<PAGE>

                     SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, DC 20549




                                  FORM 10-Q

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




For the quarter ended June 30, 2004                Commission File No. 0-20600
                      -------------                                    -------


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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes  x   No
    ---     ---

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes      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 August 16,
2004, 16,428,981 shares of Common Stock, $.01 par value, were outstanding.



<PAGE>
<PAGE>

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

<TABLE>
                                                  ZOLTEK COMPANIES, INC.

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

                                                       (Unaudited)

<CAPTION>
                                                                                                JUNE 30,     SEPTEMBER 30,
ASSETS                                                                                            2004           2003
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                                             <C>            <C>
Current assets:
     Cash and cash equivalents................................................................. $     50       $    838
     Accounts receivable, less allowance for doubtful accounts of $658 and
       $931, respectively......................................................................   11,150         10,380
     Inventories...............................................................................   26,268         26,978
     Other current assets......................................................................    1,851          1,483
                                                                                                --------       --------
          Total current assets.................................................................   39,319         39,679
Property and equipment, net....................................................................   78,750         77,373
Other assets...................................................................................    3,029          2,403
                                                                                                --------       --------
          Total assets......................................................................... $121,098       $119,455
                                                                                                ========       ========


LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------------------------------
Current liabilities:
     Current maturities of long-term debt...................................................... $ 16,902       $    933
     Trade accounts payable....................................................................   10,819         11,892
     Notes payable.............................................................................    2,281          2,916
     Accrued expenses..........................................................................    2,780          3,203
     Other liabilities.........................................................................    1,854          1,945
                                                                                                --------       --------
     Total current liabilities.................................................................   34,636         20,889
Other long-term liabilities....................................................................    1,517            509
Long-term debt, less current maturities........................................................   23,825         33,541
                                                                                                --------       --------
          Total liabilities....................................................................   59,978         54,939
                                                                                                --------       --------
Commitments and contingencies (Notes 2 and 8)

Shareholders' equity:
     Preferred stock, $.01 par value, 1,000,000 shares authorized,
       no shares issued or outstanding.........................................................        -              -
     Common stock, $.01 par value, 50,000,000 shares authorized,
       16,428,981 and 16,307,338 shares issued and outstanding, respectively...................      163            163
     Additional paid-in capital................................................................  115,747        109,290
     Accumulated retained deficit..............................................................  (43,579)       (32,505)
     Accumulated other comprehensive loss......................................................  (11,211)       (12,432)
                                                                                                --------       --------
          Total shareholders' equity...........................................................   61,120         64,516
                                                                                                --------       --------
          Total liabilities and shareholders' equity .......................................... $121,098       $119,455
                                                                                                ========       ========

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

                                     2

<PAGE>
<PAGE>


<TABLE>
                                                   ZOLTEK COMPANIES, INC.

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

<CAPTION>

                                                                      THREE MONTHS ENDED JUNE 30,  NINE MONTHS ENDED JUNE 30,
                                                                      ---------------------------  --------------------------
                                                                           2004        2003            2004         2003
-----------------------------------------------------------------------------------------------------------------------------

<S>                                                                       <C>         <C>            <C>          <C>
Net sales................................................................ $17,361     $15,847        $ 46,619     $ 48,750
Cost of sales, excluding available unused capacity costs.................  15,313      13,934          41,853       43,090
Available unused capacity costs..........................................     952       1,481           3,638        4,238
Application and development costs........................................     786         865           2,290        2,669
Selling, general and administrative expenses.............................   2,158       2,153           6,344        7,370
                                                                          -------     -------        --------     --------
         Operating loss..................................................  (1,848)     (2,586)         (7,506)      (8,617)
Other income (expense):
    Interest expense, excluding amortization of financing fees,
      debt discount and beneficial conversion feature....................    (882)       (530)         (2,266)      (1,422)
    Amortization of financing fees, debt discount and
      beneficial conversion feature......................................    (710)        (19)         (1,051)         (60)
    Interest income......................................................       7          22              19           56
    Other, net...........................................................      30        (575)             54       (1,141)
                                                                          -------     -------        --------     --------
         Loss before income taxes........................................  (3,403)     (3,688)        (10,750)     (11,184)
Income tax expense.......................................................     135         101             324           58
                                                                          -------     -------        --------     --------
Net loss................................................................. $(3,538)    $(3,789)       $(11,074)    $(11,242)
                                                                          =======     =======        ========     ========

Net loss per share:
    Basic and diluted loss per share..................................... $ (0.22)    $ (0.23)       $ (0.68)     $  (0.69)
                                                                          =======     =======        =======      ========

Weighted average common shares outstanding...............................  16,407      16,302          16,353       16,299



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

                                     3

<PAGE>
<PAGE>

<TABLE>
                                                 ZOLTEK COMPANIES, INC.

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

                                                                                              NINE MONTHS ENDED JUNE 30,
                                                                                              --------------------------
                                                                                                 2004            2003
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>             <C>
Cash flows from operating activities:
      Net loss................................................................................ $(11,074)       $(11,242)
      Adjustments to reconcile net loss to net cash used in operating activities:
           Depreciation and amortization......................................................    4,529           4,624
           Amortization of financing fees and debt discount...................................    1,051              60
           Foreign currency transaction losses................................................      127             787
           Other, net.........................................................................      (38)            (36)
           Changes in assets and liabilities:
                 (Increase) decrease in accounts receivable...................................     (404)             66
                 Decrease in inventories......................................................    1,310           2,091
                 (Increase) decrease in prepaid expenses and other assets.....................     (450)            157
                 (Decrease) in trade accounts payable.........................................   (2,816)         (1,342)
                 Increase (decrease) in other long-term liabilities...........................      909            (274)
                                                                                               --------        --------
                      Total adjustments.......................................................    4,218           6,133
                                                                                               --------        --------
Net cash used in operating activities.........................................................   (6,856)         (5,109)
                                                                                               --------        --------

Cash flows from investing activities:
      Payments for purchase of property and equipment.........................................   (4,490)         (1,262)
      Proceeds from sale of property and equipment............................................      135             121
                                                                                               --------        --------
Net cash used in investing activities.........................................................   (4,355)         (1,141)
                                                                                               --------        --------

Cash flows from financing activities:
      Proceeds from exercise of stock options.................................................      138              21
      Proceeds from issuance of convertible debt..............................................   12,750               -
      Proceeds from issuance of notes payable.................................................   10,540          14,594
      Proceeds from issuance of note payable to related party.................................    1,400               -
      Payment of financing fees...............................................................   (1,152)              -
      Repayment of note payable to related party..............................................   (1,400)              -
      Repayment of notes payable and long-term debt...........................................  (11,832)         (8,833)
                                                                                               --------        --------
Net cash provided by financing activities.....................................................   10,444           5,782
                                                                                               --------        --------
Effect of exchange rate changes on cash.......................................................      (21)             18
                                                                                               --------        --------
Net decrease in cash..........................................................................     (788)           (450)
Cash and cash equivalents at beginning of period..............................................      838             685
                                                                                               --------        --------
Cash and cash equivalents at end of period.................................................... $     50        $    235
                                                                                               ========        ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the period for:

      Interest................................................................................ $   1,491       $  2,980
      Income taxes............................................................................ $       -       $      -

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

                                     4

<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 2003 Annual
Report to Shareholders, which includes consolidated financial statements and
notes thereto for the fiscal year ended September 30, 2003. In the opinion
of management, all normal recurring adjustments and estimates considered
necessary for a fair presentation have been included. Certain
reclassifications have been made to conform prior year's data to the current
presentation. The results for the period ended June 30, 2004 are not
necessarily indicative of the results which may be expected for the fiscal
year ending September 30, 2004.

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

2.  FINANCING

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

In January 2004, the Company issued and sold convertible debentures in the
aggregate principal amount of $7.0 million to institutional private equity
and other investors (including $250,000 to each of Mr. Rumy and Mr.
McDonnell who are members of the Company's Board of Directors). The
convertible debentures have a stated maturity of 30 months and bear interest
at 6% per annum and are convertible presently into 1,295,954 shares of
common stock at a conversion price of $5.40 per share for each investor
other than Messrs. Rumy and McDonnell and $5.42 per share for each of
Messrs. Rumy and McDonnell. The Company also issued to the investors
five-year warrants to purchase an aggregate of 323,994 shares of common
stock of the Company at an exercise price of $5.40 per share for each
investor other than Messrs. Rumy and McDonnell and $5.42 per share for each
of Messrs. Rumy and McDonnell. The fair value of the debt discount
associated with the warrants and beneficial conversion feature, at the time
of issuance, was estimated to be $2.0 million and is being amortized as
non-cash interest expense over the term of the convertible debentures.
Proceeds from the issuance of these convertible debentures are being used
for working capital purposes.

