<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 March 31, 2006               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 May 1,
2006, 22,202,695 shares of Common Stock, $.01 par value, were outstanding.



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<TABLE>
PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                                                    ZOLTEK COMPANIES, INC.

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

<CAPTION>
                                                                                                 MARCH 31,      SEPTEMBER 30,
ASSETS                                                                                             2006             2005
-----------------------------------------------------------------------------------------------------------------------------
<C>                                                                                             <C>              <C>
Current assets:
     Cash and cash equivalents................................................................. $    3,610       $      255
     Accounts receivable, less allowance for doubtful accounts of $777 and
       $718, respectively......................................................................     16,944           11,101
     Inventories...............................................................................     23,021           24,753
     Other current assets......................................................................      5,062            3,195
                                                                                                ----------       ----------
          Total current assets.................................................................     48,637           39,304
Property and equipment, net....................................................................     95,630           88,018
Other assets...................................................................................      2,828            3,107
                                                                                                ----------       ----------
          Total assets......................................................................... $  147,095       $  130,429
                                                                                                ==========       ==========


LIABILITIES AND SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------------
Current liabilities:
     Current maturities of long-term debt...................................................... $    1,511       $      374
     Trade accounts payable....................................................................     11,742           13,267
     Notes payable.............................................................................         38              442
     Accrued expenses and other liabilities....................................................      5,420            6,149
                                                                                                ----------       ----------
          Total current liabilities............................................................     18,711           20,232
Other long-term liabilities....................................................................        108              107
Value of warrants and conversion feature associated with convertible debentures................     31,734           29,024
Long-term debt, less current maturities........................................................     40,408           40,421
                                                                                                ----------       ----------
          Total liabilities....................................................................     90,961           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,
       22,094,997 and 19,213,384 shares issued and outstanding, respectively...................        218              189
     Additional paid-in capital................................................................    189,379          148,982
     Accumulated deficit.......................................................................   (117,150)         (95,705)
     Accumulated other comprehensive loss......................................................    (16,313)         (12,821)
                                                                                                ----------       ----------
          Total shareholders' equity...........................................................     56,134           40,645
                                                                                                ----------       ----------
          Total liabilities and shareholders' equity .......................................... $  147,095       $  130,429
                                                                                                ==========       ==========

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


                                     2

<PAGE>
<PAGE>


<TABLE>
                                                       ZOLTEK COMPANIES, INC.

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

<CAPTION>
                                                                        THREE MONTHS ENDED MARCH 31,    SIX MONTHS ENDED MARCH 31,
                                                                        ----------------------------    --------------------------
                                                                              2006         2005              2006         2005
------------------------------------------------------------------------------------------------------------------------------------
<C>                                                                       <C>          <C>               <C>          <C>
Net sales...............................................................  $    27,320  $    14,308       $    44,041  $    26,550
Cost of sales, excluding available unused capacity costs................       19,887       13,592            33,853       24,804
Available unused capacity costs.........................................            -          524                 -        1,049
Application and development costs.......................................        1,290          824             2,368        1,652
Selling, general and administrative expenses............................        2,972        1,259             5,529        2,333
                                                                          -----------  -----------       -----------  -----------
     Operating income (loss) from continuing operations.................        3,171       (1,891)            2,291       (3,288)
Other income (expense):
     Interest expense, excluding amortization of financing fees, debt
       discount and beneficial conversion feature.......................         (545)      (1,140)           (1,331)      (2,181)
     Amortization of financing fees and debt discount...................       (2,557)      (2,622)           (4,559)      (4,436)
     Gain (loss) on value of warrants and conversion feature............      (27,464)       9,128           (17,442)     (16,426)
     Interest income....................................................            -            -                 -            2
     Other, net.........................................................         (168)        (959)             (180)        (411)
                                                                          -----------  -----------       -----------  -----------
         Income (loss) from continuing operations before income taxes...      (27,563)       2,516           (21,221)     (26,740)
Income tax expense......................................................          181          104               278          219
                                                                          -----------  -----------       -----------  -----------
Net income (loss) from continuing operations............................      (27,744)       2,412           (21,499)     (26,959)
Discontinued operations:
     Operating income (loss), net of taxes..............................           21         (266)               54         (858)
                                                                          -----------  -----------       -----------  -----------
         Net income (loss) on discontinued operations...................           21         (266)               54         (858)
                                                                          -----------  -----------       -----------  -----------
Net income (loss).......................................................  $   (27,723) $     2,146       $   (21,445) $   (27,817)
                                                                          ===========  ===========       ===========  ===========
Net income (loss) per share:
     Basic income (loss) per share:
         Continuing operations..........................................  $     (1.31) $      0.14       $     (1.05) $     (1.58)
         Discontinued operations........................................            -        (0.02)                -        (0.05)
                                                                          -----------  -----------       -----------  -----------
              Total.....................................................  $     (1.31) $      0.12       $     (1.05) $     (1.63)
                                                                          ===========  ===========       ===========  ===========
     Diluted loss per share:
         Continuing operations..........................................  $     (1.31) $     (0.21)      $     (1.05) $     (1.63)
         Discontinued operations........................................            -        (0.02)                -        (0.05)
                                                                          -----------  -----------       -----------  -----------
              Total.....................................................  $     (1.31) $     (0.23)      $     (1.05) $     (1.68)
                                                                          ===========  ===========       ===========  ===========
Weighted average common shares outstanding - basic......................       21,147       17,783            20,526       17,107
Weighted average common shares outstanding - diluted....................       21,147       20,802            20,526       18,107


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


                                     3

<PAGE>
<PAGE>

<TABLE>
                                                        ZOLTEK COMPANIES, INC.
                                     CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                                     ---------------------------------------------------------
                                                        (Amounts in thousands)
                                                             (Unaudited)

<CAPTION>
                                                                                      Accumulated
                                                              Add'l                      Other                           Total
                                                   Common    Paid-In    Accumulated  Comprehensive  Comprehensive    Shareholders'
                                                   Stock     Capital      Deficit         Loss           Loss           Equity
----------------------------------------------------------------------------------------------------------------------------------

<C>                                               <C>       <C>          <C>           <C>             <C>            <C>
Balance, September 30, 2005.....................  $    189  $ 148,982    $ (95,705)    $ (12,821)                     $  40,645
Convertible debt converted......................        25     22,975            -             -                         23,000
Unamortized value of convertible debt discount
  at time of conversion.........................         -     (7,016)           -             -                         (7,016)
Issuance cost related to convertible debt
  conversions...................................         -       (669)           -             -                           (669)
Value of conversion feature at time of
 conversion.....................................         -     14,730            -             -                         14,730
Value of warrants issued in connection with
  convertible debt..............................         -      5,278            -             -                          5,278
Value of beneficial conversion feature issued
  with convertible debt.........................         -      2,898            -             -                          2,898
Stock option compensation expense...............         -        250            -             -                            250
Exercise of warrants............................         2        933            -             -                            935
Exercise of stock options.......................         2      1,018            -             -                          1,020
Net loss........................................         -          -      (21,445)            -       $(21,445)        (21,445)
Foreign currency translation adjustment.........         -          -            -        (3,492)        (3,492)         (3,492)
                                                                                                       --------
     Comprehensive loss.........................         -          -            -             -       $(24,937)              -
                                                  --------  ---------    ---------     ---------       ========       ---------
Balance, March 31, 2006.........................  $    218  $ 189,379    $(117,150)    $ (16,313)                     $  56,134
                                                  ========  =========    =========     =========                      =========

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


                                     4

<PAGE>
<PAGE>

<TABLE>
                                                  ZOLTEK COMPANIES, INC.

