

     Management has determined that each of the control deficiencies
     described in a) and b) above constitute a material weakness.

7)   The Company did not maintain effective controls over the completeness
     and accuracy of property, plant and equipment. Specifically, effective
     controls were not designed and in place to ensure the complete and
     accurate capitalization of internal costs and the capitalization of
     interest in connection with the Company's property, plant and equipment
     additions. This control deficiency resulted in audit adjustments to the
     Company's 2005 annual consolidated financial statements and the interim
     consolidated financial statements for each of the 2005 quarters.
     Additionally, this control deficiency could result in a misstatement of
     the Company's property, plant and equipment, depreciation expense and
     interest expense that would result in a material misstatement to the
     Company's interim or annual consolidated financial statements that
     would not be prevented or detected. Accordingly, management has
     determined that this control deficiency constitutes a material
     weakness.

8)   The Company did not maintain effective controls over the completeness
     and accuracy of its accounting for derivatives associated with
     convertible debt and the related amortization of financing fees and
     debt discount and gain (loss) on value of warrants and conversion
     feature. Specifically, effective controls were not designed and in
     place over the accounting for derivatives in connection with the
     Company's convertible debt issued in January, March and October 2004,
     and February and September 2005 to ensure the completeness and accuracy
     of the accounting for (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 misstatements to long-term liabilities,
     shareholders' equity, interest expense, amortization expense, and 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, and the 2005 interim consolidated
     financial statements for the quarters ending December 31, 2004 and
     March 31, 2005, as well as audit adjustments to the Company's quarter
     ended September 30, 2005 consolidated financial statements. In
     addition, this control deficiency could result in a misstatement of the
     aforementioned accounts and disclosures 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.

9)   The Company did not maintain effective controls over the completeness
     and accuracy of its earnings per share calculation and the related
     disclosures. Specifically, the Company did not maintain effective
     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.
     In addition, this control deficiency could result in a material
     misstatement to earnings per share that would result in a material
     misstatement to the Company's annual or interim consolidated financial
     statements that would not be prevented or detected. Accordingly,
     management determined that this control deficiency constitutes a
     material weakness.

10)  The Company did not maintain effective controls over segregation of
     duties (both manual and automated), including access to financial
     applications and data. Specifically, certain financial accounting,
     reporting and information technology personnel had unrestricted access
     to financial applications and data, without independent monitoring,
     that allowed the creation, review, and processing of financial data
     without independent review and authorization for (i) purchases and
     payables, (ii) payroll, (iii) debt and related interest expense, (iv)
     revenue and accounts receivable, (v) fixed assets, and (vi) inventory.
     This control deficiency did not result in adjustments to the Company's
     2005 interim or annual consolidated financial statements. However, this
     control deficiency could result in a misstatement of the Company's
     financial statement accounts and disclosures, including those described
     in (i) through (vi) above, that would result in a material misstatement
     to the Company's interim or annual consolidated financial statements
     that would not be prevented or detected. Accordingly, management has
     determined that this control deficiency constitutes a material
     weakness.

Because of the material weaknesses described above which were identified
during management's assessment process as of September 30, 2005, the Company
has concluded that it did not maintain effective internal control over
financial reporting as of December 31, 2005.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Zoltek made no changes in its internal control over financial reporting that
occurred in the first quarter of fiscal 2006 that has materially affected,
or is reasonably likely to materially affect, its internal control over
financial reporting.

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MANAGEMENT'S REMEDIATION INITIATIVES AND INTERIM MEASURES

As discussed above, management has identified certain material weaknesses
that exist in the Company's internal control over financial reporting and
management is taking steps to strengthen its internal control over financial
reporting. Zoltek is actively engaged in the implementation of remediation
efforts to address the material weaknesses in Zoltek's internal control over
financial reporting as of December 31, 2005. These remediation efforts, as
outlined below, are designed to address the material weaknesses identified
by Zoltek management and to enhance the overall control environment.

The Company recognizes the importance of having staff with the competencies
required for the accurate interpretation and application of GAAP for having
effective internal control over financial reporting; and for establishing
the appropriate policies and procedures to assure timely, accurate, and
reliable financial information. Consequently management has initiated the
following remediation programs to address the identified material
weaknesses:

1)       The Company is currently in search of key employees with the
         commensurate knowledge, experience and training necessary to meet
         the Company's requirements regarding accounting, financial
         reporting and information technology. Specifically, the Company's
         plans to add experienced and knowledgeable staff in key support
         areas, including human resources, finance and accounting and
         information technology. The Company is in the process of developing
         processes and controls related to information technology
         infrastructure within the areas of systems development, software
         change management, computer operations and security. The Company
         believes the addition of resources and documented processes and
         controls in the information technology environment will improve the
         control consciousness within the information technology
         environment.

2)       The Company is in the process of remediating the material
         weaknesses in its internal controls related to the period-end
         financial reporting process. The Company's planned remediation
         includes:

     a)  Increasing staffing, as discussed in 1) above, to ensure
         sufficiently competent employees are available to perform necessary
         period-end financial reporting procedures.

     b)  Increasing supervisory review of the consolidation process and
         preparation of financial statements and related disclosures.

     c)  Implementation of controls surrounding the calculation of foreign
         currency translation adjustment.