As part of the Company's January 2004 refinancing, the bank lender to the
Company's Hungarian subsidiary amended certain financial covenants and
extended the maturity date of its loan to December 31, 2004. In connection
with such actions, the bank required that the Company make arrangements to
settle intercompany accounts payable by Zoltek U.S. operations to its
Hungarian subsidiary in the amount of approximately $2.8 million. The bank
was unwilling to keep open its offer to restructure Zoltek Rt.'s loans until
after the Company's January 2004 refinancing package was completed. Prior to
the refinancing, the Company did not have cash on hand or available
borrowings that would enable it to make the settlement of the intercompany
accounts required by the Hungarian bank. In order to proceed expeditiously
to resolve the Company's financing requirements, Zsolt Rumy, the Company's
Chief Executive Officer and a director of the Company, in December 2003
loaned the Company $1.4 million in cash and posted a $1.4 million letter of
credit for the benefit of the Company. This arrangement was approved by the
Company's board of directors and audit committee. The loan by Mr. Rumy bore
interest on the amount advanced and the notional amount of the letter of
credit at a rate per annum equal to LIBOR plus 11% with a LIBOR floor of 2%,
same as the interest rate of the mortgage financing discussed below. As a
result of the Company completing the refinancing transactions making
available the cash to settle the intercompany accounts, the letter of credit
was released. After converting $250,000 into convertible debt as part of the
January 2004 financing, the remaining $1.15 million loan was repaid during
the third quarter of 2004.

Also in January 2004, the Company entered into a mortgage note with a bank
in the aggregate principal amount of $6.0 million. The note has a stated
maturity of three years and bears interest at a rate of LIBOR plus 11%
(13.5% per annum as of June 30, 2004) with a LIBOR floor of 2%. The Company
will pay interest only on a monthly basis with principal balance due at time
of maturity. The loan is collateralized by a security interest in the
Company's headquarters facility and its two U.S. manufacturing facilities
that produce carbon and technical fibers. The proceeds of this transaction
were used to pay down debt of $6.0 million with its U.S. bank. Of such
proceeds, $0.5 million was held in an escrow account to be released when the
Company completed certain post-closing requirements. The Company completed
these requirements during the third quarter of 2004 and the $0.5 million was
released from escrow.

                                     5

<PAGE>
<PAGE>

Due to the January 2004 refinancing completed subsequent to the Company's
fiscal year end, the Company's U.S. bank waived the financial covenants
through February 13, 2005, the maturity date of the term loan. Additionally,
the expiration of the Company's revolving credit loan was extended from
January 31, 2004 to January 31, 2005. The refinancing allowed the Company to
execute its 2004 business plan, which was uncertain prior to the
refinancing.

In March 2004, the Company issued and sold convertible debentures in the
aggregate principal amount of $5.75 million to institutional private equity
investors and Mr. Dill ($750,000) who is member of the Company's board of
directors. The convertible debentures have a stated maturity of 30 months
and bear interest at 6% per annum and are convertible presently into 895,908
shares of common stock at a conversion price of $6.25 per share for each
investor other than Mr. Dill and $7.82 per share for Mr. Dill. The Company
also issued to the investors five-year warrants to purchase an aggregate of
223,997 shares of common stock of the Company at an exercise price of $7.50
per share for each investor other than Mr. Dill whose warrants have an
exercise price of $7.82 per share. The fair value of the debt discount
associated with the warrants and beneficial conversion feature, at the time
of issuance, estimated to be $4.0 million and is being amortized as non-cash
interest expense over the term of the convertible debentures. Proceeds from
the issuance of these convertible debentures are being used for working
capital and capital expenditures.

The Company will require further financing and restructuring of existing
debt arrangements in fiscal 2005 to refinance bank loans of its Hungarian
subsidiary and to support planned increases in its carbon fiber production
capacity to meet demand. The Company currently is undertaking efforts to
obtain that financing. However, there can be no assurance that it will be
successful in its attempt to obtain new financing. If the Company is
unsuccessful, it would have a material adverse effect on its future
financial condition and its ability to continue to pursue its current
business plan.

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

The Company executed an amended credit facility agreement, dated as of
February 13, 2003, with its U.S. bank. The amended credit facility agreement
is structured as a term loan in the amount of $3.5 million with an
outstanding balance of $0.9 million at June 30, 2004 (due February 13, 2005)
and a revolving credit loan in the amount of $5.0 million (originally due
January 31, 2004, now due January 31, 2005 - see above). The Company repaid
$5.0 million of this loan from the proceeds of the sale of convertible
debentures as discussed below. Borrowings under the amended facility are
based on a formula of eligible accounts receivable and inventories of the
Company's U.S.-based subsidiaries. The outstanding loans under the agreement
bear interest at the prime interest rate plus 2% per annum. Total borrowings
and available borrowings at June 30, 2004 under the revolving credit
agreement were $3.3 and $1.7 million respectively.

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

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

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

US Operations - The Company's current credit facility with its U.S. Bank is
described above under "-2003 Refinancing." Total borrowings under the U.S.
credit facility, including the revolving line of credit and term loan, were
$4.2 million at June 30, 2004, all of which has been classified as current
due to the maturity in January and February 2005.

Hungarian Operations - The Company's Hungarian subsidiary entered into a
credit facility with a Hungarian bank. The facility consists of a $6.0
million bank guarantee and factoring facility, a $4.0 million capital
investment facility and a $2.0 million working capital facility. All of the
Hungarian bank debt is due on December 31, 2004. Total borrowings under this
credit facility were $10.6 million at June 30, 2004, all of which has been
classified as current.

                                     6

<PAGE>
<PAGE>

In March 2003, the Company's Hungarian subsidiary entered into a credit
agreement with another Hungarian bank for $2.2 million of which $1.6 million
is outstanding as of June 30, 2004. The facility consists of a bank
guarantee, factoring and mortgages and expires December 31, 2004.

Total borrowings of the Hungarian subsidiary were $12.2 million at June 30,
2004, of which $11.4 million has been classified as current due to their
stated maturity of December 31, 2004. Borrowings under the Hungarian bank
credit facilities cannot be used in Zoltek's U.S. operations.

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

<TABLE>
<CAPTION>
                                                                                              June 30,    September 30,
                                                                                                2004          2003
                                                                                              --------    -------------
<S>                                                                                           <C>            <C>
     Note payable with interest at 9%, payable in monthly installments of
         principal and interest of $15,392 to maturity in November 2004...................... $  1,277       $ 1,507

     Note payable with interest at 9.95%, payable in monthly installments of
         principal and interest of $19,288 to maturity in September 2009.....................        -         1,042

     Note payable with interest at 9.5%, payable in monthly installments of
         principal and interest of $27,672 to maturity in December 2009 .....................        -         1,558

     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 ................    1,746         1,706

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

     Revolving credit agreement, maturing in December 2004, bearing interest
         at prime plus 2.0% in fiscal 2002 (prime rate at September 30, 2003 was 4.00%)......    3,270         4,670

     Term loan, $0.4 million payable in January 2005, balance payable in 2005, bearing
         interest at prime plus 2.0% (prime rate at September 30, 2003 was 4.00%)............      900         3,300

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

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

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

     Facilities with Hungarian banks (interest rate of 5.5% to 10.6%)........................   12,259        12,566
                                                                                              --------       -------

             Total debt......................................................................   46,302        34,474

             Less: Beneficial Conversion feature and debt discount associated with warrants..   (5,575)            -
             Less: amounts payable within one year...........................................  (16,902)         (933)
                                                                                              --------       -------
     Total Long-term debt ................................................................... $ 23,825       $33,541
                                                                                              ========       =======
</TABLE>

                                     7

<PAGE>
<PAGE>

3.  COMPREHENSIVE LOSS

Comprehensive loss for the three- and nine-month periods ended June 30, 2004
and 2003 (unaudited) was as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                    THREE MONTHS ENDED JUNE 30,
                                                                                    ---------------------------
                                                                                        2004           2003
                                                                                      -------         -------
<S>                                                                                   <C>             <C>
          Net loss.................................................................   $(3,538)        $(3,789)
          Foreign currency translation adjustment..................................      (732)           (524)
                                                                                      -------         -------
          Comprehensive loss.......................................................   $(4,270)        $(4,313)
                                                                                      =======         =======