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

<CAPTION>
                                                                                                SIX MONTHS ENDED MARCH 31,
                                                                                                --------------------------
                                                                                                  2006             2005
----------------------------------------------------------------------------------------------------------------------------
<C>                                                                                             <C>              <C>
Cash flows from operating activities:
      Net loss................................................................................. $ (21,445)       $ (27,817)
      Adjustments to reconcile net loss to net cash used in operating activities:
           Loss (income) from discontinued operations..........................................       (54)             858
           Depreciation and amortization.......................................................     3,075            2,579
           Amortization of financing fees, debt discount and beneficial conversion feature.....     4,559            4,436
           Loss on value of warrants and conversion feature....................................    17,442           16,426
           Foreign currency transaction losses.................................................         -              148
           Other, net..........................................................................         -              (33)
           Changes in assets and liabilities:
                 Increase in accounts receivable...............................................    (6,613)          (1,551)
                 Decrease (increase) in inventories............................................       762           (3,610)
                 Decrease (increase) in prepaid expenses and other assets......................    (2,010)           1,039
                 Increase (decrease) in trade accounts payable.................................      (103)             599
                 Decrease in accrued expenses and other liabilities............................      (837)            (163)
                 Increase (decrease) in other long-term liabilities............................         8             (336)
                                                                                                ---------        ---------
                      Total adjustments........................................................    16,237           20,392
                                                                                                ---------        ---------
      Net cash used in continuing operations...................................................    (5,208)          (7,425)
      Net cash used in discontinued operations.................................................       (27)            (979)
                                                                                                ---------        ---------
      Net cash used in operating activities....................................................    (5,235)          (8,404)
                                                                                                ---------        ---------

Cash flows from investing activities:
           Purchases of property and equipment.................................................   (13,342)          (5,777)
           Proceeds from sale of property and equipment........................................         -              145
                                                                                                ---------        ---------
      Net cash used in investing activities....................................................   (13,342)          (5,632)
                                                                                                ---------        ---------

Cash flows from financing activities:
           Proceeds from exercise of stock options and warrants................................     1,955              937
           Proceeds from issuance of convertible debt..........................................    25,000           40,000
           Payment of financing fees...........................................................      (928)          (2,188)
           Repayment of notes payable and long-term debt.......................................    (4,057)         (23,637)
                                                                                                ---------        ---------
Net cash provided by financing activities......................................................    21,970           15,112
Effect of exchange rate changes on cash........................................................       (38)               1
                                                                                                ---------        ---------
Net increase in cash...........................................................................     3,355            1,077
Cash and cash equivalents at beginning of period...............................................       255              267
                                                                                                ---------        ---------
Cash and cash equivalents at end of period..................................................... $   3,610        $   1,344
                                                                                                =========        =========

Supplemental disclosures of cash flow information:
Net cash paid during the period for:
     Interest.................................................................................. $   2,037        $   1,411
     Income taxes.............................................................................. $       -        $       -
Non-cash conversion of convertible securities.................................................. $  23,000        $       -


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


                                     5

<PAGE>
<PAGE>

                           ZOLTEK COMPANIES, INC.

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

1.  BASIS OF PRESENTATION AND ACCOUNTING POLICIES

The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements and should be read in conjunction with the Company's 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 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 6).
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, incurred borrowings under credit
facilities and entered into multiple convertible debenture facilities, as
well as used long-term debt financing secured the equity in the Company's
real estate properties, to maintain adequate liquidity to support the
Company's operating and capital activities.

Management will continue to seek to fund the Company's near-term operating
needs from anticipated sales increases related to increases in production
capacity at existing facilities and continued active management of the
Company's working capital. There can be no assurance 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 continued 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 provided
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. In April
2006, the Company amended the September 2005 financing package to provide
for an additional $10.0 million funding. In connection with the amendment,
the institutional investors converted the $20.0 million convertible notes
previously issued in February 2005 into approximately 1,000,000 shares of
common stock and exercised associated warrants for 1,052,000 shares related
to October 2004 and February 2005 issuances. The notes to be issued under
the amended financing package will be convertible into Zoltek common stock
at a conversion price of $25.51 per share. They mature 42 months from the
closing date and bear interest at a fixed rate of 7.5% per annum for 18
months and thereafter at LIBOR plus 4% per annum. The Company will issue the
investors five-year warrants to purchase an aggregate of up to 411,521
shares of common stock at an exercise price of $28.06 per share and up to
111,113 shares of common stock at an exercise price of $.01 per share. The
agreement provides for Zoltek to draw down the remaining financing over the
next nine months subject to satisfaction of certain conditions.

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


                                     6

<PAGE>
<PAGE>

million and $5.5 million were available as of September 30, 2005 and March
31, 2006, respectively. The Company anticipates it will require the
remaining proceeds of the $60.0 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 its capacity expansion plans for fiscal 2007
and beyond will require additional debt and equity financing.

The Company believes the $60.0 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." As a result of
the above-described amendment of the convertible debt financing package in
April 2006 and the transactions contemplated thereby, the derivative
accounting treatment described in this Note 2 will terminate in the quarter
ending June 30, 2006. See table below for impact on the financial results
for the quarterly and six-month financial results ended March 31, 2006 and
2005 (amounts in thousands).

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED MARCH 31, 2006        SIX MONTHS ENDED MARCH 31, 2006
                                                        ---------------------------------        -------------------------------
                                                                    CONVERSION                              CONVERSION
                                                         WARRANTS    FEATURES      TOTAL         WARRANTS    FEATURES      TOTAL
                                                         --------    --------      -----         --------    --------      -----
<C>                                                     <C>         <C>          <C>            <C>         <C>          <C>
January 2004 issuance - mark to market ................ $  (1,911)  $       -    $ (1,911)      $  (1,111)  $        -   $   (1,111)
March 2004 issuance - mark to market ..................      (850)          -        (850)           (477)           -         (477)
October 2004 issuance - mark to market ................    (6,368)     (3,502)     (9,870)         (4,302)      (1,556)      (5,858)
February 2005 issuance - mark to market ...............    (4,568)    (10,265)    (14,833)         (2,845)      (7,151)      (9,996)
                                                        ---------   ---------    --------       ---------   ----------   ----------
         Loss on value of warrants and
           conversion feature.......................... $ (13,697)  $ (13,767)   $(27,464)      $  (8,735)  $   (8,707)  $  (17,442)
                                                        =========   =========    ========       =========   ==========   ==========

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

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

During the six months ended March 31, 2006, the investors converted $20.0
million principal amount of the convertible debt issued in the October 2004
transaction into 2,100,580 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 $14.7 million and offset by a
reduction to equity of $6.7 million for the unamortized portion of the debt
discount. Also, at the time of conversion, the Company reclassified the
unamortized deferred financing cost of $0.7 million related to these
issuances into additional paid-in capital.

                                     7

<PAGE>
<PAGE>

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 $60 million, as amended. Zoltek now has received a total of $30
million under this arrangement. The recently issued convertible notes, which
are collateralized 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. The fair value of the debt associated
with the warrants and conversion feature at the time of issuances was $5.7
million and will be accreted to its face value over the life of the
convertible debentures.

In March 2006, investors converted $2.0 million and $1.0 million principal
amount of convertible debt issued in September 2005 and February 2003,
respectively, into 160,000 and 285,716 shares of common stock. At the time
of conversion of the debt issued in September 2005, the Company reclassified
$0.4 million of the unamortized debt discount into equity and $0.4 million
of the beneficial conversion feature into deferred financing expense.

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 provided
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 provided 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
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. The agreement provided for the debentures issuable at the third and
fourth closings 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 April 2006, the Company amended the September 2005
financing package to provide for an additional $10.0 million funding. In
connection with the amendment, the institutional investors converted the
$20.0 million convertible notes previously issued in February 2005 into
approximately 1,000,000 shares of common stock and exercised associated
warrants for 1,052,000 shares related to October 2004 and February 2005
issuances. Under the amended financing package, the notes will be
convertible into Zoltek common stock at a conversion price of $25.51 per
share. They mature 42 months from the closing date and bear interest at a
fixed rate of 7.5% per annum for 18 months and thereafter at LIBOR plus 4%
per annum. The Company will issue the investors five-year warrants to
purchase an aggregate of up to 411,521 shares of common stock at an exercise
price of $28.06 per share and up to 111,113 shares of common stock at an
exercise price of $.01 per share.

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. 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 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.

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 reclassified 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. These notes were converted
into common stock in May 2006. 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. These
warrants were exercised in May 2006. 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 was being 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

                                     8

<PAGE>
<PAGE>

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 had 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 was being 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.

