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                                UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                  FORM 10-K

                Annual Report Pursuant to Section 13 or 15(d)
                   of the Securities Exchange Act of 1934

For the fiscal year ended September 30, 2005    Commission File Number 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 Identification No.)
     incorporation or organization)

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

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
                        Common Stock, par value $.01
                              (Title of class)

     Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.  Yes   .  No X .
                                                          ---     ---

     Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes   .  No X .
                                                               ---     ---

     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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X].

     Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-25 of the Act). Yes X . No   .
                                                              ---    ---

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

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     State the aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 31, 2005:
approximately $155,530,327.

     Indicate the number of shares outstanding of each of the
registrant's classes of common stock as of December 14, 2005: 19,943,684
shares of Common Stock, par value $.01 per share.

                     DOCUMENTS INCORPORATED BY REFERENCE
     The following document is incorporated by reference into the indicated
Part of this Report:

            Document                                  Part of Form 10-K
            --------                                  -----------------

Proxy Statement for the 2006
  Annual Meeting of Shareholders                             III


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PART I

Item 1.  Business
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         This Annual Report on Form 10-K for the fiscal year ended September
30, 2005 and the documents incorporated by reference herein contain
forward-looking statements, which are inherently subject to risks and
uncertainties. See "--Special Note Regarding Forward Looking Statements."

OVERVIEW

         Zoltek Companies, Inc. (the "Company" or "Zoltek") is an applied
technology and advanced materials company. The Company's primary focus and
mission are to lead the commercialization of carbon fibers as a
price-competitive high performance reinforcement for composites used as the
primary building material in everyday commercial products.

         Zoltek believes that its business strategy has positioned it as the
leader in developing commercial markets for carbon fibers and carbon fiber
reinforced composites for a diverse range of applications based upon carbon
fibers' distinctive combination of physical and chemical properties,
principally high-strength, high-stiffness, low-weight and corrosion and
fatigue resistance. Zoltek's strategy and business model for
commercialization of carbon fibers consist of offering low, but sustainable
pricing, achieving low production costs, maintaining rapidly scalable
capacity and offering various value-added product and process enhancements.
The Company sells its carbon fibers under the PANEX(R) trade name.

         Although Zoltek has pursued its commercialization strategy for
several years, during fiscal 2004, the benefits of the strategy began to
materialize. From time to time in the past the incumbent aerospace carbon
fiber manufacturers sold their products into the commercial markets at
prices below their total costs, which undercut Zoltek's ability to execute
its commercialization strategy. During fiscal 2004 it became clear that the
world capacity for carbon fibers could support the growing demand, resulting
in a divergence of the aerospace and commercial markets. It is the Company's
belief that this divergence will persist over a long period and validates
Zoltek's commercialization strategy. The Company has received significant
supply contracts and orders from customers to utilize its carbon fibers in
wind energy, sporting goods and other applications.

         In view of the substantial increases in demand for carbon fibers,
supported by several long-term supply relationships, the Company has pursued
a three-phase capacity expansion program, the first phase of which was the
re-start of production of the five installed continuous carbonization lines
at its Abilene, Texas plant and expansion of precursor production at its
Hungarian plant which was completed in fiscal 2005 at a cost of
approximately $5.0 million. The second phase was the addition of two
continuous carbonization lines in Hungary during the first quarter of 2006
at a cost of approximately $10.0 million, most of which was incurred in
fiscal 2005. Third, the Company plans to double the precursor and carbon
fiber capacity in place by December 31, 2006, which the Company estimates
will cost $45.0 million. The Company expects that a $50.0 million
convertible debt financing package entered into in September 2005, of which
$20.0 million has been funded to date, will provide a substantial portion of
the capital resources for the planned capacity increase in fiscal 2006.

         Fiscal 2005 was very significant in Zoltek's history. The Company's
strategy was proven to be valid as the demand for commercial carbon fibers
increased tremendously. Unfortunately the Company was unable to activate
production capacity at its Abilene plant as fast as its customers expected.
The difficulties were due in large part the inability to recruit and train
qualified workers and managers at the plant that had been dormant for
several years. Zoltek's goal in fiscal 2006 will be to activate all existing
capacity and complete the second and third phases of expansion described
above. As a result, the Company is undergoing a transformation from
primarily a development business to an operational business.

         The delay in the anticipated growth in commercialization of carbon
fibers has had a material adverse effect on the Company's financial
performance over the past several years due to its substantial investments
in manufacturing assets and market and application development expenses
incurred to position the Company to capitalize on the upturn in demand which
the Company had forecasted for several years. Consequently, the Company
temporarily idled its Abilene, Texas production facility and has reported
net losses for the past several fiscal years. During and after fiscal 2005,
the Company completed various financing transactions to rationalize its
balance sheet and access capital to support its expansion program.

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         The most significant historical application for the Company has
been for aircraft brakes that incorporate the Company's technical fibers as
base materials for the carbon/carbon composite brake systems used in most
newly designed aircraft (both for new and replacement brakes). However,
recently wind energy, sporting goods and other commercial composite
reinforcement applications have emerged with far greater near-term potential
to become the Company's next leading applications, as demand has outstripped
available supply in the market.

         In addition to carbon fibers, the Company believes its
intermediate product, stabilized and oxidized acrylic fiber, has a
significant market potential in the field of flame and heat resistant
applications. These products, sold under the PYRON(R) trade name, represent
significant market potential for the Company. The Company believes it is
well positioned to supply material to the flame/heat barrier market and that
its products offer an excellent cost/performance value to manufacturers as
they design new products to comply with voluntary and legislated new open
flame fire safety standards.

         During the fourth quarter of fiscal 2005, the Company formally
adopted a plan to discontinue and exit its carboxymethyl cellulose ("CMC")
division. This division is not part of the long-term strategy of the Company
and is not expected to be profitable in the foreseeable future due to the
continued pricing pressure from competitive manufacturers.

         The Company is a Missouri corporation founded in 1975. Zoltek
entered the carbon fibers business in fiscal 1989 and divested its original
industrial equipment business in fiscal 1995. After entering the carbon
fibers business, the Company significantly grew the aircraft brake business
and developed the commercialization strategy it is now pursuing. In 1992,
the Company completed its initial public offering. The Company acquired its
Hungarian subsidiary in 1995 to secure access to the technology underlying
the production of acrylic "precursor," the principal raw material used in
making carbon fibers and oxidized tow. Since that time, the Company has
added carbon fiber and technical fiber manufacturing capacity in Hungary and
converted all of its legacy textile acrylic production to the manufacture of
precursor. During fiscal 2004, the Company undertook a plan to exit the
historical textile and other non-core businesses in Hungary.