3)       The Company is in the process of remediating the material weakness
         in its internal controls related to the preparation, review and
         approval of journal entries. The Company's remediation plan
         includes increased staffing, as discussed in 1) above, to ensure
         sufficiently competent employees are available to prepare, review
         and approve journal entries.

4)       The Company is in the process of remediating the material weakness
         in its internal controls related to the account reconciliation
         process. The Company's remediation plan includes increased
         staffing, as discussed in 1) above, to ensure sufficiently
         competent employees are available to prepare, review and approve
         significant account reconciliations.

5)       The Company has implemented a formal process on an interim and
         annual basis regarding its review and determination of allowance
         for doubtful accounts at its Hungarian subsidiary.

6)       The Company will improve its controls over its accounting for
         inventory by implementing the following:

     a)  The Company will improve compliance with its previously established
         cycle counting process, by instituting greater management
         oversight, providing additional training for cycle count personnel,
         mandating use of specifically designed cycle count worksheets,
         requiring review and approval of all cycle counts by another
         trained individual, and adding secondary verification that all
         cycle count adjustments have been entered into the Company's
         inventory system. Additionally, the Company will implement written
         procedures for the annual physical inventory to ensure that all
         inventory items are appropriately identified and accounted for.

     b)  The Company will implement a formal plan to establish controls over
         its inventory valuation process. A cost accounting process will be
         implemented, including formal identification of current costs of
         manufactured products, development of new cost standards to be
         utilized in the manufacturing process, and routine review of
         manufacturing variances against benchmarks to validate production
         costs and inventory values. Finally, the Company is committed to a
         plan for effectively evaluating the adequacy of its inventory
         valuation reserve to ensure recognition of valuation adjustments,
         obsolescence, and slow moving inventory.

7)       The Company plans to implement a fixed asset capitalization policy
         to establish procedures over fixed asset acquisitions and
         retirements, and formalize capitalization eligibility limits,
         including mandated identification and recognition of interest used
         to finance asset acquisitions.

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<PAGE>

8)       The increased staffing of competent and trained employees referred
         to in 1) above will allow the Company to enhance its review of
         significant non-routine and complex accounting issues, including
         establishing controls over accounting for derivatives.

9)       The increased staffing of competent and trained employees referred
         to in 1) above will allow the Company to enhance its review of
         significant non-routine and complex accounting issues, including
         establishing controls over accounting for earnings per share
         disclosures.

10)      The Company recognizes the importance of segregation of duties and
         the access controls to programs and data. The Company's remediation
         plans include:

     a)  Increasing staffing, as discussed in 1) above, to ensure
         sufficiently competent staffing is in place to ensure segregation
         of duties can occur.

     b)  Establishment of manual controls to segregate duties, where
         necessary, associated with the creation, critical review, approval
         and reconciliation of transactions related to the financial
         reporting process.

     c)  Establishment of an information technology infrastructure that
         ensures that access to programs and data are controlled to ensure
         proper segregation of duties.


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                           ZOLTEK COMPANIES, INC.

PART II. OTHER INFORMATION

Item 1.      Legal Proceedings

                   See Note 9 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

                   In September 2005, Zoltek entered into an agreement for a
             new convertible debenture financing package of up to $50
             million in a private placement with a group of institutional
             investors. In order to match the cash needs to support the
             Company's planned expansion, the financing agreement provides
             for the funding to occur in four separate closings of $5.0
             million which was drawn down on September 30, 2005, $15.0
             million which was drawn down in December 2005, $20.0 million
             and $10.0 million. The agreement provides for Zoltek to draw
             down the remaining financing over the next twelve months
             subject to the Company registering the shares related to the
             prior draw downs in September and December 2005. The
             borrowings incurred at each closing will mature 42 months from
             that closing and bear interest at a fixed rate of 7.5% per
             annum. The convertible debentures issued at the first and
             second closings are convertible into Zoltek common stock of
             400,000 and 1,200,000 shares, respectively, which correlates to
             a conversion price of $12.50 per share. Debentures issuable at
             the third and fourth closings will be convertible into Zoltek
             common stock at a conversion price equal to the market price at
             the time of the applicable closing.

                   The debentures issued in the first two closings, were
             accompanied by five-year warrants that give holders the right
             to purchase up to a total of 560,000 shares of Zoltek common
             stock at an exercise price of $14.50 per share. In the third
             and fourth closings, the amount and number of warrants will
             vary according to Zoltek's share price at the time of the
             closing. As part of the new financing agreement, Zoltek reduced
             the conversion price on its outstanding convertible debt in the
             aggregate principal amount of $20.0 million issued in October
             2004 from $12.00 to $9.50, with the requirement that conversion
             take place within 30 days of the second closing. Further,
             Zoltek also has agreed to reduce the conversion price on its
             outstanding convertible debt in the aggregate principal amount
             of $20.0 million issued February 2005 based on the market price
             of Zoltek's common stock on the nine-month anniversary of the
             second closing. The adjusted conversion price will equal 90% of
             the market price of the common stock, but will not be less than
             $12.50 nor exceed $20.00.

                   The Company issued the foregoing securities without
             registration under the Securities Act of 1933, as amended, in
             reliance upon the exemption therefrom set forth in Section 4(2)
             of such Act relating to sales by an issuer not involving a
             public offering.

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:  February 9, 2006                      By:      /s/ KEVIN SCHOTT
       ----------------                         -------------------------------
                                                        Kevin Schott
                                                    Chief Financial Officer


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