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>
                                   FEBRUARY    JANUARY      MARCH       OCTOBER    FEBRUARY      SEPTEMBER    DECEMBER    FEBRUARY
                                    2003(1)     2004        2004         2004        2005          2005(1)     2005(1)     2006(1)
                                    ----        ----        ----         ----        ----          ----        ----        ----
<C>                                <C>        <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       $10.0
Per share conversion price on
 debenture......................   $3.25      $5.40       $6.25        $12.00      $20.00        $12.50       $12.50      $13.07
Interest rate...................   7.5%       6.0%        6.0%         7.0%        7.5%          7.5%         7.5%        7.5%
Term of debenture...............   60 months  30 months   30 months    42 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     267,789
Term of warrants................   60 months  48 months   48 months    72 months   48 months     60 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      $15.16
Fair value per warrant at
 issuance.......................   $0.93      $2.27       $5.43        $6.02       $10.47        $9.34        $5.92       $10.50
Value per share conversion
 feature at issuance............   $3.11      $1.78       $5.06        $4.31       $10.47        $9.91        $10.72      $10.20
Stock price on date of
 agreement......................   $1.58      $5.40       $9.53        $9.60       $16.68        $13.15       $8.80       $13.99
Stock volatility at issuance....   100%       50%         61%          75%         84%           205%         96%         99%
Dividend yield..................   0.0%       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%       4.28%
Converted.......................   Partial    Yes         Yes          Yes         Partial       Partial      No          No

<FN>
----------
(1)    The warrants issued in connection with the February 2003, September
       2005, December 2005 and February 2006 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 and February 2006 issuances do 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 (loss) per share:

<TABLE>
<CAPTION>
                                                                                                       THREE MONTHS ENDED
                                                                                                         MARCH 31, 2005
                                                                                                         --------------
<C>                                                                                                        <C>
         Numerators:
         Income from continuing operations................................................................ $   2,412
         Impact of convertible debt and warrants:
                  Add:  interest expense..................................................................       548
                  Add:  amortization of financing fees and debt discount..................................     1,824
                  Less: gain on value of conversion feature and warrants..................................    (9,272)
                                                                                                           ---------
         Loss from continuing operations..................................................................    (4,488)
         Loss from discontinued operations................................................................      (266)
                                                                                                           ---------
         Net loss ........................................................................................ $  (4,754)
                                                                                                           =========

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

         Earnings (loss) per share - basic:
                  Continuing operations................................................................... $    0.14
                  Discontinued operations.................................................................     (0.02)
                                                                                                           ---------
         Basic earnings per share......................................................................... $    0.12
                                                                                                           =========

         Loss per share - diluted:
                  Continuing operations................................................................... $   (0.21)
                  Discontinued operations.................................................................     (0.02)
                                                                                                           ---------
         Diluted loss per share........................................................................... $   (0.23)
                                                                                                           =========
<CAPTION>

                                                                                                        SIX MONTHS ENDED
                                                                                                         MARCH 31, 2005
                                                                                                         --------------
<C>                                                                                                        <C>
         Numerators:
         Loss from continuing operations.................................................................. $ (26,959)
         Impact of convertible debt and warrants:
                  Add:  interest expense..................................................................       198
                  Add:  amortization of financing fees and debt discount..................................       669
                  Less:  gain on value of conversion feature and warrants.................................    (3,358)
                                                                                                           ---------
         Loss from continuing operations..................................................................   (29,450)
         Loss from discontinued operations................................................................      (858)
                                                                                                           ---------
         Net loss ........................................................................................ $ (30,308)
                                                                                                           =========

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

         Loss per share - basic:
                  Continuing operations................................................................... $   (1.58)
                  Discontinued operations.................................................................     (0.05)
                                                                                                           ---------
         Basic loss per share............................................................................. $   (1.63)
                                                                                                           =========

         Loss per share - diluted:
                  Continuing operations................................................................... $   (1.63)
                  Discontinued operations.................................................................     (0.05)
                                                                                                           ---------
         Diluted loss per share........................................................................... $   (1.68)
                                                                                                           =========
</TABLE>

In accordance with SFAS No. 128, "Earnings per Share," the Company has
adjusted the numerator in the diluted earnings per share calculation for the
mark to market gain, 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 for the three and six
months ended March 31, 2005. Diluted earnings per share is not presented for
the three and six months ended March 31, 2006 because the impact of these
potential additional shares is anti-dilutive. The Company does have
outstanding warrants and convertible debt at March 31, 2006 and 2005


                                     10

<PAGE>
<PAGE>

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 6.1 million
and 5.6 million shares for the three and six months ended March 31, 2006,
respectively, would have been included in the Company's diluted earnings per
share calculation. The additional shares relate to issuance of convertible
debt of 5.5 million, warrants of 2.1 million of which 0.3 million and zero
would be dilutive using the treasury stock method and stock options of 1.0
million of which 0.4 million and 0.3 million would be dilutive using the
treasury stock method for the three and six months ended March 31, 2006,
respectively.

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 matures on
January 1, 2007. Total borrowings under the U.S. credit facility, including
the revolving line of credit and term loan, were $0.1 million at March 31,
2006 leaving an availability of $5.5 million.

Hungarian Operations - The Company's Hungarian subsidiary has a credit
facility with a Hungarian bank. Total borrowings under this credit facility
were $3.0 million at March 31, 2006. 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 have restrictive covenants related
to minimum cash balances, dividends and use of proceeds. The Company was in
compliance with all restrictive covenants at March 31, 2006.

The Hungarian Government has pledged a grant of 2.9 billion HUF
(approximately $14.5 million) to Zoltek's Hungarian subsidiary for use in
modernizing its facility, establishing a research and development center
there, and supporting a rapid buildup of manufacturing capacity for both
acrylic fiber precursor raw material and carbon fiber. As of March 31, 2006,
no amount has been funded under this program.

<TABLE>
<CAPTION>
Long-term debt consists of the following (amounts in thousands):                              March 31,   September 30,
                                                                                                2006          2005
                                                                                              ---------   -------------
<C>                                                                                           <C>          <C>
     Note payable with interest at 9%, payable in monthly installments of
         principal and interest of $15 to maturity in January 2007........................... $  1,393     $   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 ................    1,877         1,865

     Convertible debentures due February 2008 bearing interest at 7.0%.......................    6,800         7,800

     Revolving credit agreement, maturing in January 2007, bearing interest at prime
         plus 2.0% (prime rate at March 31, 2006 was 7.75%)..................................        -         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 March 31, 2006 was 7.75%).......................................................      100           300

     Convertible debentures due April 2008 bearing interest at 7%............................        -        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%..........................   18,000         5,000
     Convertible debentures due August 2009 bearing interest at 7.5%.........................   10,000             -
     Facilities with Hungarian banks (interest rate of 5.5% to 10.6%)........................    2,974         2,766
                                                                                              --------     ---------
         Total debt..........................................................................   61,144        62,961
         Less:  conversion feature and debt discount associated with warrants................  (19,225)      (22,166)
         Less:  amounts payable within one year..............................................   (1,511)         (374)
                                                                                              --------     ---------
     Total long-term debt ................................................................... $ 40,408     $  40,421
                                                                                              ========     =========
</TABLE>



                                     11

<PAGE>
<PAGE>

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

<TABLE>
<CAPTION>
                                                                 MARCH 31, 2006                       SEPTEMBER 30, 2005
                                                                 --------------                       ------------------
                                                                    CONVERSION                             CONVERSION
                                                        WARRANTS     FEATURES     TOTAL         WARRANTS    FEATURES      TOTAL
                                                        --------     --------     -----         --------    --------      -----
<C>                                                    <C>         <C>          <C>           <C>         <C>          <C>
January 2004 issuance.................................. $   1,695   $       -    $  1,695      $   1,818   $        -   $    1,818
March 2004 issuance....................................       543           -         543            867            -          867
October 2004 issuance..................................     9,335           -       9,335          5,033       11,141       16,174
February 2005 issuance.................................     6,481      13,680      20,161          3,637        6,526       10,163
                                                        ---------   ---------    --------      ---------   ----------   ----------
         Totals........................................ $  18,054   $  13,680    $ 31,734      $  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 6). Certain information with respect to
the discontinued operations of the textile acrylic, nylon fibers and CMC
divisions for the three and six months ended March 31, 2006 and 2005 is
summarized as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED         SIX MONTHS ENDED
                                                                                MARCH 31,                 MARCH 31,
                                                                                ---------                 ---------
                                                                           2006         2005         2006         2005
                                                                         ---------    ---------    ---------    ---------

<C>                                                                      <C>          <C>          <C>          <C>
         Net sales.....................................................  $     111    $   1,784    $     558    $   4,338
         Cost of sales.................................................        164        1,557          527        4,063
                                                                         ---------    ---------    ---------    ---------
              Gross profit (loss)......................................        (53)         227           31          275
         Selling, general and administrative expenses..................         12          450          (39)       1,415
                                                                         ---------    ---------    ---------    ---------
              Loss from operations.....................................        (65)        (223)          (8)      (1,140)
         Other income (loss)...........................................         86          (43)          62          282
                                                                         ---------    ---------    ---------    ---------
         Income (loss) on discontinued operations......................  $      21    $    (266)   $      54    $    (858)
                                                                         =========    =========    =========    =========
</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 prospective 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.