COMPANY OPERATIONS

         The Company manufactures, markets and develops carbon fibers for
various applications. The Company has three carbon fiber and technical fiber
manufacturing plants. The Abilene, Texas facility is the Company's major
carbon fiber manufacturing facility with five installed continuous
carbonization lines and auxiliary processing capabilities. The plant in
Hungary has four continuous carbonization lines and produces intermediate
oxidized fibers, carbon fiber textile products and acrylic precursor.
Zoltek's St. Charles, Missouri facility is primarily dedicated to production
of technical fibers for aircraft brake and other friction applications.

         Acrylic fiber precursor comprises more than 50% of the total cost
of producing carbon fibers. During 1999, the Company converted the textile
Mavilon (acrylic) production line at its Hungarian facility to the
production of precursor. During 2000, the Company began to manufacture
production quantities of precursor and currently all of the Company's carbon
fibers are produced from this precursor. The Company converted all of its
acrylic fiber capacity to precursor manufacturing and anticipates that this
technology will be transferable to other potential suppliers to assure
sufficient cost-competitive supply of raw material to support the Company's
long-term carbon fiber growth strategy.

         As of December 15, 2005, the Company operates four carbon fiber
production lines in Hungary and expects that, despite start-up and post
start-up difficulties experienced in fiscal 2005, the five lines at its
Abilene plant will be running at full operational capacity by the second
quarter of fiscal 2006. Each carbon fiber production line has a rated annual
production capacity of approximately one million pounds, however, the
operational capacity is less due to production scheduling and maintenance
factors. Management expects that as the Company's production scale
increases, operational capacity will trend toward rated capacity. The
Company sells carbon fibers under the PANEX(R) trade name and its flame and
heat resistant fibers under the PYRON(R) trade name.

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         A primary element of Zoltek's strategy is to offer customers
value-added processing of the fibers it produces. The Company performs
certain downstream processing, such as weaving, needling, blending with
other fibers, chopping and milling, and preparation of pre-form, pre-cut
stacks of fabric. At its facility in Salt Lake City, the Company also
produces resin pre-impregnated carbon fibers (prepregs). In addition, the
Company's Salt Lake City-based Entec Composite Machines subsidiary designs
and builds composite manufacturing equipment and markets the equipment along
with manufacturing technology and materials.

         The Company's longer-term focus is creating integrated solutions
for large potential end users by working directly with users in the primary
market sectors targeted by the Company. The Company also provides composite
design and engineering for development of applications for carbon fiber
reinforced composites. The Company reported research and development
expenses of $3.3 million, $3.1 million and $3.5 million in fiscal 2005,
fiscal 2004 and fiscal 2003, respectively.

         Zoltek Rt. currently produces plastic netting and compounding
material, which are businesses the Company is seeking to sell as they do not
fit the long-term strategy of Company. This business unit which reported
revenues of $6.0 million in fiscal 2005, is not included in discontinued
operations and is profitable, therefore there was no impairment of its
assets as of September 30, 2005.

         For historical financial information regarding the Company's
various business segments, see Note 11 of the accompanying Notes to
Consolidated Financial Statements.

CARBON FIBERS INDUSTRY OVERVIEW

         Carbon fiber composite materials are suited for a diverse range of
applications based on their distinctive combination of physical and chemical
properties. Carbon fibers are used as reinforcements in composite materials
that combine reinforcement carbon fibers with resins or other matrix
materials to form a substance with high strength, light weight, exceptional
stiffness and other exceptional properties not found in either component
alone. Carbon fibers most often are manufactured from acrylic fiber
precursor, which is desirable due to the linear orientation of its molecular
structure and high carbon content (approximately 60%). While most other
producers of carbon fibers utilize custom-made acrylic raw material, the
Company utilizes less costly textile-type acrylic fiber.

         Until recently, the high cost of carbon fibers precluded all but
the most demanding applications, limiting carbon fibers use primarily to the
aerospace industry. While the basic technology to manufacture commercial and
aerospace carbon fibers is the same and fiber-to-fiber properties are
equivalent, demands for specific fabrication methods, level of quality
documentation and certification costs make the aerospace fibers
significantly more costly to produce than carbon fiber suitable for
commercial applications.

         For several years prior to fiscal 2004, as addition of new capacity
occasionally outpaced demand from aerospace applications, manufacturers sold
excess production at significantly reduced prices into specialty sporting
goods and industrial applications. As a result, the distinctive
characteristics of carbon fibers and the techniques for fabricating carbon
fiber composites became more broadly understood and some new and diverse
transitional applications developed. In sporting goods (the first
significant commercial application), the strength-to-weight ratio,
stiffness, rapid damping and fatigue resistance characteristics of carbon
fibers have made them a desirable and affordable material for a wide range
of products such as blades on windmills, reinforced service umbilical system
for sub-sea natural gas production and golf club shafts. Until Zoltek
introduced its strategy to commercialize carbon fibers, there was no
significant differentiation in sources of supply to the aerospace and
non-aerospace markets.

         Over the past year the Airbus A-380 airplane entered production
phase and Boeing announced the introduction of the 787 airplane, both of
which incorporate substantial amounts of carbon fibers. The demand for
carbon fibers for these two programs has eliminated the excess capacity in
aerospace fibers and triggered the divergence of the aerospace and
commercial markets for carbon fibers. Zoltek believes this development has
validated its commercialization strategy and it is well positioned to
capitalize on the changes in market conditions with significant available
capacity, favorable quality and properties of its PANEX(R)-35 fibers
compared to other commercial carbon fibers and aerospace fibers, its
established internal source of precursor and low manufacturing costs.

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         Extensive commercially viable applications are only possible at
carbon fiber prices significantly lower than those historically prevailing
for aerospace applications. To support the long-term growth in commercial
carbon fiber markets, the Company believes it is most important to maintain
attractive and predictable pricing and bring capacity on line fast enough to
support application development.