<CAPTION>
                                                                                    NINE MONTHS ENDED JUNE 30,
                                                                                    --------------------------
                                                                                       2004            2003
                                                                                     --------        --------
<S>                                                                                  <C>             <C>
          Net loss.................................................................  $(11,074)       $(11,242)
          Foreign currency translation adjustment..................................     1,221           2,109
                                                                                     --------        --------
          Comprehensive loss.......................................................  $ (9,853)       $ (9,133)
                                                                                     ========        ========
</TABLE>

4.   STOCK OPTION PLAN

At June 30, 2004, the Company had stock-based employee compensation plans.
The Company accounts for those plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees, and its related interpretations.
No stock-based employee compensation costs are reflected in net loss, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. During fiscal
2004, the Company granted 40,000 employee stock options with an exercise
price that equaled the Company's stock price on the applicable date of
grant. The following table illustrates the effect on net loss and loss per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123 ("FAS 123"), Accounting
for Stock Based Compensation, to stock-based employee compensation (in
thousands, except per share):

<TABLE>
<CAPTION>
                                                                                      THREE MONTHS ENDED JUNE 30,
                                                                                      ---------------------------
                                                                                           2004          2003
                                                                                         -------       -------
<S>                                                                                      <C>          <C>
       <C>           <C>
         Reported net loss.............................................................. $(3,538)      $(3,789)
         Total stock-based employee compensation expense determined under
           fair value based method for all awards, net of tax effects...................     (46)           (1)
                                                                                         -------       -------
         Pro forma net loss............................................................. $(3,584)      $(3,790)
                                                                                         =======       =======
         Reported basic and diluted loss per share...................................... $ (0.22)      $ (0.23)
                                                                                         =======       =======
         Pro forma basic and diluted loss per share..................................... $ (0.22)      $ (0.23)
                                                                                         =======       =======

<CAPTION>
                                                                                       NINE MONTHS ENDED JUNE 30,
                                                                                       --------------------------
                                                                                           2004         2003
                                                                                         --------     --------
<S>                                                                                      <C>          <C>
         Reported net loss.............................................................. $(11,074)    $(11,242)
         Total stock-based employee compensation expense determined under
           fair value based method for all awards, net of tax effects...................     (138)        (281)
                                                                                         --------     --------
         Pro forma net loss............................................................. $(11,212)    $(11,523)
                                                                                         ========     ========
         Reported basic and diluted loss per share...................................... $  (0.68)    $  (0.69)
                                                                                         ========     ========
         Pro forma basic and diluted loss per share..................................... $  (0.69)    $  (0.71)
                                                                                         ========     ========
</TABLE>

5.  SEGMENT INFORMATION

The Company's strategic business units are based on product categories and
have been presented as three reportable segments: Carbon Fibers, Technical
Fibers and Specialty Products. Effective in the fourth quarter of fiscal
2003, the Company began reporting the former Carbon Fibers segment as two
reportable segments: Carbon Fibers and Technical Fibers. The Company made
this change based on the current economic characteristics of these two
operating segments. Segment information for fiscal 2003 has been
reclassified to reflect this change.

The Carbon Fibers segment manufactures low-cost carbon fibers used as
reinforcement material in composites, carbon fiber composite products and
filament winding equipment used in the composite industry. The Technical
Fibers segment manufactures aircraft brake pads and oxidized acrylic fibers
for heat/fire barrier applications. These two segments also facilitate
development of product and

                                     8

<PAGE>
<PAGE>

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 acrylic and nylon products and fibers primarily to
the textile industry and is located in Hungary. With the exception of the
Technical Fibers segment, none of the segments are substantially dependent
on sales from one customer or a small group of customers.

Management evaluates the performance of its operating segments on the basis
of operating income (loss) contribution to the Company. The following table
presents financial information on the Company's operating segments as of and
for the three months and nine months ended June 30, 2004 and 2003 (amounts
in thousands):

<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED JUNE 30, 2004
                                                                           --------------------------------
                                                                                                      Corporate
                                                                                                     Headquarters
                                                          Technical       Carbon       Specialty         and
                                                           Fibers         Fibers        Products     Eliminations        Total
                                                          ---------      -------       ---------     ------------       -------
<S>                                                        <C>           <C>             <C>           <C>              <C>
Net sales............................................      $4,127        $ 5,669         $7,565        $     -          $17,361
Net sales - intersegment.............................         595            501              -         (1,096)               -
Cost of sales, excluding available unused capacity...       4,062          5,594          7,351         (1,694)          15,313
Available unused capacity expenses...................           -            952              -              -              952
Operating (loss) income..............................         271         (1,010)          (794)          (315)          (1,848)
Depreciation and amortization expense................         389            961            186             24            1,560
Capital expenditures.................................         411            825            167             32            1,439

<CAPTION>
                                                                           THREE MONTHS ENDED JUNE 30, 2003
                                                                           --------------------------------
                                                                                                      Corporate
                                                                                                     Headquarters
                                                          Technical       Carbon       Specialty         and
                                                           Fibers         Fibers        Products     Eliminations        Total
                                                          ---------      -------       ---------     ------------       -------
<S>                                                        <C>           <C>             <C>           <C>              <C>
Net sales............................................      $3,080        $ 3,631         $9,136        $     -          $15,847
Net sales - intersegment.............................         670            393              -         (1,063)               -
Cost of sales, excluding available unused capacity...       3,092          4,149          8,218         (1,525)          13,934
Available unused capacity expenses...................           -          1,481              -              -            1,481
Operating (loss) income..............................         485         (2,711)           (40)          (320)          (2,586)
Depreciation and amortization expense................         233            983            280             55            1,551
Capital expenditures.................................         270            (26)           299              3              546

<CAPTION>
                                                                           NINE MONTHS ENDED JUNE 30, 2004
                                                                           -------------------------------
                                                                                                      Corporate
                                                                                                     Headquarters
                                                          Technical       Carbon       Specialty         and
                                                           Fibers         Fibers        Products     Eliminations        Total
                                                          ---------      -------       ---------     ------------       -------
<S>                                                        <C>           <C>            <C>            <C>              <C>
Net sales............................................      $10,611       $13,438        $22,570        $     -          $46,619
Net sales - intersegment.............................        1,371         1,492              -         (2,863)               -
Cost of sales, excluding available unused capacity...       10,297        13,030         21,706         (3,180)          41,853
Available unused capacity expenses...................            -         3,638              -              -            3,638
Operating (loss) income..............................          699        (4,309)        (2,285)        (1,611)          (7,506)
Depreciation and amortization expense................          902         2,889            663             73            4,527
Capital expenditures.................................          615         3,488            395             (8)          (4,490)




                                     9

<PAGE>
<PAGE>

<CAPTION>
                                                                           NINE MONTHS ENDED JUNE 30, 2003
                                                                           -------------------------------
                                                                                                      Corporate
                                                                                                     Headquarters
                                                          Technical       Carbon       Specialty         and
                                                           Fibers         Fibers        Products     Eliminations        Total
                                                          ---------      -------       ---------     ------------       -------
<S>                                                        <C>           <C>            <C>            <C>              <C>
Net sales............................................      $9,421        $11,075        $28,254        $     -          $48,750
Net sales - intersegment.............................       1,186          2,877              -         (4,063)               -
Cost of sales, excluding available unused capacity...       8,748         12,606         26,089         (4,353)          43,090
Available unused capacity expenses...................           -          4,238              -              -            4,238
Operating (loss) income..............................         762         (6,393)        (1,143)        (1,843)          (8,617)
Depreciation and amortization expense................         749          3,005            746            184            4,684
Capital expenditures.................................         480            318            449             15            1,262


<CAPTION>
                                                                                      TOTAL ASSETS
                                                                                      ------------
                                                                                                      Corporate
                                                                                                     Headquarters
                                                          Technical       Carbon       Specialty         and
                                                           Fibers         Fibers        Products     Eliminations         Total
                                                          ---------      -------       ---------     ------------       --------
<S>                                                        <C>           <C>            <C>            <C>              <C>
June 30, 2004........................................      $18,929       $61,563        $37,478        $ 3,128          $121,098
September 30, 2003...................................       22,611        66,226         32,569         (1,951)          119,455

<CAPTION>
GEOGRAPHIC INFORMATION (UNAUDITED) / (IN THOUSANDS)
---------------------------------------------------

                                                    REVENUES (1)                  REVENUES (1)
                                                 THREE MONTHS ENDED            NINE MONTHS ENDED           LONG-LIVED ASSETS (2)
                                                ---------------------        ---------------------        -----------------------
                                               JUNE 30,      JUNE 30,        JUNE 30,     JUNE 30,        JUNE 30,  SEPTEMBER 30,
                                                 2004          2003            2004         2003            2004        2003
                                                -------      --------        --------     -------         --------  -------------
<S>                                             <C>          <C>             <C>          <C>             <C>          <C>
United States.................................. $ 5,855      $ 5,292         $15,248      $17,699         $46,383      $45,936
Hungary........................................  11,506       10,555          31,371       31,051          32,367       31,436
                                                -------      -------         -------      -------         -------      -------
Total.......................................... $17,361      $15,847         $46,619      $48,750         $78,750      $77,373
                                                =======      =======         =======      =======         =======      =======
<FN>
------------------------
(1)  Revenues are attributed to the entity recognizing the sale in the
     interim statements, as it is not practical to accumulate every
     customer's country of domicile on an interim basis.