For the three and six months ended March 31, 2006 the Company recorded into
selling and general administrative expense and into its corporate
headquarters segment $0.1 million and $0.2 million, respectively, 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 March 31, 2006. There were no recognized tax
benefits during the quarter ended March 31, 2006, as any benefit is offset
by the Company's full valuation allowance on its net deferred tax asset.


                                     12

<PAGE>
<PAGE>


During the three and six months ended March 31, 2005 had the cost of
employee services received in exchange for equity instruments was 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           SIX MONTHS ENDED
                                                                            MARCH 31, 2005              MARCH 31, 2005
                                                                            --------------              --------------
<C>                                                                           <C>                         <C>
         Reported net income (loss)........................................   $    2,146                  $ (27,817)
         Total stock-based employee compensation expense
           determined under fair value based method for all awards,
           net of tax effects..............................................          (70)                      (140)
                                                                              ----------                  ---------
         Pro forma net income (loss).......................................   $    2,076                  $ (27,957)
                                                                              ==========                  =========
         Reported basic income (loss) per share............................   $     0.12                  $   (1.63)
                                                                              ==========                  =========
         Pro forma basic income (loss) per share...........................   $     0.12                  $   (1.63)
                                                                              ==========                  =========
         Reported diluted loss per share...................................   $    (0.23)                 $   (1.68)
                                                                              ==========                  =========
         Pro forma diluted loss per share..................................   $    (0.23)                 $   (1.68)
                                                                              ==========                  =========
</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>
                                                                                           SIX MONTHS ENDED MARCH 31,
                                                                                           --------------------------
         ASSUMPTIONS                                                                        2006              2005
         -----------                                                                    -----------        ----------
<C>                                                                                        <C>               <C>
         Expected life of option.....................................................      6 years           6 years
         Risk-free interest rate.....................................................        4.63%             4.25%
         Volatility of stock.........................................................          91%               77%
         Cancellation experience.....................................................          10%               21%
         Expected dividend yield.....................................................           --                --
</TABLE>

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 non-qualified 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 1,007,667 are
currently outstanding. Outstanding stock options expire ten years from the
date of grant or upon termination of employment. Options granted in 1998 and
prior vest 100% five years from 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 2006 through 2015, respectively.


                                     13

<PAGE>
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                                         AGGREGATE
                                                                                        WTD. AVG.                        INTRINSIC
                                                                                        EXERCISE        WTD. AVG.          VALUE
                                             OPTIONS     EXERCISE PRICE  EXERCISABLE      PRICE      REMAINING LIFE        (`000)
                                             -------     --------------  -----------    ---------    --------------      ---------
<C>                                         <C>             <C>            <C>          <C>            <C>               <C>
         Balance, September 30, 2005        1,051,667       $   8.37       812,028      $  8.85                          $  3,783
             Granted......................    177,500          10.23             -            -                               882
             Exercised....................    168,000           6.03                                                        1,540
             Cancelled....................    (53,500)         19.35                                                            -
                                            ---------
         Balance, March 31, 2006            1,007,667       $   7.93       701,000      $  7.82        5.63 years        $  4,568
                                            =========
</TABLE>

As of March 31, 2006 the Company had $0.8 million of total unrecognized
compensation expense related to stock option plans that will be recognized
over the weighted average period of two 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 quarter 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
March 31, 2006 and September 30, 2005 and for the second quarter and six
months, ended March 31, 2006 and 2005 (amounts in thousands):

<TABLE>
<CAPTION>
                                                                          THREE MONTHS ENDED MARCH 31, 2006
                                                                          ---------------------------------
                                                           Carbon       Technical     Specialty       Corporate
                                                           Fibers        Fibers        Products     Headquarters        Total
                                                        ------------   -----------   -----------    ------------     -----------
<C>                                                     <C>            <C>           <C>             <C>             <C>
Net sales............................................   $     19,639   $     6,308   $     1,373     $         -     $    27,320
Cost of sales........................................         14,172         4,594         1,121               -          19,887
Operating income (loss)..............................          3,815         1,298          (190)         (1,752)          3,171
Depreciation and amortization expense................          1,079           392            87              32           1,590
Capital expenditures.................................          7,290         1,499           117             197           9,103

<CAPTION>
                                                                           THREE MONTHS ENDED MARCH 31, 2005
                                                                           ---------------------------------
                                                           Carbon       Technical     Specialty       Corporate
                                                           Fibers        Fibers        Products     Headquarters        Total
                                                        ------------   -----------   -----------    ------------     -----------
<C>                                                     <C>            <C>           <C>             <C>             <C>
Net sales............................................   $      8,226   $     4,651   $     1,431     $         -     $    14,308
Cost of sales, excluding available unused capacity...          8,472         3,896         1,224               -          13,592
Available unused capacity expenses...................            524             -             -               -             524
Operating income (loss)..............................         (1,432)          392           (54)           (797)         (1,891)
Depreciation and amortization expense................            924           224           132              25           1,305
Capital expenditures.................................          3,330            92             4               -           3,426



                                     14

<PAGE>
<PAGE>

<CAPTION>
                                                                           SIX MONTHS ENDED MARCH 31, 2006
                                                                           -------------------------------
                                                           Carbon       Technical     Specialty       Corporate
                                                           Fibers        Fibers        Products     Headquarters        Total
                                                        ------------   -----------   -----------    ------------     -----------
<C>                                                     <C>            <C>           <C>             <C>             <C>
Net sales............................................   $     30,397   $    10,823   $     2,821     $         -     $    44,041
Cost of sales........................................         23,142         8,424         2,287               -          33,853
Operating income (loss)..............................          4,228         1,662          (476)         (3,123)          2,291
Depreciation and amortization expense................          2,201           615           194              65           3,075
Capital expenditures.................................         10,393         2,635           117             197          13,342

<CAPTION>
                                                                           SIX MONTHS ENDED MARCH 31, 2005
                                                                           -------------------------------
                                                           Carbon       Technical     Specialty       Corporate
                                                           Fibers        Fibers        Products     Headquarters        Total
                                                        ------------   -----------   -----------    ------------     -----------
<C>                                                     <C>            <C>           <C>             <C>             <C>
Net sales............................................   $     15,278   $     8,429   $     2,843     $         -     $    26,550
Cost of sales, excluding available unused capacity...         15,547         6,865         2,392               -          24,804
Available unused capacity expenses...................          1,049             -             -               -           1,049
Operating income (loss)..............................         (3,114)          749           479          (1,402)         (3,288)
Depreciation and amortization expense................          1,816           463           273              27           2,579
Capital expenditures.................................          5,335           252           179              11           5,777

<CAPTION>
                                                                                       TOTAL ASSETS
                                                                                       ------------
                                                           Carbon        Technical     Specialty       Corporate
                                                           Fibers         Fibers        Products     Headquarters        Total
                                                        ------------   -----------   -------------   --------------  -------------
<C>                                                     <C>            <C>           <C>             <C>             <C>
March 31, 2006.......................................   $    104,205   $    25,214   $     2,176     $    15,550     $   147,095
September 30, 2005...................................         93,386        22,662         2,967          11,414         130,429
</TABLE>

7. INVENTORIES

Inventories consist of the following (amounts in thousands):

<TABLE>
<CAPTION>
                                                                                         MARCH 31,      SEPTEMBER 30,
                                                                                           2006             2005
                                                                                         ---------      -------------
<C>                                                                                      <C>              <C>
         Raw materials.................................................................  $  12,252        $  11,872
         Work-in-process...............................................................        623              430
         Finished goods................................................................      9,607           11,638
         Supplies, spares and other....................................................        539              813
                                                                                         ---------        ---------
                                                                                         $  23,021        $  24,753
                                                                                         =========        =========
</TABLE>

8. NEW ACCOUNTING PRONOUNCEMENTS

FASB Staff Position (FSP) on FAS 123-R addresses the classification of
options and similar instruments issued as employee compensation that allow
for cash settlement upon the occurrence of a contingent event. That is, a
cash settlement feature that can be exercised only upon the occurrence of a
contingent event that is outside the employee's control does not meet the
condition until it becomes probable that the event will occur. The Company
currently does not have any options that meet this treatment.