         Commercial applications categories targeted by the Company, due to
the favorable weight, strength and stiffness properties of carbon fibers,
include wind turbine blades, compressed natural gas (CNG) tanks, civil
structures, construction components, automotive body and structural members,
mass transit vehicle components, high strength piping, marine uses and
alternative energy systems. In all cases carbon fiber reinforced composites
are competing with other materials like steel, aluminum and other composite
reinforcements.

BUSINESS STRATEGY

         Zoltek's business strategy and its relevance to current market
conditions can be summarized as follows:

         o Continue Reducing Production Costs -- Zoltek believes its
         proprietary process and equipment design technology enable it to
         produce carbon fibers at costs substantially lower than those
         generally prevailing in the industry and to supply carbon fibers
         for applications which are not economically viable for higher cost
         competitors. Zoltek seeks to reduce its total production costs
         through various means, including enhancement of its acrylic fiber
         precursor manufacturing capability and upgrades to its carbon fiber
         production equipment and process designed to achieve increased
         efficiencies.

         o Sustainable Price Leadership -- Zoltek believes that it is
         beginning to achieve success in its ultimate objective--selling
         carbon fibers to high volume users. The Company's pricing strategy
         is to market carbon fibers for use as a base reinforcement material
         in composites at sustainable price levels resulting in predictable
         composite costs per unit of strength or stiffness which compete
         favorably with alternative base construction materials such as
         glass fiber composites, steel and aluminum. In the past there have
         been cycles of carbon fiber shortages accompanied by price
         increases that stifled the development of new applications. With
         its targeted cost structure Zoltek believes that it can maintain
         sustainable but competitive pricing.

                  Although from time to time in the past, certain aerospace
         producers have sold carbon fibers for commercial applications at
         prices below their total production costs, their current production
         now is allocated to large commercial aviation programs and the
         Company does not expect they will compete in the commercial markets
         for the foreseeable future.

         o Leverage Capacity Leadership -- The Company believes that its
         decision to build and maintain significant available capacity has
         directly resulted in long-term supply arrangements with high volume
         customers. Zoltek's installed capacity has enabled it to attain
         relationships to supply users of carbon fibers who need assurances
         of stable sources of carbon fiber. From fiscal 1997 through early
         fiscal 1999 the Company pursued an aggressive capacity expansion
         program and believes it currently has the largest rated capacity
         for commercial carbon fibers production in the world. Zoltek has
         developed, and is continually seeking to improve, a standardized
         continuous carbonization line design in order to increase
         efficiency and shorten lead time from the decision to add lines to
         the time when the lines become operational. Demonstrated ability to
         increase capacity at a level that matches the growth of the
         commercial markets is essential to encourage development of large
         volume applications. The Company believes it is uniquely positioned
         to expand capacity rapidly enough to keep pace with commercial
         market demand.

         o Support New Commercial Market and Applications Development -- To
         accelerate the commercialization of carbon fibers and carbon fiber
         composites across a broad range of mass-market applications, the
         Company has pursued various initiatives, including significant
         partnerships with potential users of carbon fibers to act as
         catalysts in the development of new low-cost, high volume products.
         The Company believes that its supply relationships with customers
         for wind energy and automotive applications are the direct result
         of these development efforts.

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TARGETED DEVELOPING APPLICATIONS

         After a review of Zoltek's strategy in 2002, the Company decided to
concentrate on certain categories that are the primary application
categories believed to offer the highest potential for substantial sales
over coming years. These application categories are as follows:

         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
              introduced or announced plans to introduce such large
              turbines. The length of these blades requires the use of
              carbon fibers. The Company has put forth a significant effort
              to qualify and certify its PANEX(R)-35 fibers for this
              application.

              In fiscal 2004 and 2005, the Company announced long-term
              supply arrangements with the two largest manufacturers of wind
              turbines. The Company expects that these supply arrangements
              will generate $80 to $100 million of sales over the next three
              years.

         o    Offshore oil and gas development and recovery has become a
              fertile arena for carbon fiber reinforced composite
              deployment. The newest and largest fields for future
              development of gas and oil recovery offshore are found in
              deeper waters. New technologies are continually required to
              harvest these new sources of oil and gas. In many cases,
              carbon fiber reinforced composites have become the enabling
              material for such exploration and development efforts.

              One example is the recent development of a carbon fiber
              reinforced service umbilical system for sub-sea natural gas
              production by Aker Kvaerner of Norway. As sub-sea developments
              have moved to ever deeper waters, one of the more critical
              issues that has needed to be addressed is the effect this
              harsh environment plays on the umbilical systems that link the
              architecture on the seafloor back to the host platform. Over
              the years, the water depths and environment surpassed the
              limits of existing umbilical technology in steel; steel
              becomes ineffective as a load-carrying element due to its
              elongation. As a result, this elongation transfers tensile
              loads into the umbilical conductors.

              Aker Kvaerner developed a solution by replacing steel rods
              with carbon fiber rods, which effectively solves the problem.
              Aker Kvaerner along with five independent operators aim to
              develop a multitude of natural gas fields in upwards of 9,000
              feet of water all tied back to a central floating production
              facility moored in a world-record 8,400 feet of water. The
              carbon fiber umbilical is entirely enabling this project. Aker
              Kvaerner has selected Zoltek's PANEX(R)-35 as the material of
              choice for the commercial umbilicals now being deployed in the
              Gulf Coast of the United States for this project.

              Other applications Zoltek is selling fiber into or working on
              include carbon fiber buoyancy devices, tethering systems,
              production riser systems and high temperature piping systems.
              The amount of development activity around carbon fiber
              composites at the major oil companies and their suppliers has
              increased dramatically with the expected long-term rise in oil
              prices.

         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 significant improvement
              in the car's performance and/or fuel consumption. Both are
              important 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.

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         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 to 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.

SIGNIFICANT CUSTOMERS

         In the fiscal years ended September 30, 2005 and 2004, the Company
reported sales of $8.6 million and $7.2 million, respectively, to Goodrich,
a major aircraft brake manufacturer, which was the only customer that
represented greater than 10% of the Company's total consolidated revenues.