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

6.  INVENTORIES

Inventories consist of the following (amounts in thousands):

<TABLE>
<CAPTION>
                                                                     JUNE 30,     SEPTEMBER 30,
                                                                      2004            2003
                                                                     --------     -------------
<S>                                                                  <C>             <C>
         Raw materials...........................................    $ 5,170         $ 4,859
         Work-in-process.........................................      1,654           1,132
         Finished goods..........................................     16,932          19,057
         Supplies, spares and other..............................      2,512           1,930
                                                                     -------         -------
                                                                     $26,268         $26,978
                                                                     =======         =======
</TABLE>

7.  NEW ACCOUNTING PRONOUNCEMENTS

The FASB issued FASB Interpretation No. 46-R "Consolidation of Variable
Interest Entities" (FIN No. 46-R) in December 2003, which addressed the
requirements for consolidating certain variable interest entities. FIN No.
46-R applied immediately to variable interest entities created after January
31, 2003 and to variable interest entities that are considered special
purpose entities as of December 31, 2003. FIN No. 46-R applied to all other
variable interest entities as of March 31, 2004. The Company currently has
no interests in entities that are considered special purpose entities.
Additionally, the Company has no significant variable interests in
non-special purpose entities. Accordingly, the adoption of FIN No. 46-R had
no material impact on the Company's financial statements.

                                     10

<PAGE>
<PAGE>

8.  COMMITMENTS AND CONTINGENCIES

Legal
-----

In October 2003, the Company was named as a defendant in a civil action
filed in the Court of Common Pleas for Cuyahoga County, Ohio by the former
owner of Hardcore Composites Operations, LLC ("Hardcore") alleging breach by
Hardcore and the Company of their respective obligations under a sublease,
the Company's guaranty of the sublease, and prior settlement agreement among
the parties. The former owner's action claims damages from the Company in
the amount of $300,000 for breaches by the Company of its obligations under
the guaranty and the settlement agreement and, in addition, demands $450,000
in damages from the Company and Hardcore, jointly and severally, under the
terms of the settlement agreement. During the quarter ended June 30, 2004,
Hardcore filed a petition under Chapter 11 of the U.S. Bankruptcy Code. The
Company is vigorously defending this matter and has asserted counterclaims.
Management believes that the ultimate resolution of this litigation will not
have a material adverse effect on the Company's results of operations, cash
flow or financial condition.

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

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

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

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

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

Liquidity
---------

See discussion under Note 2 - "Financing"

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

GENERAL
-------

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

In addition to its underlying strategy to penetrate developing markets,
through the Carbon Fibers segment the Company is the leading supplier of
carbon fibers to the aircraft brake industry. Also, the Company participates
in traditional carbon fiber markets, such as sporting goods and conductive
thermoplastic manufacturing. The Company also manufactures and markets
oxidized acrylic fibers, an intermediate product of the carbon fiber
manufacturing process, for fire and heat resistance applications.

The Company's strategic plan of introducing low-cost carbon fibers into high
volume potential end uses to attract significant new applications for carbon
fiber reinforced composites in automotive, infrastructure, wind energy, oil
and gas production and other industries has been well received. The Company
believes it is the lowest cost producer of carbon fibers and it is well
positioned to eventually produce sufficient volumes of carbon fibers to
satisfy indicated future demand. The Company is participating in ongoing
development projects. Recent strengthening of the market for current and
emerging applications has begun to generate meaningful orders and the demand
from existing and potential new customers exceeds the Company's current
capacity.

                                     11

<PAGE>
<PAGE>

The Company introduced its carbon fibers strategic plan in 1995 to develop a
low-cost process to produce carbon fibers and build significant capacity
while encouraging growth of new applications. As part of its strategy to
establish availability of carbon fibers on a scale sufficient to encourage
growth of large-volume applications, the Company completed a major carbon
fiber production capacity expansion in fiscal 1998 at its Abilene, Texas
facility. While the Company succeeded in developing its infrastructure to
become the low-cost producer, the large volume applications were slower to
develop than anticipated. From 1998 to mid 2003 total carbon fiber usage did
not grow significantly and aerospace applications actually declined. This
situation resulted in substantial overcapacity and destructive pricing in
the industry. Much of the new carbon fiber business was captured by the
aerospace fibers as certain manufacturers sold their aerospace-grade fibers
on the commercial markets at prices that did not cover their costs,
undermining the Company's commercialization strategy.

The carbon fiber market conditions began to change during the second quarter
of fiscal 2004. Two major aerospace programs, the Airbus A-380 and the
Boeing 7E7, have absorbed virtually all of the aerospace fiber capacity, and
resulted in the divergence of the aerospace and commercial markets for
carbon fibers. The Company's receipt of previously announced carbon fiber
orders aggregating 1.8 million pounds from Asian sporting goods
manufacturers toward the beginning of this fiscal year was an early
indication of this shift. Significant sales increases in carbon fiber
products in the second and third quarters of fiscal 2004 confirmed this
shift. Further causing the divergence of the two markets was the quick pace
of development of the carbon fiber wind turbine blade market. Currently
Zoltek believes it is in a unique position of having installed capacity and
fiber quality that can attract current available and future new business.

The recent increase in the demand for carbon fibers relates to several
different applications including aerospace. During the third quarter of
2004, the Company experienced its second sequential quarter of significant
growth in customer demand in the carbon and technical fiber business units,
as sales (excluding inter-segment sales) increased $3.9 and $1.4 million
over the first and second quarters of 2004, respectfully. The improved sales
in the carbon fibers and technical fibers business units resulted in a
reduction in the overall operating loss reported by the Company from a loss
of $3.2 million in the first quarter of 2004 to a loss of $2.5 million in
the second quarter of 2004 to a loss of $1.8 million in the third quarter of
2004.

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

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

         The largest supplier of wind turbines has approved the Company as a
         one of two sources of carbon fiber for the production of blades and
         we expect significant carbon fiber orders from this application in
         the remainder of fiscal 2004 and increased orders in fiscal 2005.
         Another significant blade manufacturer has now begun using our
         fibers. Also, the Company's Entec subsidiary is in the process of
         building machinery to make the blades for the wind turbines with an
         automated process, to be used by a leading supplier of wind
         turbines, which the Company believes will lead to meaningful carbon
         fiber sales beginning in fiscal 2005.

    o    The Company's PYRON(R) products offer one of the best and most
         economical solutions for flame and heat resistance insulation
         applications in protective clothing, mattress and furniture
         applications. The Company is marketing its products in a variety of
         textile formats in protective clothing applications, from firemen's
         uniforms, factory protective clothing and auto racing uniforms.
         These applications continue to grow at a significant rate.

         Fire barrier in automobiles has been a significant application for
         some time. New applications for fire barriers are continuing to
         develop. The largest opportunity in this potential application
         category, other than automotive, appears to be fire barriers for
         mattresses and, eventually, for furniture. While most applications
         are market and safety driven, the consumer applications are demanded
         by government regulations.

         The first regulations in place relate to the mattress products in
         the State of California. The Company, in cooperation with a major
         supplier to the mattress industry, has developed a solution for the
         regulations put in place by the State of California. It is expected
         that consumer product safety standards that regulate flame-
         retardant bedding and furniture will begin to be enforced by the
         State of California starting in 2005. So far the mattress industry
         is vigorously opposing the California regulations and is seeking to
         defer offering compliant products until the U.S. federal
         regulations are imposed. The American Home Fire Safety Act, which
         is expected to be the basis for the federal regulations, has been
         passed by the Senate and introduced in the House. The federal
         standards are expected to be more stringent than the final version
         of the California regulation. In view of recent legal developments
         regarding implementation of these laws and rules at this time, it
         is not clear when the industry will implement the introduction of
         the flame-resistant mattresses. However, it is the Company's belief
         that the potential exposure to product liability eventually will
         force the industry to comply with the standards, and to do so
         across the United States. The Company is already selling its
         products to institutional mattress manufacturers, protective
         clothing manufacturers and automotive flame barrier applications
         and expects sales to grow for these applications.