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. However, the recognition of the
deferred tax liabilities associated with the beneficial conversion features
is offset by a change in the Company's valuation allowance on its net
deferred tax asset.

FASB Statement No. 155, "Accounting for Certain Hybrid Financial Instruments,"
issued in February 2006, addresses issues on the evaluation of beneficial
interests issued in securitization transactions under Statement 133. The
FASB staff interim guidance in this Implementation Issue remains effective
for instruments recognized prior to the effective date of Statement 155.
This statement is effective for all financial instruments acquired or issued
after the beginning of the Company's fiscal year that begins after September
15, 2006. The Company believes this new pronouncement will have an
immaterial impact on the Company's financial statements in future periods.

                                     15

<PAGE>
<PAGE>

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 with the
ongoing litigation with the former owner, Zoltek is asserting that Zoltek
has no further ongoing guarantee obligation with respect to the lease. The
Company also is the obligee on aggregate original value of unsecured
promissory notes of $9.3 million in connection with the sale of Hardcore,
for which a full valuation allowance has been recorded. A full valuation
allowance is appropriate in light of Hardcore's current financial condition
which, among other relevant factors, make the collection of the promissory
notes doubtful.

In September 2004, the Company was named a defendant in a civil action filed
by 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 decision
granting summary judgment against the Company was entered in April 2005 and
a trial on damages took place in December 2005, which a judgment has not
been filed. The Company is vigorously defending this matter, has filed
counterclaims and will file an appeal once the damage judgment is rendered.
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.


                                     16

<PAGE>
<PAGE>

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 six months ended March 31, 2006, the Company reported sales of $8.5
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.

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 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 the 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 $60.0 million convertible debt financing package
entered into in September 2005 and amended in April 2006, 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 drilling, construction and
automotive. Development of the use of carbon fibers is continuing in each of
these targeted market segments.

                                     17

<PAGE>
<PAGE>

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 third quarter of fiscal
2006. The improvements in operation in the first half of fiscal 2006 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 lack of unique technology
and sufficient size to compete in an open market. 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 three divisions have been reclassified to
discontinued operations.

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

THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31, 2005
-------------------------------------------------------------------------------

The Company's sales increased 91%, or $13.0 million, to $27.3 million in the
second quarter of fiscal 2006 from $14.3 million in the second quarter of
fiscal 2005. Carbon fiber sales increased 139%, or $11.4 million, to $19.6
million in the second quarter of fiscal 2006 from $8.2 million in the second
quarter of fiscal 2005 as production and sales continued and the demand for
the Company's carbon fibers significantly increased from prior years. The
Company's sales benefited from the newly added capacity in Hungary of two
carbon fiber lines, continued improvement in the operations of the Abilene
facility production and price increases which took effect during the fiscal
2006 second quarter. Technical fiber sales increased 35%, or $1.7 million,
to $6.3 million in the second quarter of fiscal 2006 from $4.6 million in
the second quarter of fiscal 2005. Technical fiber sales increased as the
Company experienced a significant increase in orders from its aircraft brake
customers and new sales within the automotive heat resistance applications.
Sales of the continuing components of the specialty products business
segment were flat at $1.4 million in the second quarter of fiscal 2006.

The Company's cost of sales (including available unused capacity costs)
increased by 41%, or $5.8 million, to $19.9 million in the second quarter of
fiscal 2006 from $14.1 million in the second quarter of fiscal 2005. Carbon
fiber cost of sales increased by 58%, or $5.2 million, to $14.2 million for
the second quarter of fiscal 2006 from $9.0 million for the first quarter of
fiscal 2005. The 58% increase in carbon fiber cost of sales resulted from
the increased sales of 139% discussed above and margins benefited from
reduction of costs related to the start-up operating inefficiencies of the
installed carbon fiber lines at its Abilene, Texas facility. Technical fiber
cost of sales increased $0.7 million, or 18%, to $4.6 million for the second
quarter of fiscal 2006 from $3.9 million for the second quarter of fiscal
2005. The cost of sales of the specialty products segment was flat for the
second quarter of fiscal 2006 at $1.1 million compared to the second quarter
of fiscal 2005 at $1.2 million.

During the second 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 second 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 $1.3 million in the second
quarter of fiscal 2006 and $0.8 million in the second 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 second
quarter of fiscal 2006 included application development of the towpreg
product at the Company's prepreg facility in Utah.

Selling, general and administrative expenses were $3.0 million in the second
quarter of fiscal 2006 compared to $1.3 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. The Company recorded $0.2 million for the cost of employee
services received in exchange for equity instruments under SFAS 123-R in the
second quarter of fiscal 2006. In the second quarter of fiscal 2006, the
Company accrued a charge of $0.5 million in respect of a contingent liability
related to a lawsuit.

                                     18

<PAGE>
<PAGE>

Operating income was $3.2 million in the second quarter of fiscal 2006
compared to a loss of $1.9 million in the second quarter of fiscal 2005.
Carbon fiber operations reported a loss of $1.4 million in the second
quarter of fiscal 2005 and a profit of $3.8 million in the second 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 second quarter of fiscal 2005 as the Company added new capacity at
its Hungarian facility, increased prices and improved production efficiency
at its Abilene facility. The operating income in technical fibers increased
$0.9 million as sales increased 35% due to increased orders form the
European aircraft brake customers and new sales within the automotive heat
resistance applications. Specialty products reported an operating loss of
$0.2 million during the second quarter of fiscal 2006 compared to a loss of
$0.1 million in the second 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 $1.0 million to
a loss of $1.8 million in the second 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. In the second quarter of fiscal
2006, the Company accrued a charge of $0.5 million in respect of a
contingent liability related to a lawsuit. The Company's consolidated
operating income was benefited by the newly added capacity in Hungary of two
carbon fiber lines, the Abilene facility production which continued to
improve and a price increases which took effect during the 2006 second
quarter.

Interest expense was approximately $0.5 million in the second quarter of
fiscal 2006 compared to $1.1 million in the corresponding period of fiscal
2005. The decrease in interest resulted from reduction in debt levels from
prior fiscal year and by the capitalization of interest cost of $0.4 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 $2.6 million in the second quarter of fiscal 2006 compared to
$2.6 million in the second quarter of fiscal 2005. The decrease in
amortization resulted from the conversion of debt during fiscal 2006 offset
by the expensing of $0.4 million of a beneficial conversion feature related
to a partial conversion of the September 2005 issuance (see "--Liquidity and
Capital Resources").

Gain or loss on value of warrants and conversion feature, which is a
non-cash item, was a loss of $27.5 million in the second quarter of fiscal
2006 compared to a gain of $9.1 million in the second quarter of fiscal 2005
(see "--Liquidity--Financing"). The loss during the second quarter of fiscal
2006 was attributable to the increase in the market price of the Company's
common stock during the quarter. Due to the amendments to the convertible
debt financing package in April 2006, the Company will no longer report
convertible debt on a derivative accounting basis beginning in the quarter
ending June 30, 2006.

Other income/expense, net, was expense of $0.2 million in the second quarter
of fiscal 2006 compared to a loss of $1.0 million for the second quarter
fiscal 2005. The benefit was due to in the foreign currency transactional
loss during the second quarter of fiscal 2006 being less which was due to
the Hungarian Forint becoming less weak during the second quarter of 2006
compared to the Euro and Pound in which the Company buys most of its raw
material.

Income tax expense was $0.2 million for the second 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 related to local
taxes for the Hungarian facility.

The foregoing resulted in loss from continuing operations of $27.7 million
for the second quarter of fiscal 2006 compared to income of $2.4 million for
the second quarter of fiscal 2005. Similarly, the Company reported loss from
continuing operations per share of $1.31 basic and diluted basis for the
second quarter of fiscal 2006 and income from continuing operations per
share of $0.14 and $0.21 on a basic and diluted basis, respectively, for the
second quarter of fiscal 2005. The weighted average common shares
outstanding were 21.1 million basic and diluted for fiscal 2006 and 17.8 and
20.8 million basic and diluted, respectively, for the second quarter of
fiscal 2005.