2006 OUTLOOK

         In addition to the expansion in demand for Zoltek's PANEX(R) carbon
fibers, the demand for its intermediate PYRON(R) fibers also has increased
significantly. In fiscal 2005, the Company captured additional market share
in the aircraft brake business and flame and heat resistant applications
have also increased steadily. The Company anticipates that PYRON(R)
expansion will generate significant improvement in its financial performance
in 2006.

         Early in fiscal 2006, Zoltek will focus on enhancement of its
production operations and continue efforts to reduce inventory. The Company
has taken steps to improve its management and staffing in its Abilene
facility and believe that during the second quarter the plant will begin
operating at targeted production levels. In addition, the Company has been
adding new production lines in Hungary, which were two of which activated in
December and also are expected to reach targeted production levels during
the second quarter.

         Accordingly, the Company expects that by mid-fiscal 2006 its
installed capacity will be operating at targeted production levels.
Additionally, the Company is increasing its prices enough to reflect its
significant raw material and energy cost increases during 2005.

         In addition, the Company will remain very active in increasing its
carbon fibers capacity. During the third quarter of fiscal 2006, Zoltek
plans to complete the installation of half of its 2006 carbon fibers planned
capacity increase, adding approximately five million pounds of rated
capacity per year. The Company plans to have an additional five million
pound rated capacity expansion completed by December 31, 2006. The Company
expects that a $50.0 million convertible debt financing package entered into
in September 2005, of which $20.0 million has been funded to date, will
provide a substantial portion of the capital resources for the planned
capacity increase in fiscal 2006. The Company will be looking to raise
capital to finance the fiscal 2007 expansion of an additional 10 million
pounds of annual production or possibly more rated capacity if demand
continues to grow.

INTERNATIONAL

         The Company conducts its carbon fiber products operations primarily
in the United States and Europe. The Company sells its carbon fibers
globally.

         There are additional risks attendant to the Company's foreign
operations, such as currency fluctuations. For additional information
regarding the Company's international operations, see Note 11 of the
accompanying Notes to Consolidated Financial Statements.

SOURCES OF SUPPLY

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

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INTELLECTUAL PROPERTY

         The Company believes that it has developed and utilizes valuable
technology and innovations, including various aspects of its manufacturing
process, which are trade secrets in which it has a proprietary interest. The
Company seeks to protect its proprietary information by, among other things,
requiring key employees to execute non-disclosure agreements.

         The Company is plaintiff in a patent infringement lawsuit pending
in the United States Court of Federal Claims. The lawsuit, which has been
pending since 1996, involves the alleged unauthorized use of the Company's
carbon fiber processing technology in the manufacture of extremely stealthy
aircraft. A preliminary court ruling has been favorable for the Company, but
the Company cannot predict the timing or the outcome of this litigation or
the impact on the Company's financial condition and results of operations.

COMPETITION

         The Company's carbon fibers and technical fibers business segments
compete with various other producers of carbon fibers, many of which have
substantially greater research and development, marketing, financial and
managerial resources than the Company and represent significant competition
for the Company.

         The Company believes that no single manufacturer of carbon and
fibers products competes across all of its product lines and applications.
The Company also believes its business plan distinguishes it from other
carbon fiber manufacturers in supporting the long-term growth of the
commercial carbon fiber market.

         The carbon fibers business segment's direct carbon fiber
competitors include SGL Carbon in the United States and Europe, inasmuch as
it uses similar textile-type precursor as the Company. SGL currently is
Zoltek's only primary competitor in the oxidized fiber market.

         To varying degrees, depending on market conditions and supply, the
Company also competes with aerospace grade carbon fiber producers, such as
Hexcel Corporation in the United States and Toray Industries, Inc., Toho
Rayon and Mitsubishi Rayon Co., Ltd. in United States and Japan. These
carbon fibers producers tend to market higher cost products than the
Company's products, with a principal focus on aerospace structural
applications. These manufacturers, while unable to sustain low pricing, tend
to enter into direct competition with the Company primarily when they engage
in significant discounting due to protection of their market share, excess
capacity or product surpluses. Management has observed a significant shift
in this situation as the aerospace fiber demand has been significantly
affected with the introduction of Airbus A-380 and Boeing 787 airplanes.

         The Company believes that the principal areas of competition for
its carbon fibers and technical fibers business segment are sustainable
price, quality, development of new applications and ability to reliably meet
the customer's volume requirements and qualifications for particular
programs.

ENVIRONMENTAL

         The Company's operations generate various hazardous wastes,
including gaseous, liquid and solid materials. The operations of the
Company's carbon fibers and technical fibers business segments in Abilene,
Texas, St. Charles, Missouri and Hungary utilize thermal oxidation of
various by-product streams designed to comply with applicable laws and
regulations. The plants produce air emissions that are regulated and
permitted by various environmental authorities. The plants are required to
verify by performance tests that certain emission rates are not exceeded.
Management believes that the plants are currently operating in compliance
with their permits and the conditions set forth therein. The Company does
not believe that compliance by its carbon fibers and technical fibers
operations with applicable environmental regulations will have a material
adverse effect upon the Company's future capital expenditure requirements,
results of operations or competitive position. There can be no assurance,
however, as to the effect of interpretation of current laws or future
changes in federal, state or international environmental laws or regulations
on the business segment's results of operations or financial condition.

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EMPLOYEES

         As of September 30, 2005, the Company employed approximately 250
persons in its U.S. operations and approximately 550 in its Hungarian
operations. The Company's U.S. employees are not represented by any
collective bargaining organizations. By law, most employees in Hungary are
represented by at least one labor union. At Zoltek Rt. there are two active
unions: Union Viscosa with approximately 340 members and Viscosa 1990 with
approximately 225 members (some Zoltek Rt. employees belong to both unions).
The Company believes that relations with both unions are good. Management
meets with union representatives on a regular basis. There have not been any
problems or major disagreements with either union in the past five years.
The Company believes that overall its employee relations are good.