                                     12

<PAGE>
<PAGE>

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

         In addition to BMW, the Company has worked with other auto
         companies and their vendors. Current indications are that a number
         of other applications are coming to fruition. The Company expects
         that components made with the Company's carbon fibers will appear
         on series production cars by 2005.

With the new orders in place and indications for additional significant
orders, the Company has restarted its major carbon fiber manufacturing
facility in Abilene, Texas which had been temporarily idled. The Company has
begun operation of manufacturing lines with aggregate rated capacity of 2
million pounds per year and expects to begin operation of additional
manufacturing lines with aggregate rated capacity of 3 million pounds per
year by the end of calendar year 2004. The Hungarian carbon fiber
manufacturing facility currently is operating at full capacity. Maintaining
the excess capacity has been costly, but the Company believed it has been
necessary to assure customers of adequate supply and encourage them to shift
to carbon fibers from other materials. With the reactivation of the Abilene
plant, unused capacity costs are expected to diminish and, ultimately, be
fully absorbed in ongoing production as all the carbon fiber lines start
operating.

The Company also moved its fiber prepreg facilities from San Diego to Salt
Lake City in the first quarter of fiscal 2004. This facility is now ready
for production and samples are being supplied to prior customers for
re-qualification.

Outside of the carbon fiber business, the Company sells acrylic and nylon
fibers into textile markets and manufactures other specialty products in its
Hungary facility. The Company is currently developing plans to discontinue
the nylon fiber operation and to exit from the acrylic textile business and
will utilize a significant portion of the acrylic fiber capacity to supply
precursor for its growing carbon fiber manufacturing operations. The Company
has begun to initiate these plans and expects to be completed by the end of
the fourth quarter of fiscal 2004. This could result in a charge to
earnings, which could include severance and fixed asset impairment, but the
Company believes it will not have amaterial impact on cash flow.

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

THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
-----------------------------------------------------------------------------

The Company's sales increased by 10%, or $1.6 million, to $17.4 million in
the third quarter of fiscal 2004 from $15.8 million in the third quarter of
fiscal 2003. A decrease in sales of the specialty products unit was more
than offset by the increases in carbon fiber sales (excluding intersegment)
and technical fiber sales (excluding intersegment). Carbon fiber sales
(excluding intersegment) increased 55%, or $2.1 million, to $5.7 million in
the third quarter of fiscal 2004 from $3.6 million in the third quarter of
fiscal 2003. The carbon fiber sales in fiscal 2004 included a decrease of
$1.3 million from 2003 related to the Company's decision to relocate its
prepreg operations from California to Utah to combine its operations with
another of the Company's facilities. Carbon fibers sales other than prepreg
sales increased by $3.4 million in fiscal 2004 from fiscal 2003 as
production and sales of sporting goods and wind energy orders continued
during the third quarter of fiscal 2004 and the Company experienced a
general increase in the overall demand for carbon fiber from prior years.
Technical fiber sales (excluding intersegment) increased 33%, or $1.0
million, to $4.1 million in the third quarter fiscal 2004 from $3.1 million
in the third quarter fiscal 2003. Technical fiber sales increased as demand
improved not only in the aircraft brake customers but also for the
flame-retardant market. Sales of the specialty products business segment
decreased 17%, or $1.5 million, to $7.6 million in the third quarter of
fiscal 2004 from $9.1 million in the third quarter of fiscal 2003. The
reduced revenue was primarily the result of management's decision to lower
acrylic fiber production in order to limit sales at unfavorable profit
levels. The Company expects these depressed conditions impacting the acrylic
markets to continue during fiscal 2004 and 2005. The Company is currently
developing plans to discontinue the nylon fiber operation and to exit from
the acrylic textile business and will utilize a significant portion of the
acrylic fiber capacity to supply precursor for its growing carbon fiber
manufacturing operations. The Company has begun to initiate these plans and
expects to be completed by the end of the fourth quarter of fiscal 2004.

The Company's cost of sales (excluding available unused capacity costs)
increased by 9.8 %, or $1.4 million, to $15.3 million in the third quarter
of fiscal 2004 from $13.9 million in the third quarter of fiscal 2003. The
cost of sales of the Company's specialty products business segment decreased
10% compared to the 17% decrease in sales, reflecting sales mix factors.
Carbon and technical fiber cost of sales (excluding intersegment) increased
by 37% or $2.2 million to $8.0 million in the third quarter of 2004 from
$5.8 million in the third quarter of 2003 as sales of carbon and technical
fiber (excluding intersegment) increased 46% for the same period.

                                     13

<PAGE>
<PAGE>

The Company continued to incur costs related to the underutilized productive
capacity for carbon fibers at the Abilene, Texas facility. These costs
included depreciation and other overhead associated with the unused
capacity. These costs, which were separately identified on the income
statement, were approximately $1.0 million during the third quarter of
fiscal 2004 and $1.5 million in the third quarter of fiscal 2003. The
Company believes it has been necessary to maintain available capacity to
encourage development of significant new large-scale applications. With the
increased orders in fiscal 2004, unused capacity costs are expected to
continue to decrease significantly during that period and to be fully
absorbed in ongoing operations by the end of fiscal 2005. See additional
discussion of the Abilene facility under "--Liquidity and Capital
Resources."

Application and market development costs were $0.8 million in the third
quarter of fiscal 2004 and $0.9 million in the third quarter of fiscal 2003.
These costs included product and market development efforts, product trials
and sales and product development personnel and related travel. Targeted
emerging applications include automobile components, fire/heat barrier and
alternate energy technologies.

Selling, general and administrative expenses were $2.2 million in the third
quarter of fiscal 2004 compared to $2.2 million in the third quarter of
fiscal 2003. Although sales for the quarter increased 10% and carbon fibber
sales increased 37% the Company has continued cost containment measures
related to non-operations departments implemented during fiscal 2003.

Operating loss was $1.8 million in the third quarter of fiscal 2004 compared
to a loss of $2.6 million in the third quarter of fiscal 2003, an
improvement of $0.8 million. Carbon fiber operating loss improved from a
loss of $2.7 million in the third quarter of fiscal 2003 to a loss of $1.0
million in the third quarter of fiscal 2004. The operating income in
technical fibers decreased from income of $0.5 million in the third quarter
of fiscal 2003 to $0.3 million in the third quarter of fiscal 2004.
Corporate headquarters operating loss was flat with a loss of $0.3 million
in the third quarter of fiscal 2004. Specialty product operating loss
increased from a loss of $0.1 million in the third quarter of 2003 to a loss
of $0.8 million in the third quarter of 2004; the loss increased due the to
decrease in sales and margins related to this business unit. The decrease in
the Company's total operating loss was a result of the significant
improvement in the carbon fibers and technical fibers business units as
sales and production have increased to absorb fixed manufacturing cost and
the continued reduction of operating expenses due to the cost containment
measures implemented during 2003.

Interest expense was approximately $0.9 million in the third quarter of
fiscal 2004 compared to $.5 million in the third quarter of fiscal 2003. The
increase in interest resulted from higher debt levels after the Company's
refinancing transactions (see "--Liquidity and Capital Resources").

Amortization of warrants discount, deferred financing and beneficial
conversion feature costs which are non-cash expenses was approximately $0.7
million in the third quarter of fiscal 2004 compared to zero in the third
quarter of fiscal 2003. The increase in amortization resulted from the
Company's refinancing transactions (see "--Liquidity and Capital
Resources").

Other income/expense, net, was immaterial in the third quarter of fiscal
2004 compared to an expense of $0.6 million for the third quarter of fiscal
2003 due to an increase in the foreign currency transactional loss during
the three months ended June 30, 2003 on the Company's debt at its Hungarian
subsidiary which is denominated in Euros.

Income tax expense was $.01 million for the third quarter of fiscal 2004
compared to an income tax expense of $0.1 million for the corresponding
period in the prior year. A valuation allowance was recorded against the
income tax benefit resulting from the pre-tax loss in both the third
quarters of fiscal 2004 and 2003 due to uncertainties in the Company's
ability to utilize tax losses in the future.