Income from discontinued operations of $0.02 million for the second quarter
of fiscal 2006 compared to a loss of $0.3 million for the second quarter of
fiscal 2005. The significant decrease in sales was offset by a significant
decrease in cost during the second 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 $0.00 on a basic and diluted basis for fiscal 2006 and a loss
per share of $0.02 on a basic and diluted basis for the second quarter of
2005.

                                     19

<PAGE>
<PAGE>

SIX MONTHS ENDED MARCH 31, 2006 COMPARED TO SIX MONTHS ENDED MARCH 31, 2005
---------------------------------------------------------------------------

The Company's sales increased 65%, or $17.4 million, to $44.0 million for
the first six months of fiscal 2006 from $26.6 million in the first six
months of fiscal 2005. Carbon fiber sales increased 99%, or $15.1 million,
to $30.4 million for the first six months of fiscal 2006 from $15.3 million
for the first six months of 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 drilling business significantly increased from
prior years. The Company's sales benefited from the newly added capacity in
Hungary of two carbon fiber lines, the Abilene facility production which
continued to improve and price increases which took effect during the fiscal
2006 second quarter. Technical fiber sales increased 29%, or $2.4 million,
to $10.8 million for the first six months of fiscal 2006 from $8.4 million
for the first six months fiscal 2005. Technical fiber sales increased as the
Company experienced a significant increase in orders from its European
aircraft brake customers and new sales within automotive heat resistance
applications. Sales of the continuing components of the specialty products
business segment were flat at $2.8 million for the first six months fiscal
2006 compared to the prior year period.

The Company's cost of sales (including available unused capacity costs)
increased by 31%, or $7.9 million, to $33.8 million for the first six months
of fiscal 2006 from $25.9 million for the first six months of fiscal 2005.
Carbon fiber cost of sales increased by 39%, or $6.5 million, to $23.1
million for the first six months of fiscal 2006 from $16.6 million for the
first six months of fiscal 2005. The 39% increase in carbon fiber cost of
sales resulted from the increased sales of 99% discussed above and by the
improvement in reducing cost related to the start-up operating
inefficiencies of the installed carbon fiber lines at its Abilene, Texas
facility. Technical fiber cost of sales increased $1.5 million, or 22%, to
$8.4 million for the first six months of fiscal 2006 from $6.9 million for
the first six months of fiscal 2005. The cost of sales of the specialty
products segment was flat for the first six months of fiscal 2006 at $2.3
million compared to the first six months of fiscal 2005 at $2.4 million.

During the first six months 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
$1.0 million for the first six months 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 $2.4 million for the first six
months of fiscal 2006 and $1.7 million for the first six months 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 for the first six
months of fiscal 2006 included application development of the towpreg
product at the Company's prepreg facility in Utah.

Selling, general and administrative expenses were $5.5 million for the first
six months of fiscal 2006 compared to $2.3 million for the first six months
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. The Company recorded $0.3 million for the
cost of employee services received in exchange for equity instruments under
SFAS 123-R in the first six months of fiscal 2006. In the second quarter of
fiscal 2006, the Company accrued a charge of $0.5 million in respect of a
contingent liability related to a lawsuit.

Operating income was $2.3 million for the first six months of fiscal 2006
compared to a loss of $3.3 million for the first six months of fiscal 2005.
Carbon fiber operations went from a loss of $3.1 million for the first six
months of fiscal 2005 to a profit of $4.2 million for the first six months
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 six months of fiscal 2005 as the Company added new capacity
at its Hungarian facility, increased prices and improved production
efficiency at its Abilene facility. The operating income in technical fibers
increased $1.0 million as sales increased 29% due to increased orders from
the European aircraft brake customers and new sales within the automotive
heat resistance applications. Specialty products reported an operating loss
of $0.5 million for the first six months of fiscal 2006 compared to income
of $0.5 million for the first six months 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 $1.7
million to a loss of $3.1 million for the first six months 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. In the second
quarter of fiscal 2006, the Company accrued a charge of $0.5 million in
respect of a contingent liability related to a lawsuit. The Company's
consolidated operating income was benefited by the newly added capacity in
Hungary of two carbon fiber lines, the Abilene facility production which
continued to improve and price increases which took effect during the 2006
second quarter.

Interest expense was approximately $1.3 million for the first six months of
fiscal 2006 compared to $2.2 million in the corresponding period of fiscal
2005. The decrease in interest resulted from reduction in debt levels from
prior fiscal year and by the capitalization of


                                     20

<PAGE>
<PAGE>

interest cost of $0.8 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 $4.6 million for the first six months of fiscal 2006 compared
to $4.4 million for the first six months of fiscal 2005. The decrease in
amortization resulted from the reduction of convertible debt balances due to
the conversion of debt during fiscal 2006 offset by the expensing of $0.4
million of a beneficial conversion feature related to a partial conversion
of the September 2005 issuance (see "--Liquidity and Capital Resources").

Gain or loss on value of warrants and conversion feature, which is a
non-cash item, was a loss of $17.4 million for the first six months of
fiscal 2006 compared to a loss of $16.4 million for the first six months of
fiscal 2005 (see "--Liquidity--Financing"). The loss for the first six
months of fiscal 2006 was attributable to the increase in the market price
of the Company's common stock from September 30, 2005.

Other income/expense, net, was expense of $0.2 million for the first six
months of fiscal 2006 compared to expense of $0.4 million for the first six
months of fiscal 2005. The benefit was due to in the foreign currency
transactional loss during the first six months of fiscal 2006 being less,
which was due to the Hungarian Forint becoming less weak during the second
quarter of 2006 compared to the Euro and Pound in which the Company buys
most of its raw material.

Income tax expense was $0.3 million for the second quarter of fiscal 2006
compared to $0.2 million for the corresponding period in the prior year. A
valuation allowance was recorded against the income tax benefit resulting
from the pre-tax loss in both periods 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 periods related to local taxes for the
Hungarian facility.

The foregoing resulted in loss from continuing operations of $21.2 million
for the first six months of fiscal 2006 compared to loss of $27.0 million
for the first six months of fiscal 2005. Similarly, the Company reported
loss from continuing operations per share of $1.05 basic and diluted basis
for the first six months of fiscal 2006 and loss from continuing operations
per share of $1.58 and $1.63 on a basic and diluted basis, respectively, for
the first six months of fiscal 2005. The weighted average common shares
outstanding were 20.5 million basic and diluted for fiscal 2006 and 17.1 and
18.1 million, respectively, basic and diluted for fiscal 2005.

The income from discontinued operations of $0.05 million for the first six
months of fiscal 2006 compared to a loss of $0.9 million for the first six
months of fiscal 2005. The significant decrease in sales was offset by a
significant decrease in cost during the first six months 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 $0.00 on a basic and diluted basis for
fiscal 2006 and a loss per share of $0.05 on a basic and diluted basis for
the first six months of 2005.

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, incurred borrowings under credit
facilities, entered into multiple convertible debenture facilities, as well
as used long-term debt financing secured by the equity in the Company's real
estate properties, to maintain adequate liquidity to support the Company's
operating and capital activities.

Management will continue to seek to fund the Company's near-term operating
needs from anticipated sales increases related to increases in production
capacity at existing facilities and continued active management of the
Company's working capital. There can be no assurance 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 continued 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 provided
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. In April
2006, the Company amended the September 2005 financing package to provide
for an additional $10.0 million funding. In connection with the amendment,
the institutional investors converted the $20.0 million convertible notes
previously issued in February 2005 into


                                     21

<PAGE>
<PAGE>

approximately 1,000,000 shares of common stock and exercised associated
warrants for 1,052,000 shares related to October 2004 and February 2005
issuances. The notes to be issued under the amended financing package will
be convertible into Zoltek common stock at a conversion price of $25.51 per
share. They mature 42 months from the closing date and bear interest at a
fixed rate of 7.5% per annum for 18 months and thereafter at LIBOR plus 4%
per annum. The Company will issue the investors five-year warrants to
purchase an aggregate of up to 411,521 shares of common stock at an exercise
price of $28.06 per share and up to 111,113 shares of common stock at an
exercise price of $.01 per share. The agreement provides for Zoltek to draw
down the remaining financing over the next nine months subject to
satisfaction of certain conditions.