AVAILABLE INFORMATION

         The Company regularly files periodic reports with the Securities
and Exchange Commission ("SEC"), including annual reports on Form 10-K and
quarterly reports on Form 10-Q, as well as, from time to time, current
reports on Form 8-K and amendments to those reports. These filings are
available free of charge on the Company's website at www.zoltek.com, as soon
as reasonably practicable after their electronic filing with the SEC.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

         This Form 10-K, the Company's Annual Report to Shareholders and
certain information provided periodically in writing and orally by the
Company's designated officers and agents contain certain statements which
constitute "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. The terms "Zoltek," "Company," "we," "our"
and "us" refer to Zoltek Companies, Inc. The words "expect," "believe,"
"goal," "plan," "intend," "estimate," and similar expressions and variations
thereof are intended to specifically identify forward-looking statements.
Those statements appear in this Form 10-K, the Annual Report and the
documents incorporated herein by reference, particularly "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
and include statements regarding the intent, belief or current expectations
of the Company, its directors and officers with respect to, among other
things: (1) the Company's financial prospects; (2) the Company's growth
strategy and operating strategy including the focus on facilitating
acceleration of the introduction and development of mass market applications
for carbon fibers; (3) the Company's current and expected future revenue;
and (4) the Company's ability to complete financing arrangements that are
adequate to fund current operations and the Company's long-term strategy.

         You are cautioned that any such forward looking statements are not
guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors. The factors that
might cause such differences include, among others, the following: (1) the
Company's ability to profitably operate its formerly idle manufacturing
facilities on a timely and cost-effective basis, to meet current order
levels for carbon fibers; (2) the Company's ability to successfully add new
capacity for the production of carbon fiber and precursor raw material; (3)
the Company's ability to execute plans to exit its specialty products
business and reduce costs; (4) the Company's ability to achieve profitable
operations; (5) the Company's ability to raise new capital and increase its
borrowing at acceptable costs; (6) the Company's ability to manage changes
in customers' forecasted requirements for the Company's products; (7) the
Company's ability to continue investing in application and market
development; (8) the Company's ability to manufacture low-cost carbon fibers
and profitably market them; and (9) the Company's ability to penetrate
existing, identified and emerging markets. For additional information see
Item 1A. of this report.

         Except as otherwise required by law, the Company undertakes no
obligation to publicly update or revise forward-looking statements to
reflect events or circumstances after the date of this Annual Report on Form
10-K and the Company's Annual Report to Shareholders or to reflect the
occurrence of unanticipated events.

                                     10

<PAGE>
<PAGE>

Item 1A.  Risk Factors
--------  ------------

         The following are certain risk factors that could affect Zoltek's
business, financial results and results of operations. These risk factors
should be considered in connection with evaluating the forward-looking
statements contained in this Annual Report on Form 10-K because these
factors could cause the actual results and conditions to differ materially
from those projected in forward-looking statements. Before you buy the
Company's common stock, you should know that making such an investment
involves some risks, including the risks described below. The risks that the
Company has highlighted here are not the only ones that the Company faces.
If any of the risks actually occur, the Company's business, financial
condition or results of operations could be negatively affected. In that
case, the trading price of its stock could decline, and you may lose all or
part of your investment.

         ZOLTEK HAS REPORTED NET LOSSES AND NEGATIVE CASH FLOWS FROM
OPERATIONS FOR EACH OF THE PAST FIVE FISCAL YEARS.

         Zoltek has reported net losses and negative cash flows from
continuing operations for each of the past five fiscal years in the period
ended September 30, 2005. The Company reported net losses of $31.6 million,
$7.8 million, $15.6 million, $22.8 million and $40.4 million in the fiscal
years ended September 30, 2001, 2002, 2003, 2004 and 2005, respectively. The
Company reported negative cash flows from continuing operations of $6.2
million, $2.0 million, $2.2 million, $7.7 million and $7.4 million in the
fiscal years ended September 30, 2001, 2002, 2003, 2004 and 2005,
respectively. These net losses and negative cash flows from operations were
attributable to, among other things, the adverse market conditions discussed
above, combined with excess capacities and inventories it has maintained in
anticipation of greater sales volumes and in 2004 and 2005 the non-cash loss
related to the mark to market of derivatives of $4.9 million and $16.6
million, respectively. The Company cannot assure you when, if at all, it
will return to profitable operations or generate cash flows from operations.
The Company has relied on equity financing and borrowings to finance its
business over the past five fiscal years. The Company intends to fund its
near-term continuing operations from cost-containment, aggressive management
of its working capital and additional bank borrowings, private equity and
debt financing. Such additional funding may not be available on favorable
terms or at all. If adequate funds are not otherwise available, the Company
may be forced to curtail operations and/or development activities
significantly, or seek other sources of capital, including asset sales.

         ZOLTEK'S OPERATING RESULTS HAVE BEEN ADVERSELY AFFECTED BY
PREVIOUSLY ADVERSE CONDITIONS IN THE MARKETS FOR CARBON FIBER AND ACRYLIC
FIBER.
         Until fiscal 2004, Zoltek's carbon fiber operations were adversely
affected during the preceding five years by oversupply conditions in the
marketplace, coupled with an overall lack of development for large volume
applications for carbon fiber composites. Accordingly, during such period
the Company had excess carbon fiber manufacturing capacity which resulted in
substantial depreciation and other charges and constrained the operating
results of its carbon fiber manufacturing activities. Since the beginning of
fiscal 2004, the market has strengthened for current and emerging
applications for carbon fiber products, and it has generated meaningful
orders and experienced significant sales increases in carbon fiber products.
However, the Company may not be able to attain anticipated sales increases
unless the market and demand for current and emerging applications for
carbon fiber products continues to strengthen.

         Since fiscal 1998, the Company's results have been negatively
impacted by depressed market conditions in the acrylic fibers sector, which
was a principal line of business for its Zoltek Rt. subsidiary. In the
fourth quarter of fiscal 2004, the Company discontinued and exited two
divisions of its Zoltek Rt. operations which manufacture acrylic and nylon
fibers and yarns. In the fourth quarter of fiscal 2004, the Company recorded
an impairment loss on discontinued operations of $0.2 million related to
severance obligations due to discontinuance of these businesses. In the
fourth quarter of fiscal 2005, the Company formally adopted a plan to
discontinue the CMC division of its Zoltek Rt. operations and does not
expect any impairment loss related to discontinuing of this operation.

         ZOLTEK'S OPERATING RESULTS HAVE BEEN ADVERSELY AFFECTED BY
DIFFICULTIES IN OPERATING THE COMPANY'S EXPANDED CARBON FIBERS CAPACITY AT
ITS ABILENE, TEXAS FACILITY.