The foregoing resulted in a net loss of $3.5 million for the third quarter
of fiscal 2004 compared to a net loss of $3.8 million for the third quarter
of fiscal 2003. Similarly, the Company reported a net loss per share of
$0.22 and $0.23 on a basic and diluted basis for the third quarter of fiscal
2004 and 2003, respectively. The weighted average common shares outstanding
were 16.4 million for the third quarter of fiscal 2004 and 16.3 million for
the corresponding period of fiscal 2003.

NINE MONTHS ENDED JUNE 30, 2004 COMPARED TO NINE MONTHS ENDED JUNE 30, 2003
---------------------------------------------------------------------------

The Company's sales decreased 4.3%, or $2.2 million, to $46.6 million in
fiscal 2004 from $48.8 million in fiscal 2003, as decreases in the specialty
product unit's sales offset an increase in sales of the carbon fiber and
technical fiber units. Carbon fiber sales (excluding intersegment) increased
21%, or $2.3 million, to $13.4 million in fiscal 2004 from $11.1 million in
fiscal 2003. The carbon fiber units sales in fiscal 2004 increased despite a
decrease of $4.4 million from 2003 related to the Company's decision to
relocate its prepreg operations from California to Utah to combine its
operations with another of the Company's facilities. Carbon fiber sales,
other than prepreg, increased by $6.7 million in fiscal 2004 from fiscal
2003 as production and sales for sporting goods and wind energy applications
continued to grow during the third quarter of fiscal 2004 and the Company
experienced a general increase in the overall demand for carbon fiber.
Technical fiber sales (excluding intersegment) increased 12.6%, or $1.2
million, to $10.6 million in fiscal 2004 from $9.4 million in fiscal 2003.
Technical fiber sales increased due to the stronger demand and the timing of
orders


                                     14

<PAGE>
<PAGE>

from aircraft brake customers during the third quarter of 2004 as this
segment's principal customer returned to historical shipment levels. Sales
of the specialty products business segment decreased 20%, or $5.7 million,
to $22.6 million in fiscal 2004 from $28.3 million in fiscal 2003. The
reduced revenue was primarily the result of management's decision to lower
acrylic fiber production in order to limit sales at unfavorable profit
levels. The Company expects these depressed conditions impacting the acrylic
markets to continue during fiscal 2004 and into fiscal 2005. The Company is
currently developing plans to discontinue the nylon fiber operation and to
exit from the acrylic textile business and will utilize a significant
portion of the acrylic fiber capacity to supply precursor for its growing
carbon fiber manufacturing operations. The Company has begun to initiate
these plans and expects to be completed by the end of the fourth quarter of
fiscal 2004.

The Company's cost of sales (excluding available unused capacity costs)
decreased by 2.9%, or $1.2 million, to $41.9 million in fiscal 2004 from
$43.1 million in fiscal 2003. The decrease in cost of sales (excluding
available unused capacity costs) was consistent with the decrease in sales.
The Company's specialty products business segment reported a decrease in
cost of sales of 16% compared to a 20% decrease in sales reflecting a change
in sales mix. Carbon and technical fibers cost of sales (excluding
intersegment) increased by 17.3%, or $3.1 million, to $20.4 million in
fiscal 2004 from $17.3 million in fiscal 2003 as sales of carbon and
technical fibers (excluding intersegment) increase the same amount for the
period.

The Company continued to incur costs related to the underutilized productive
capacity for carbon fibers at the Abilene, Texas facilities. These costs
included depreciation and other overhead associated with the unused
capacity. These costs, which were separately identified on the consolidated
statement of operations, were approximately $3.6 million during the first
nine months of fiscal 2004 and $4.2 million in the first nine months of
fiscal 2003. The Company believes it has been necessary to maintain
available capacity to encourage development of significant new large-scale
applications. With the increased orders during fiscal 2004, the Company
expects unused capacity costs to decrease significantly during the fourth
quarter of 2004 and be fully absorbed in ongoing operations by the end of
fiscal 2005. See additional discussion of the Abilene facility under
"--Liquidity and Capital Resources."

Application and development costs were $2.3 million in the first nine months
of fiscal 2004 and $2.7 million in the first nine months of fiscal 2003.
These costs included product and market development efforts, product trials
and sales and product development personnel and related travel. Targeted
emerging applications include automobile components, fire/heat barrier and
alternate energy technologies.

Selling, general and administrative expenses were $6.4 million in the first
nine months of fiscal 2004 compared to $7.4 million in the first nine months
of fiscal 2003. The decrease in expense was primarily due to the cost
containment measures implemented during fiscal 2003.

Operating loss was $7.5 million in the first nine months of fiscal 2004
compared to a loss of $8.6 million in the first nine months of fiscal 2003,
an improvement of $1.1 million. Carbon fibers operating loss decreased from
a loss of $6.4 million in the first nine months of fiscal 2003 to a loss of
$4.3 million in the first nine months of fiscal 2004. Operating income in
technical fibers was flat with income of $0.7 million in both periods.
Corporate headquarters operating loss decreased from a loss of $1.8 million
in the first nine months of fiscal 2003 to a loss of $1.6 million in the
first nine months of fiscal 2004. Specialty products operating loss
increased from a $1.1 million loss in the first nine months of fiscal 2003
to a loss of $2.3 million in the first nine months of fiscal 2004. The
decrease in the consolidated operating loss was a result of the improvement
in margins of the carbon fibers business unit and the reduction of operating
expenses due to the cost containment measures implemented during 2003.

Interest expense was approximately $2.3 million in the first nine months of
fiscal 2004 compared to $1.5 million in the corresponding period of fiscal
2003. The increase resulted from higher debt levels after the Company's
refinancing transactions (see "--Liquidity and Capital Resources").

Amortization of warrants, deferred financing costs and beneficial conversion
which are non-cash expenses were approximately $1.0 million in the first
nine months of fiscal 2004 compared to zero in the first nine months of
fiscal 2003. The increase in amortization resulted from warrants issued and
beneficial conversion feature on the Company's refinancing transactions (see
"--Liquidity and Capital Resources").

Other income/expense, net, was income of $0.1 million for the first nine
months of fiscal 2004 compared to an expense of $1.1 million for the first
nine months of fiscal 2003 due to an decrease in the foreign currency
transactional losses during the 9 months ended June 30, 2003 on the
Company's debt at its Hungarian subsidiary which is denominated in Euros.

Income tax expense was $0.3 million for the first nine months of fiscal 2004
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 for both fiscal 2004 and 2003.

                                     15

<PAGE>
<PAGE>

The foregoing resulted in a net loss from continuing operations of $11.1
million for the first nine months of fiscal 2004 compared to a net loss of
$11.2 million for the corresponding period of fiscal 2003. Similarly, the
Company reported a net loss per share of $0.68 and $0.69 on a basic and
diluted basis for the first nine months of fiscal 2004 and 2003,
respectively. The weighted average common shares outstanding were 16.4
million and 16.3 million for the first nine months of fiscal 2004 and 2003,
respectively.

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

Due to the timing of development of markets for carbon fiber products, the
Company's operating activities have used cash in each of the past three
fiscal years and during the nine months ended June 30, 2004. As a result,
the Company has executed refinancing arrangements and incurred borrowings
under credit facilities, supplemented with long-term debt financing
utilizing the equity in the Company's real estate properties, to maintain
adequate liquidity to support the Company's operating and capital
activities.

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

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

In January 2004, the Company issued and sold convertible debentures in the
aggregate principal amount of $7.0 million to institutional private equity
and other investors (including $250,000 to each of Mr. Rumy and Mr.
McDonnell who are members of the Company's Board of Directors). The
convertible debentures have a stated maturity of 30 months and bear interest
at 6% per annum and are convertible presently into 1,295,954 shares of
common stock at a conversion price of $5.40 per share for each investor
other than Messrs. Rumy and McDonnell and $5.42 per share for each of
Messrs. Rumy and McDonnell. The Company also issued to the investors
five-year warrants to purchase an aggregate of 323,994 shares of common
stock of the Company at an exercise price of $5.40 per share for each
investor other than Messrs. Rumy and McDonnell and $5.42 per share for each
of Messrs. Rumy and McDonnell. The fair value of the debt discount
associated with the warrants and beneficial conversion feature, at the time
of issuance, was estimated to be $2.0 million and is being amortized as
non-cash interest expense over the term of the convertible debentures.
Proceeds from the issuance of these convertible debentures are being used
for working capital purposes.