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 were
available as of September 30, 2005 and March 31, 2006, respectively. The
Company anticipates it will require the remaining proceeds of the $60.0
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 its
capacity expansion plans for fiscal 2007 and beyond will require additional
debt and equity financing.

The Company believes the $60.0 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." As a result of
the above-described amendment of the convertible debt financing package in
April 2006 and the transactions contemplated thereby, the derivative
accounting treatment described in this Note 2 will terminate in the quarter
ending June 30, 2006. See table below for impact on the financial results
for the quarterly and six-month financial results ended March 31, 2006 and
2005 (amounts in thousands).

<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED MARCH 31, 2006       SIX MONTHS ENDED MARCH 31, 2006
                                                         ---------------------------------       -------------------------------
                                                                    CONVERSION                             CONVERSION
                                                         WARRANTS    FEATURES      TOTAL        WARRANTS    FEATURES       TOTAL
                                                         --------    --------      -----        --------    --------       -----

<C>                                                    <C>         <C>          <C>           <C>         <C>          <C>
January 2004 issuance - mark to market ................ $  (1,911)  $       -    $ (1,911)     $  (1,111)  $        -   $   (1,111)
March 2004 issuance - mark to market ..................      (850)          -        (850)          (477)           -         (477)
October 2004 issuance - mark to market ................    (6,368)     (3,502)     (9,870)        (4,302)      (1,556)      (5,858)
February 2005 issuance - mark to market ...............    (4,568)    (10,265)    (14,833)        (2,845)      (7,151)      (9,996)
                                                        ---------   ---------    --------      ---------   ----------   ----------
         Loss on value of warrants and
           conversion feature.......................... $ (13,697)  $ (13,767)   $(27,464)     $  (8,735)  $   (8,707)  $  (17,442)
                                                        =========   =========    ========      =========   ==========   ==========
</TABLE>


                                     22

<PAGE>
<PAGE>

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

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

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

During the six months ended March 31, 2006, the investors converted $20.0
million principal amount of the convertible debt issued in the October 2004
transaction into 2,100,580 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 $14.7 million and offset by a
reduction to equity of $6.7 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 $0.7 million related to these
issuances into additional paid-in capital.

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 $60 million, as amended. Zoltek now has received a total of $30
million under this arrangement. The recently issued convertible notes, which
are collateralized 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. The fair value of the debt associated
with the warrants and conversion feature at the time of issuances was $5.7
million and will be accreted to its face value over the life of the
convertible debentures.

In March 2006, investors converted $2.0 million and $1.0 million principal
amount of convertible debt issued in September 2005 and February 2003,
respectively, into 160,000 and 285,716 shares of common stock. At the time
of conversion of the debt issued in September 2005, the Company reclassified
$0.4 million of the unamortized debt discount into equity and $0.4 million
of the beneficial conversion feature into deferred financing expense.

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 provided
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 provided 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
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. The agreement provided for the debentures issuable at the third and
fourth closings to 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 April 2006, the Company amended the September 2005
financing package to provide for an additional $10.0 million funding. In
connection with the amendment, the institutional investors converted the
$20.0 million convertible notes previously issued in February 2005 into
approximately 1,000,000 shares of common stock and exercised associated
warrants for 1,052,000 shares related to October 2004 and February 2005
issuances. Under the amended financing package, the notes will be
convertible into Zoltek common stock at a conversion price of $25.51 per
share. They mature 42 months from the closing date and bear interest at a
fixed rate of 7.5% per annum for 18 months and thereafter at LIBOR plus 4%
per annum. The Company will issue the investors five-year warrants to
purchase an aggregate of up to 411,521 shares of common stock at an exercise
price of $28.06 per share and up to 111,113 shares of common stock at an
exercise price of $.01 per share.

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. 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


                                     23

<PAGE>
<PAGE>

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.

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 reclassified 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. These notes were converted
into common stock in May 2006. 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. These
warrants were exercised in May 2006. 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 was being 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 had 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 was being 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.


                                     24

<PAGE>
<PAGE>


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

<TABLE>
<CAPTION>
                                   FEBRUARY    JANUARY       MARCH      OCTOBER    FEBRUARY      SEPTEMBER     DECEMBER   FEBRUARY
                                    2003(1)      2004        2004        2004        2005         2005(1)       2005(1)    2006(1)
                                    ----         ----        ----        ----        ----         ----          ----       ----
<C>                                <C>        <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       $10.0
Per share conversion price on
 debenture......................   $3.25      $5.40        $6.25       $12.00      $20.00        $12.50       $12.50      $13.07
Interest rate...................   7.5%       6.0%         6.0%        7.0%        7.5%          7.5%         7.5%        7.5%
Term of debenture...............   60 months  30 months    30 months   42 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     267,789
Term of warrants................   60 months  48 months    48 months   72 months   48 months     60 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      $15.16
Fair value per warrant at
 issuance.......................   $0.93      $2.27        $5.43       $6.02       $10.47        $9.34        $5.92       $10.50
Value per share conversion
 feature at issuance............   $3.11      $1.78        $5.06       $4.31       $10.47        $9.91        $10.72      $10.20
Stock price on date of
 agreement......................   $1.58      $5.40        $9.53       $9.60       $16.68        $13.15       $8.80       $13.99
Stock volatility at issuance....   100%       50%          61%         75%         84%           205%         96%         99%
Dividend yield..................   0.0%       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%       4.28%
Converted.......................   Partial    Yes          Yes         Yes         Partial       Partial      No          No

<FN>
---------
(1)    The warrants issued in connection with the February 2003, September
       2005, December 2005 and February 2006 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 and February 2006 issuances do have a
       beneficial conversion feature; however, the February 2003 and
       December 2005 issuances have no beneficial conversion feature.
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                                                                        THREE MONTHS ENDED
                                                                                                          MARCH 31, 2005
                                                                                                          --------------
<C>                                                                                                         <C>
         Numerators:
         Income from continuing operations................................................................  $   2,412
         Impact of convertible debt and warrants:
                  Add:  interest expense..................................................................        548
                  Add:  amortization of financing fees and debt discount..................................      1,824
                  Less: gain on value of conversion feature and warrants..................................     (9,272)
                                                                                                            ---------
         Loss from continuing operations..................................................................     (4,488)
         Loss from discontinued operations................................................................       (266)
                                                                                                            ---------
         Net loss ........................................................................................  $  (4,754)
                                                                                                            =========

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

         Earnings (loss) per share - basic:
                  Continuing operations...................................................................  $    0.14
                  Discontinued operations.................................................................      (0.02)
                                                                                                            ---------
         Basic earnings per share.........................................................................  $    0.12
                                                                                                            =========

         Loss per share - diluted:
                  Continuing operations...................................................................  $   (0.21)
                  Discontinued operations.................................................................      (0.02)
                                                                                                            ---------
         Diluted loss per share...........................................................................  $   (0.23)
                                                                                                            =========
</TABLE>


                                     25

<PAGE>
<PAGE>

<TABLE>
<CAPTION>
                                                                                                         SIX MONTHS ENDED
                                                                                                          MARCH 31, 2005
                                                                                                          --------------
<C>                                                                                                         <C>
         Numerators:
         Loss from continuing operations..................................................................  $ (26,959)
         Impact of convertible debt and warrants:
                  Add:  interest expense..................................................................        198
                  Add:  amortization of financing fees and debt discount..................................        669
                  Less: gain on value of conversion feature and warrants..................................     (3,358)
                                                                                                            ---------
         Loss from continuing operations..................................................................    (29,450)
         Loss from discontinued operations................................................................       (858)
                                                                                                            ---------
         Net loss ........................................................................................  $ (30,308)
                                                                                                            =========

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

         Loss per share - basic:
                  Continuing operations...................................................................  $   (1.58)
                  Discontinued operations.................................................................      (0.05)
                                                                                                            ---------
         Basic loss per share.............................................................................  $   (1.63)
                                                                                                            =========

         Loss per share - diluted:
                  Continuing operations...................................................................  $   (1.63)
                  Discontinued operations.................................................................      (0.05)
                                                                                                            ---------
         Diluted loss per share...........................................................................  $   (1.68)
                                                                                                            =========
</TABLE>

In accordance with SFAS No. 128, "Earnings per Share," the Company has
adjusted the numerator in the diluted earnings per share calculation for the
mark to market gain, 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 for the three and six
months ended March 31, 2005. Diluted earnings per share is not presented for
the three and six months ended March 31, 2006 because the impact of these
potential additional shares is anti-dilutive. The Company does have
outstanding warrants and convertible debt at March 31, 2006 and 2005 which
are not included in the determination of diluted earnings per share
presented above because the impact of these potential additional shares is
anti-dilutive. Had these securities been dilutive, an additional 6.1 million
and 5.6 million shares for the three and six months ended March 31, 2006,
respectively, would have been included in the Company's diluted earnings per
share calculation. The additional shares relate to issuance of convertible
debt of 5.5 million, warrants of 2.1 million of which 0.3 million and zero
would be dilutive using the treasury stock method and stock options of 1.0
million of which 0.4 million and 0.3 million would be dilutive using the
treasury stock method for the three and six months ended March 31, 2006,
respectively.