         Demand for Zoltek's carbon fibers from existing and potential new
customers exceeds its current capacity, and the Company has restarted carbon
fiber production at its major carbon fiber manufacturing facility in
Abilene, Texas which had been temporarily idled. However, the Company
presently cannot produce carbon fibers at levels adequate to supply current
demand. The Company has experienced difficulties in achieving targeted
production levels at its Abilene facility, which has resulted in operating
losses despite strong demand for its products. The difficulties were due in
large part the inability to recruit and train qualified workers and managers
at the plant that had been dormant for several years. The Company may not be
able to supply anticipated demand unless it is able to achieve targeted
production levels at its Abilene facility.

                                     11

<PAGE>
<PAGE>

         ZOLTEK'S ABILITY TO MANAGE ITS ANTICIPATED GROWTH WILL AFFECT ITS
OPERATING RESULTS.

         The growth in the Company's business has placed, and is expected to
continue to place, a significant strain on its management and operations. In
order to effectively manage potential long-term growth, the Company must add
to its carbon fiber manufacturing capacity, have access to adequate
financial resources to fund significant capital expenditures and maintain
gross profit margins while pursuing a growth strategy, continuing to
strengthen its operations, financial and management information systems, and
expanding, training and managing its employee workforce. There can be no
assurance that the Company will be able to do so effectively or on a timely
basis. Failure to do so effectively and on a timely basis could have a
material adverse effect upon its business, operating results and financial
condition.

         ZOLTEK'S OPERATIONS AND SALES IN FOREIGN COUNTRIES ARE SUBJECT TO
RISKS.

         Zoltek's international operations and sales are subject to risks
associated with foreign operations and markets generally, including foreign
currency fluctuations, unexpected changes in regulatory, economic or
political conditions, tariffs and other trade barriers, longer accounts
receivable payment cycles, potentially adverse tax consequences,
restrictions on repatriation of earnings and the burdens of complying with a
wide variety of foreign laws. These factors could have a material adverse
effect upon the Company's future revenues and business, results of
operations and financial condition.

         ZOLTEK'S OPERATIONS ARE DEPENDENT UPON ITS SENIOR MANAGEMENT AND
TECHNICAL PERSONNEL.

         Zoltek's future operating results depend upon the continued service
of its senior management, including Zsolt Rumy, the Company's Chief
Executive Officer, President and Chairman of the Board, and its technical
personnel, none of whom are bound by an employment agreement. The Company's
future success will depend upon its continuing ability to attract and retain
highly qualified managerial and technical personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will
retain its key managerial and technical employees or that it will be
successful in attracting, assimilating or retaining other highly qualified
personnel in the future.

         ZOLTEK'S STOCK PRICE MAY FLUCTUATE.

         Future announcements concerning Zoltek or its competitors or
customers, quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or changes in
product pricing policies by the Company or its competitors, developments
regarding proprietary rights, changes in earnings estimates by analysts or
reports regarding the Company or its industry in the financial press or
investment advisory publications, among other factors, could cause the
market price of the common stock to fluctuate substantially. In addition,
stock prices for many technology companies fluctuate widely for reasons
often unrelated to operating results. These fluctuations, as well as general
economic, political and market conditions, such as recessions, world events,
military conflicts or market or market-sector declines, may materially and
adversely affect the market price of the common stock. In addition, the
Company believes that electronic bulletin board postings regarding us could
in the future contribute to volatility in the market price of the common
stock. Any information concerning the Company, including projections of
future operating results, appearing in investment advisory publications or
on-line bulletin boards, or otherwise emanating from a source other than the
Company, should not be relied upon as having been supplied or endorsed by
Zoltek.

                                     12

<PAGE>
<PAGE>

         ZOLTEK'S OPERATING RESULTS MAY FLUCTUATE.

         Zoltek's quarterly results of operations may fluctuate as a result
of a number of factors, including the timing of purchase orders for and
shipments of the Company's products. Therefore, quarter-to-quarter
comparisons of results of operations have been and will be impacted by the
timing of such orders and shipments. In addition, its operating results
could be adversely affected by these factors, among others, such as
variations in the mix of product sales, price changes in response to
competitive factors, increases in raw material costs and interruptions in
plant operations.

         DEVELOPMENTS BY COMPETITORS MAY IMPACT ZOLTEK'S PRODUCTS AND
TECHNOLOGIES.

         Zoltek competes with various other participants in the advanced
materials and textile fibers markets. Many of these entities have
substantially greater research and development, manufacturing, marketing,
financial and managerial resources than the Company. In addition, existing
carbon fibers producers may refocus their activities to compete more
directly with the Company. Developments by existing or future competitors
may render the Company's products or technologies noncompetitive. In
addition, the Company may not be able to keep pace with new technological
developments. The Company's customers could decide to vertically integrate
their operations and perform some or all of the functions currently
performed by Zoltek.

         FAILURE TO KEEP PACE WITH TECHNOLOGICAL DEVELOPMENTS MAY ADVERSELY
AFFECT ZOLTEK OPERATIONS.

         Zoltek is engaged in an industry which will be affected by future
technological developments. The introduction of products or processes
utilizing new technologies could render existing products or processes
obsolete or unmarketable. The Company's success will depend upon its ability
to develop and introduce on a timely and cost-effective basis new products,
processes and applications that keep pace with technological developments
and address increasingly sophisticated customer requirements. The Company
may not be successful in identifying, developing and marketing new products,
applications and processes and product or process enhancements. The Company
may experience difficulties that could delay or prevent the successful
development, introduction and marketing of product or process enhancements
or new products, applications or processes. The Company's products,
applications or processes may not adequately meet the requirements of the
marketplace and achieve market acceptance. Its business, operating results
and financial condition could be materially and adversely affected if it
were to incur delays in developing new products, applications or processes
or product or process enhancements or if it were to not gain market
acceptance.

         ZOLTEK'S BUSINESS DEPENDS UPON THE MAINTENANCE OF ITS PROPRIETARY
TECHNOLOGY.

         Zoltek depends upon its proprietary technology. The Company relies
principally upon trade secret and copyright law to protect its proprietary
technology. The Company regularly enters into confidentiality agreements
with its key employees, customers and potential customers and limit access
to and distribution of its trade secrets and other proprietary information.
These measures may not be adequate to prevent misappropriation of the
Company's technology or that its competitors will not independently develop
technologies that are substantially equivalent or superior to its
technology. In addition, the laws of some foreign countries do not protect
its proprietary rights to the same extent as the laws of the United States.
The Company is also subject to the risk of adverse claims and litigation
alleging infringement of intellectual property rights.