As part of the Company's January 2004 refinancing, the bank lender to the
Company's Hungarian subsidiary amended certain financial covenants and
extended the maturity date of its loan to December 31, 2004. In connection
with such actions, the bank required that the Company make arrangements to
settle intercompany accounts payable by Zoltek U.S. operations to its
Hungarian subsidiary in the amount of approximately $2.8 million. The bank
was unwilling to keep open its offer to restructure Zoltek Rt.'s loans until
after the Company's January 2004 refinancing package was completed. Prior to
the refinancing, the Company did not have cash on hand or available
borrowings that would enable it to make the settlement of the intercompany
accounts required by the Hungarian bank. In order to proceed expeditiously
to resolve the Company's financing requirements, Zsolt Rumy, the Company's
Chief Executive Officer and a director of the Company, In December 2003
loaned the Company $1.4 million in cash and posted a $1.4 million letter of
credit for the benefit of the Company. This arrangement was approved by the
Company's board of directors and audit committee. The loan by Mr. Rumy bore
interest on the amount advanced and the notional amount of the letter of
credit at a rate per annum equal to LIBOR plus 11% with a LIBOR floor of 2%,
the same interest rate of the mortgage financing discussed below. As a
result of the Company completing the refinancing transactions making
available the cash to settle the intercompany accounts, the letter of credit
was released. After converting $250,000 into convertible debt as part of the
January 2004 financing, the remaining $1.15 million loan was repaid during
the third quarter of 2004.

Also in January 2004, the Company entered into a mortgage note with a bank
in the aggregate principal amount of $6.0 million. The note has a stated
maturity of three years and bears interest at a rate of LIBOR plus 11%
(13.5% per annum as of June 30, 2004) with a LIBOR floor of 2%. The Company
will pay interest only on a monthly basis with principal balance due at time
of maturity. The loan is collateralized by a security interest in the
Company's headquarters facility and its two U.S. manufacturing facilities
that produce carbon and technical fibers. The proceeds of this transaction
were used to pay down debt of $6.0 million with its U.S. bank. Of such
proceeds, $0.5 million was held in an escrow account to be released when the
Company completed certain post-closing requirements. The Company completed
these requirements during the third quarter of 2004 and the $0.5 million was
released from escrow.

Due to the January 2004 refinancing completed subsequent to the Company's
fiscal year end, the Company's U.S. bank waived the financial covenants
through February 13, 2005, the maturity date of the term loan. Additionally,
the expiration of the Company's revolving credit loan was extended from
January 31, 2004 to January 31, 2005. The refinancing allowed the Company to
execute its 2004 business plan, which was uncertain prior to the
refinancing.

In March 2004, the Company issued and sold convertible debentures in the
aggregate principal amount of $5.75 million to institutional private equity
investors and Mr. Dill ($750,000) who is member of the Company's board of
directors. The convertible debentures


                                     16

<PAGE>
<PAGE>

have a stated maturity of 30 months and bear interest at 6% per annum and
are convertible presently into 895,908 shares of common stock at a
conversion price of $6.25 per share for each investor other than Mr. Dill
and $7.82 per share for Mr. Dill. The Company also issued to the investors
five-year warrants to purchase an aggregate of 223,997 shares of common
stock of the Company at an exercise price of $7.50 per share for each
investor other than Mr. Dill whose warrants have an exercise price of $7.82
per share. The fair value of the debt discount associated with the warrants
and beneficial conversion feature, at the time of issuance, estimated to be
$4.0 million and is being amortized as non-cash interest expense over the
term of the convertible debentures. Proceeds from the issuance of these
convertible debentures are being used for working capital and capital
expenditures.

The Company will require further financing and restructuring of existing
debt arrangements in fiscal 2005 to refinance bank loans of its Hungarian
subsidiary and to support planned increases in its carbon fiber production
capacity to meet demand. The Company currently is undertaking efforts to
obtain that financing. However, there can be no assurance that it will be
successful in its attempt to obtain new financing. If the Company is
unsuccessful, it would have a material adverse effect on its future
financial condition and its ability to continue to pursue its current
business plan.

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

The Company executed an amended credit facility agreement, dated as of
February 13, 2003, with its U.S. bank. The amended credit facility agreement
is structured as a term loan in the amount of $3.5 million with an
outstanding balance of $0.9 million at June 30, 2004 (due February 13, 2005)
and a revolving credit loan in the amount of $5.0 million (originally due
January 31, 2004, now due January 31, 2005 - see above). The Company repaid
$5.0 million of this loan from the proceeds of the sale of convertible
debentures as discussed below. Borrowings under the amended facility are
based on a formula of eligible accounts receivable and inventories of the
Company's U.S.-based subsidiaries. The outstanding loans under the agreement
bear interest at the prime interest rate plus 2% per annum. Total borrowings
and available borrowings at June 30, 2004 under the revolving credit
agreement were $3.3 and $1.7 million respectively.

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

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

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

US Operations - The Company's current credit facility with its U.S. Bank is
described above under "-2003 Refinancing." Total borrowings under the U.S.
credit facility, including the revolving line of credit and term loan, were
$4.2 million at June 30, 2004, all of which has been classified as current
due to the maturity in January and February 2005.

Hungarian Operations - The Company's Hungarian subsidiary entered into a
credit facility with a Hungarian bank. The facility consists of a $6.0
million bank guarantee and factoring facility, a $4.0 million capital
investment facility and a $2.0 million working capital facility. All of the
Hungarian bank debt is due on December 31, 2004. Total borrowings under this
credit facility were $10.6 million at June 30, 2004, all of which has been
classified as current.

In March 2003, the Company's Hungarian subsidiary entered into a credit
agreement with another Hungarian bank for $2.2 million of which $1.6 million
is outstanding as of June 30, 2004. The facility consists of a bank
guarantee, factoring and mortgages and expires December 31, 2004.

Total borrowings of the Hungarian subsidiary were $12.2 million at June 30,
2004, of which $11.4 million has been classified as current due to their
stated maturity of December 31, 2004. Borrowings under the Hungarian bank
credit facilities cannot be used in Zoltek's U.S. operations.

                                     17

<PAGE>
<PAGE>

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

In the third quarter of fiscal 2001, the Company elected to temporarily idle
a significant part of the operations located at the Abilene, Texas facility.
The Company has resumed certain levels of manufacturing at this facility
during the third quarter of 2004. Accordingly, the Company does not believe
that any impairment of its carrying value exists based on an analysis of
expected future net cash flow to be generated from this facility over the
expected remaining useful life.

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

Net cash used by operating activities was $6.9 million for the nine months
ended June 30, 2004. The cash flows used by operating activities during the
nine months ended June 30, 2004 were primarily due to the net loss of $11.1
million plus an increase in net operating assets of $1.4 million offset by
non-cash items, including depreciation and amortization of $5.6 million. The
increase in net operating assets consisted of an increase in receivables and
other assets of $0.8 million as carbon fiber sales increased during the
period, and a $2.8 million decrease in accrued expenses and other
liabilities and trade payables, as additional cash allowed the Company to
reduce its payables and accrued expenses, offset by a $0.9 million increase
in long-term liabilities and a decrease in inventories of $1.3 million.

The Company has undertaken steps to sell carbon fiber inventories to improve
its cash flow. The Company has decreased the carbon fiber and specialty
unit's actual inventory by $1.4 million which was offset by an increase
inventory in the Entec division related to building machinery for the second
largest wind turbine provider to make carbon fiber composite blades for the
wind turbines with an automated process, the machine is scheduled to be
delivered in the fourth quarter of 2004.

Inventories consist of the following (amounts in thousands):

<TABLE>
<CAPTION>
                                                                                           JUNE 30,   SEPTEMBER 30,
                                                                                             2004         2003
                                                                                           --------   -------------
<S>                                                                                        <C>           <C>
         Raw materials.................................................................... $ 5,170       $ 4,859
         Work-in-process..................................................................   1,654         1,132
         Finished goods...................................................................  16,932        19,057
         Supplies, spares and other.......................................................   2,512         1,930
                                                                                           -------       -------
                                                                                           $26,268       $26,978
                                                                                           =======       =======
</TABLE>

                                     18

<PAGE>
<PAGE>

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

Net cash used for investing activities for the nine months ended June 30,
2004 was $4.4 million which consisted of capital expenditures. The primary
capital expenditures consisted of the $1.7 million purchase of the Company's
Abilene nitrogen plant which was previously leased in an arrangement
accounted for as an operating lease and the expenditures related to the
expansion of the Company's precursor facility and carbon fiber operations.