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 matures on
January 1, 2007. Total borrowings under the U.S. credit facility, including
the revolving line of credit and term loan, were $0.1 million at March 31,
2006 leaving an availability of $5.5 million.

Hungarian Operations - The Company's Hungarian subsidiary has a credit
facility with a Hungarian bank. Total borrowings under this credit facility
were $3.0 million at March 31, 2006. 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 have restrictive covenants related
to minimum cash balances, dividends and use of proceeds. The Company was in
compliance with all restrictive covenants at March 31, 2006.

The Hungarian Government has pledged a grant of 2.9 billion HUF
(approximately $14.5 million) to Zoltek's Hungarian subsidiary for use in
modernizing its facility, establishing a research and development center
there, and supporting a rapid buildup of manufacturing capacity for both
acrylic fiber precursor raw material and carbon fiber. As of March 31, 2006,
no amount has been funded under this program.

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

The $3.2 million decrease in cash used in continuing operations in the first
six months of fiscal 2006, was the result of a $6.1 million increase in
operating income as sales and margins continue to increase. Receivables
increased, as the Company's sales grew significantly during the second
quarter of fiscal 2006. Inventory decreased as sales of chopped and milled
fiber improved. The Company anticipates improving future cash flows from
operations as it gains operating efficiency at the Abilene and Hungarian
manufacturing facilities.

                                     26

<PAGE>
<PAGE>

Cash Used In Discontinued Operating Activities
----------------------------------------------

Net cash used in discontinued operating activities was $0.1 million for the
second quarter of fiscal 2006. The cash flow used by discontinued operating
activities during the quarter was primarily related to the net income of
$0.1 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 six months ended March 31,
2006 was $13.3 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 six months ended March 31,
2005 was $5.6 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 $22.0 million and $15.1
million for the six months ended March 31, 2006 and 2005, respectively. The
various financing transactions for the second quarters of 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 March
31, 2006 included the following:

<TABLE>
<CAPTION>
                                                                                  LESS THAN                   3-5      MORE THAN
                                                                       TOTAL       1 YEAR     1-3 YEARS      YEARS      5 YEARS
                                                                     ----------   ---------   ----------   ---------   ----------
<C>                                                                  <C>          <C>         <C>          <C>         <C>
         Notes payable.............................................  $       38   $     38                 $       -   $        -
         Convertible debentures....................................      54,800          -    $   54,800           -            -
         Long-term debt, including current maturities..............       6,343      1,511         4,832           -            -
                                                                     ----------   --------    ----------   ---------   ----------
                  Total debt.......................................      61,181      1,549        59,632           -            -
         Operating leases..........................................         290         58           174          58            -
                                                                     ----------   --------    ----------   ---------   ----------
                  Total debt and operating leases..................      61,471      1,607        59,806          58            -
         Contractual interest payments.............................      11,785      4,432         7,353           -            -
         Accrued litigation cost...................................       1,715      1,715             -           -            -
         Purchase obligations......................................       1,885      1,885             -           -            -
                                                                     ----------   --------    ----------   ---------   ----------
                  Total contractual obligations....................  $   76,856   $  9,639    $   67,159   $      58   $        -
                                                                     ==========   ========    ==========   =========   ==========
</TABLE>


                                     27

<PAGE>
<PAGE>

The future contractual obligations and debt could be reduced by up to $65.8
million in exchange for up to 5.3 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
                                                     ----------    ---------    ---------    ---------     --------     ---------
<C>                                                   <C>          <C>          <C>          <C>           <C>          <C>
Total contractual obligation.......................                $  76,856    $   9,639    $  67,159     $     58     $       -
February 2003 issuance.............................   $   3.25        (6,800)           -       (6,800)           -             -
February 2005 issuance.............................      20.00       (20,000)           -      (20,000)           -             -
September 2005 issuance............................      12.50        (3,000)           -       (3,000)           -             -
December 2005 issuance.............................      12.50       (15,000)           -      (15,000)           -             -
February 2006 issuance.............................      13.07       (10,000)           -      (10,000)           -             -
Interest payments..................................                  (11,039)      (4,076)      (6,963)           -             -
                                                                   ---------    ---------    ---------     --------     ---------
     Total contractual obligations assuming
      conversion...................................                $  11,017    $   5,563    $   5,396     $     58     $       -
                                                                   =========    =========    =========     ========     =========
</TABLE>

As of May 1, 2006, the last reported sale price of the Company's common
stock was $26.01 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.

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 decision
granting summary judgment against the Company was entered in April 2005 and
a trial on damages took place in December 2005, which a judgment has not
been filed. The Company is vigorously defending this matter, has filed
counterclaims and will file an appeal once the damage judgment is rendered.

NEW ACCOUNTING PRONOUNCEMENTS

FASB Staff Position (FSP) on FAS 123-R addresses the classification of
options and similar instruments issued as employee compensation that allow
for cash settlement upon the occurrence of a contingent event. That is, a
cash settlement feature that can be exercised only upon the occurrence of a
contingent event that is outside the employee's control does not meet the
condition until it becomes probable that the event will occur. The Company
currently does not have any options that meet this treatment.

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. However, the Company currently has a
large net operating loss carryforward which would offset any deferred tax
liability arising from the book to tax difference in treatment of the
beneficial conversion feature.

FASB Statement No. 155, "Accounting for Certain Hybrid Financial Instruments,"
issued in February 2006, addresses issues on the evaluation of beneficial
interests issued in securitization transactions under Statement 133. The
FASB staff interim guidance in this Implementation Issue remains effective
for instruments recognized prior to the effective date of Statement 155.
This statement is

                                     28

<PAGE>
<PAGE>

effective for all financial instruments acquired or issued after the
beginning of the Company's fiscal year that begins after September 15, 2006.
The Company believes this new pronouncement will have an immaterial impact
on the Company's financial statements in future periods.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to changes in interest rates primarily as a result of
borrowing activities under its credit facilities. The nature and amount of
the Company's debt may vary as a result of future business requirements,
market conditions and other factors. The extent of the Company's interest
rate risk is not quantifiable or predictable because of the variability of
future interest rates and business financing requirements. The Company does
not believe such risk is material because a significant amount of the
Company's current debt is at fixed rates.

                                    * * *

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, 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 March 31, 2006, 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 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,


                                     29

<PAGE>
<PAGE>

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 September 30,
2005 and March 31, 2006.

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. However,
     management believes that despite these weaknesses, the financial
     reports accurately represent the Company's financial results and
     position.

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 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 GAAP. 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.

                                     30

<PAGE>
<PAGE>

     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.

     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


                                     31

<PAGE>
<PAGE>

     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 ended 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 March 31, 2006.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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 March 31, 2006. 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:

                                     32

<PAGE>
<PAGE>

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.

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:

                                     33

<PAGE>
<PAGE>

     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.


                                     34

<PAGE>
<PAGE>


                           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 1A.  Risk Factors

               Not applicable - no changes in risk factors since fiscal
          year ended September 30, 2005.

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 drawdowns 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 received an additional $10 million of funding in
          February 2006 under the previously announced September 2005
          convertible financing facility of up to $60 million, as amended.
          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.

               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.

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<PAGE>
<PAGE>

          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.

                                  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:  May 10, 2006                           By:    /s/ KEVIN SCHOTT
       ------------                              ----------------------------
                                                        Kevin Schott
                                                   Chief Financial Officer



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