         ZOLTEK WILL INCUR INCREASED COSTS AND DEMANDS UPON MANAGEMENT AS A
RESULT OF COMPLYING WITH THE LAWS AND REGULATIONS AFFECTING PUBLIC
COMPANIES, WHICH COULD AFFECT ITS OPERATING RESULTS.

         As a public company, Zoltek has incurred and will continue to incur
significant legal, accounting and other expenses that it would not incur as
a private company, including costs associated with public company reporting
requirements. The Company also has incurred and will incur costs associated
with recently adopted corporate governance requirements, including
requirements under the Sarbanes-Oxley Act of 2002, as well as new rules
implemented by the SEC and the Nasdaq Stock Market. The expenses incurred by
public companies generally for reporting and corporate governance purposes
have increased. These rules and regulations have increased the Company's
legal and financial compliance costs and have made some activities more
time-consuming and costly, although it is unable to currently estimate these
costs with any degree of certainty. The


                                     13

<PAGE>
<PAGE>

Company does believe, however, that it will be able to fund these costs out
of its available working capital. It is possible that these new rules and
regulations may make it more difficult and more expensive for the Company to
obtain director and officer liability insurance, and it may be required to
accept reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage than used to be available. As a
result, it may be more difficult for the Company to attract and retain
qualified individuals to serve on its board of directors or as its executive
officers.

         ZOLTEK MANAGEMENT AND ITS INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM HAVE IDENTIFIED MATERIAL WEAKNESSES IN THE DESIGN AND OPERATION OF ITS
INTERNAL CONTROLS, WHICH, IF NOT PROPERLY REMEDIATED COULD RESULT IN
MATERIAL MISSTATEMENTS IN ITS FINANCIAL STATEMENTS IN FUTURE PERIODS.

         Zoltek management and its independent registered public accounting
firm have identified certain matters that they consider to constitute
material weaknesses in the design and operation of its internal controls as
of September 30, 2005. See "Item 9A. Controls and Procedures." A material
weakness is defined by the Public Company Accounting Oversight Board (United
States) as a control deficiency, or combination of control deficiencies,
that results in more than a remote likelihood that a material misstatement
of the annual or interim financial statements will not be prevented or
detected. A control deficiency exists when the design or operation of a
control does not allow management or employees, in the normal course of
performing their assigned functions, to prevent or detect misstatements on a
timely basis. As set forth in Item 9A. Controls and Procedures, as of
September 30, 2005, the Company identified material weaknesses in its
general control environment and its controls over period-end financial
reporting process, journal entries and account reconciliations,
determination of allowance for doubtful accounts, accounting for inventory,
valuation of property plant and equipment, accounting for derivatives
associated with convertible debt and related amortization of financing fees
and debt discount and gain (loss) on value of warrants and conversion
feature, earnings per share disclosures, segregation of duties and
restricted access. These control deficiencies resulted in accounting errors
which required the restatement of its previously issued financial statements
contained in its Annual Report on Form 10-K for the year ended September 30,
2004, and its Quarterly Reports on Form 10-Q for the quarters ended March
31, 2004, June 30, 2004, December 31, 2004 and March 31, 2005. The Company
is currently evaluating steps that can be taken to remediate these
weaknesses in its internal controls, including steps that can be taken in
the process of documenting and evaluating the applicable treatment for
non-routine or complex transactions as they may arise.

         Zoltek expects to incur significant expenses associated with these
corrective actions to remedy the identified material weaknesses. If the
remedial policies and procedures the Company implements are insufficient to
address the material weaknesses that exist as of September 30, 2005, or if
additional material weaknesses in its internal controls are discovered in
the future, the Company may fail to meet its future reporting obligations,
its financial statements may contain material misstatements and its
operating results may be harmed. Any such failure could also adversely
affect the results of the periodic management evaluations and annual auditor
attestation reports regarding the effectiveness of the Company's "internal
control over financial reporting" that are required by the SEC's rules under
Section 404 of the Sarbanes-Oxley Act of 2002. The existence of a material
weakness could result in errors in the Company's financial statements that
could result in a restatement of financial statements, cause it to fail to
meet its reporting obligations and in turn cause investors to lose
confidence in its reported financial information, leading to a decline in
the Company's stock price. Although the Company believes it can address its
material weaknesses in internal controls with remedial measures, it cannot
assure you that the measures it will take will remediate the material
weaknesses identified or that any additional material weaknesses will not
arise in the future due to a failure to implement and maintain adequate
internal controls over financial reporting.

         DEVELOPMENT OF NEW MARKETS FOR ZOLTEK CARBON FIBER PRODUCTS IS
UNCERTAIN.

         Zoltek's future profitability and growth will depend in part upon
the development of new markets for a broad range of large-scale applications
which incorporate the Company's carbon fiber products. Development of new
markets for its carbon fiber products will require substantial technical,
marketing and sales efforts and the expenditure of significant funds.
Development of new markets for carbon fibers may not occur and, if such
development does occur, its products may not achieve significant market
acceptance. The Company's business, operating results and financial
condition could be materially and adversely affected if new markets for its
carbon fiber products do not develop or if its products do not gain market
acceptance.

                                     14

<PAGE>
<PAGE>

         THERE ARE OPERATIONAL RISKS ASSOCIATED WITH ZOLTEK'S BUSINESS.

         Zoltek's carbon fiber operations utilize high temperature
processes, substantial electrical current and industrial gases which
potentially can be subject to volatile chemical reactions. The Company
believes that its current plant design and operating procedures minimize
operational risks associated with these factors. However, as a result of
mechanical or human failure or unforeseen conditions or events related to
its manufacturing and engineering processes or otherwise, its manufacturing
capacity could be materially limited or temporarily interrupted.

         ONGOING LITIGATION IN WHICH ZOLTEK IS INVOLVED COULD RESULT IN ITS
HAVING TO PAY SUBSTANTIAL DAMAGES.