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
(excluding the one-time nitrogen plant refinancing) in connection with the
restart of the Abilene carbon fiber lines to meet the increase demand for
carbon fiber.

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

Net cash provided by financing activities was $10.4 million for the nine
months ended June 30, 2004. The financing transactions are described above.

A summary of significant contractual obligations is shown below. See Note 2
to the Consolidated Financial Statements for discussion of the Company's
debt agreements. The Company's financial commitments as of June 30, 2004
included the following:

<TABLE>
<CAPTION>
                                                                                 LESS THAN                   3-5       MORE THAN
                                                                       TOTAL      1 YEAR      1-3 YEARS     YEARS       5 YEARS
                                                                      -------    ---------    ---------     -----      ---------
<S>                                                                   <C>         <C>          <C>          <C>          <C>
         Notes payable............................................... $ 2,281     $ 2,281
         Convertible debentures......................................  20,850                  $20,850
         Long-term debt, including current maturities................  25,452      16,902        7,103      $1,447       $    -
                                                                      -------     -------      -------      ------       ------
              Total debt.............................................  48,583      19,183       27,953       1,447            -
         Operating leases............................................     333          58          174         101            -
                                                                      -------     -------      -------      ------       ------
              Total debt and operating leases........................ $48,916     $19,241      $28,127      $1,548       $    -
                                                                      =======     =======      =======      ======       ======
</TABLE>

In fiscal 2002, as a part of the sale of the Company's interest in Hardcore
Composites, the Company continues to guarantee Hardcore Composite's lease
obligations of approximately $30,000 per month to the former owner. The
obligation relates to a lease of the Hardcore Composites manufacturing
facility, which expires in March 31, 2008. Hardcore filed a petition under
Chapter 11 of the U.S. Bankruptcy Code in fiscal 2004. The Company is
vigorously defending this matter and has asserted counterclaims. Management
believes that the ultimate resolution of this litigation will not have a
material adverse effect on the Company's results of operations, cash flow or
financial condition.

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

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

Revenue recognition

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

Inventories

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

                                     19

<PAGE>
<PAGE>

In recent years, carbon fiber sales have been depressed by excess capacity
across the industry, distressed pricing across most existing markets and
weak economic conditions globally. These factors combined with the high
level of inventories maintained by the Company, have resulted in the Company
reducing the cost of certain carbon fiber inventories to their lower
estimated market values. Although conditions have improved for carbon fiber,
the increased product demand is currently not for products contained in the
Company's inventory, if the markets for these products do not improve, it is
possible that the market value of certain of the Company's carbon fiber
inventories may further decrease resulting in additional charges to cost of
sales.

Application and development expenses

The Company is actively pursuing the development of a number of applications
for the use of its carbon fiber and related products. The Company is
currently party to several developmental agreements with various prospective
users of these products for the purpose of accelerating the development of
various carbon fiber applications. Additionally, the Company is executing
several internal developmental strategies to further the use of carbon fiber
and consumer and industrial products made from carbon fiber. As a result,
the Company incurs certain costs for research, development and engineering
of products and manufacturing processes. These costs are expensed as
incurred and totaled approximately $2.3 million and $2.7 million in the
first nine months of fiscal 2004 and 2003, respectively, and $0.8 million
and $0.9 million for the three months ended June 30, 2004 and 2003,
respectively. Application and development expenses are presented as an
operating item on the Company's consolidated statement of operations. Given
the Company's position and strategy within the carbon fiber industry, it is
expected that similar or greater levels of application and development
expenses could be incurred in future periods.

Unused capacity costs

As of June 30, 2004, the Company was not operating its continuous
carbonization lines located at the Abilene, Texas facility. As a result, the
Company has elected to categorize certain costs related to these idle assets
as unused capacity costs. Such costs totaled $3.6 million and $4.2 million
for the nine months ended June 30, 2004 and 2003, respectively, and $1.0
million and $1.5 million for the three months ended June 30, 2004 and 2003,
respectively. With the new orders in place and indications for additional
significant orders, the Company has restarted its major carbon fiber
manufacturing facility in Abilene, Texas which had been temporarily idled.
The Company has begun operation of manufacturing lines with aggregate rated
capacity of 2 million pounds per year and expects to begin operation of
additional manufacturing lines with aggregate rated capacity of 3 million
pounds per year in the latter part of calendar 2004.

Valuation of long-lived assets

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

Income taxes

The Company accounts for certain income and expense items differently for
financial reporting and income tax purposes. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities applying enacted statutory
tax rates in effect for the year in which the differences are expected to
reverse. A valuation allowance is provided against certain deferred tax
assets when realization of those assets are not considered to be more likely
than not.

                                     20

<PAGE>
<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS

The FASB issued FASB Interpretation No. 46-R "Consolidation of Variable
Interest Entities" (FIN No. 46-R) in December 2003, which addressed the
requirements for consolidating certain variable interest entities. FIN No.
46-R applied immediately to variable interest entities created after January
31, 2003 and to variable interest entities that are considered special
purpose entities as of December 31, 2003. FIN No. 46-R applied to all other
variable interest entities as of March 31, 2004. The Company currently has
no interests in entities that are considered special purpose entities.
Additionally, the Company has no significant variable interests in
non-special purpose entities. Accordingly, the adoption of FIN No. 46-R had
no material impact on the Company's financial statements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to changes in interest rates primarily as a result of
borrowing activities under its credit facility. The nature and amount of the
Company's debt may vary as a result of future business requirements, market
conditions and other factors. The extent of the Company's interest rate risk
is not quantifiable or predictable because of the variability of future
interest rates and business financing requirements, but the Company does not
believe such risk is material. At June 30, 2004, the Company did not have
any interest rate swap agreements outstanding. However, a one percent
increase in the weighted average interest rate of the Company's debt would
result in a $0.5 million increase in interest expense based on the debt
levels at June 30, 2004.

The Company views as long-term its investment in Zoltek Rt., which has a
functional currency other than the U.S. dollar. As a result, the Company
does not hedge this net investment. In terms of foreign currency translation
risk, the Company is exposed to Zoltek Rt.'s functional currency, which is
the Hungarian Forint. The Company's net foreign currency investment in
Zoltek Rt. translated into U.S. dollars using period-end exchange rates was
$35.4 million and $35.4 million at June 30, 2004 and September 30, 2003,
respectively. The potential loss in value of the Company's net foreign
currency investment in Zoltek Rt. resulting from a hypothetical 10% adverse
change in quoted foreign currency exchange rate of the Hungarian Forint at
June 30, 2004 and September 30, 2003 amounted to $3.5 million and $3.5
million, respectively. In addition, Zoltek Rt. routinely sells its products
to customers located primarily throughout Europe in sales transactions that
are denominated in foreign currencies other than the Hungarian Forint. As a
result, Zoltek Rt. is exposed to foreign currency risks related to these
transactions. The Company does not currently employ a foreign currency
hedging strategy related to the sales of Zoltek Rt. and, at current sales
levels, does not believe these risks will have a material adverse impact on
the Company's results of operations or financial position.

                                    * * *

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 return to operating on a profitable basis, obtain a
waiver of its debt covenants as of June 30, 2004, and otherwise comply with
its obligations under its credit agreements, refinance those agreements at
their maturity dates, increase production capacity to meet increased orders
on a timely and profitable basis, manage its excess carbon fiber production
capacity and inventory levels, continue investing in application and market
development, manufacture low-cost carbon fibers and profitably market them
at decreasing price points and penetrate existing, identified and emerging
markets, as well as other matters discussed herein.

ITEM 4.  CONTROLS AND PROCEDURES

Based on their evaluation as of June 30, 2004, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures (as defined in Rule 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934, as amended) are
effective. There have been no changes in internal controls or in other
factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

                                     21

<PAGE>
<PAGE>


                           ZOLTEK COMPANIES, INC.

PART II. OTHER INFORMATION

             (a) Exhibits:

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

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

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

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

             (b) Reports on Form 8-K:

                 The registrant filed the following Current Reports on
                 Form 8-K during the period ended June 30, 2004:

                 1.   The registrant filed a Current Report on Form 8-K on
                      May 20, 2004, reporting pursuant to Item 12 on the
                      Company's financial results for the quarter ended
                      March 31, 2004.


                                  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: August 16, 2004                     By:       /s/ KEVIN SCHOTT
      ---------------                        ---------------------------------
                                                       Kevin Schott
                                                  Chief Financial Officer

                                     22