         Zoltek is party to various legal actions as either plaintiff or
defendant. As previously disclosed, the Company is party to an action filed
in the Court of Common Pleas of Cuyahoga County, Ohio, by the former owners
of Hardcore Composites Operations LLC against each of Hardcore and the
Company alleging breach by Hardcore and the Company of its respective
obligations under a sublease, guaranty and settlement agreement entered into
in connection with the former owner's sale of Hardcore. In October 2004, the
Court ruled in favor of the former owner of Hardcore Composites in the
amount of $1.1 million. The Company has recorded an accrual of $1.1 million
in respect of the possible liability in this matter. The Company is
vigorously defending this motion and it has filed counterclaims and an
appeal. Additionally, as previously disclosed in September 2004 the Company
was named a defendant in a civil action filed by a former investment banker
that was retained by it to obtain equity investors, alleging that it
breached its obligations under the agreement signed by the parties. The
investment banker alleges that it is owed commission from equity investment
the Company obtained from a different source. The ultimate outcome of these
actions and other pending litigation and the estimates of the potential
future impact on its financial position, cash flows or results of operations
for these proceedings could have a material adverse effect on its business.
In addition, the Company may incur additional legal costs in connection with
pursuing and defending such actions.

         ZOLTEK'S PRINCIPAL SHAREHOLDER HAS VOTING CONTROL OVER THE COMPANY.

         Zsolt Rumy, Zoltek's founder and principal shareholder, owns
approximately 30% of the Company's outstanding shares of common stock. As a
result, he has effective voting control over the Company, including the
election of directors, and is able to effectively prevent an affirmative
vote which would be necessary for a merger, sale of assets or similar
transaction, irrespective of whether other shareholders believe such a
transaction to be in their best interests. The Company's Articles of
Incorporation and By-laws do not provide for cumulative voting in the
election of directors.

         ZOLTEK'S BOARD OF DIRECTORS HAS THE AUTHORITY TO ISSUE PREFERRED
STOCK WHICH COULD AFFECT THE RIGHTS OF HOLDERS OF COMMON STOCK.

         Zoltek's Articles of Incorporation authorize the issuance of "blank
check" preferred stock with such designations, rights and preferences as may
be determined from time to time by the Board of Directors. Accordingly, the
Board of Directors is empowered, without shareholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of common stock. Holders of common stock will have no preemptive
rights to subscribe for a pro rata portion of any preferred stock which may
be issued. In the event of issuance, the preferred stock could be utilized,
under certain circumstances, as a method of discouraging, delaying or
preventing a change in control. The possible impact on takeover could
adversely affect the price of the common stock. Although the Company has no
present intention to issue any shares of preferred stock, it may do so in
the future.

         ZOLTEK'S CLASSIFIED BOARD OF DIRECTORS COULD DISCOURAGE A CHANGE IN
CONTROL.

         Zoltek's Articles of Incorporation divide the Board of Directors
into three classes, with three-year staggered terms. The classified board
provision could increase the likelihood that, in the event an outside party
acquired a controlling block of the Company's stock, incumbent directors
nevertheless would retain their positions for a substantial period, which
may have the effect of discouraging, delaying or preventing a change in
control. The possible impact on takeover attempts could adversely affect the
price of the common stock.

                                     15

<PAGE>
<PAGE>

          FUTURE SALES OF COMMON STOCK COULD AFFECT THE PRICE OF COMMON
STOCK.

          No prediction can be made as to the effect, if any, that future
sales of shares or the availability of shares for sale will have on the
market price of the common stock prevailing from time to time. Sales of
substantial amounts of common stock, or the perception that such sales might
occur, could adversely affect prevailing market prices of the common stock.

Item 1B.  Unresolved Staff Comments
--------  -------------------------

          None.

Item 2.   Properties
-------   ----------

          The Company's facilities are listed below and are considered to be
suitable and adequate for its operations. Except as noted below, all the
Company's properties are owned, subject to various mortgage loans.

<TABLE>
<CAPTION>
                                                                                            APPROXIMATE AREA
                  LOCATION                                       USE                        (IN SQUARE FEET)
                  --------                                       ---                        ----------------

         <S>                                      <C>                                          <C>
         St. Louis, Missouri (2)...............   Administrative, marketing and                   40,000
                                                  central engineering offices

         St. Charles, Missouri (1).............   Technical fibers manufacturing                 107,000

         Abilene, Texas (2)....................   Carbon fibers manufacturing                    278,000

         Salt Lake City, Utah I (2)............   Composite fabrication equipment                 65,000
                                                  design and manufacturing

         Salt Lake City, Utah II (3)...........   Carbon fiber prepreg manufacturing              35,000

         Nyergesujfalu, Hungary (2)............   Carbon fibers, acrylic fiber precursor       1,600,000
                                                  and other products manufacturing

<FN>
--------
(1) Property subject to ground lease and leasehold mortgage.
(2) Properties subject to mortgage.
(3) Property subject to lease.
</TABLE>

Item 3.  Legal Proceedings
-------  -----------------

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

                                     16

<PAGE>
<PAGE>

         In September 2004, the Company was named a defendant in a civil
action pending in "the Federal District Court for the Southern District of
New York" filed by a former investment banker that was retained by the
Company to obtain equity financing, alleging breach by the Company of its
obligations under the agreement signed by the parties. The investment banker
alleges it is owed commission from equity investment obtained by the Company
from a different source. The Company has asserted various defenses,
including that the investment banker breached the agreement by not
performing reasonable efforts to obtain financing for the Company and,
therefore, the agreement was terminated by the Company prior to obtaining
new financing. The court granted summary judgment in favor of the plaintiff
on the issue of breach of the agreement and the parties are contesting the
issue of damages. The Company cannot predict the timing or the outcome of
this litigation or the impact on the Company's financial condition and
results of operations.

         The Company is plaintiff in a patent infringement lawsuit pending
in the United States Court of Federal Claims. The lawsuit, which has been
pending since 1996, involves the alleged unauthorized use of the Company's
carbon fiber processing technology in the manufacture of extremely stealthy
aircraft. A preliminary court ruling has been favorable for the Company, but
the Company cannot predict the timing or the outcome of this litigation or
the impact on the Company's financial condition and results of operations.

         Except as described above, the Company is not a party to any legal
proceedings other than ordinary routine litigation incidental to its
business, which the Company does not believe will result in any material
adverse effect on future consolidated results of operations, financial
condition or cash flows.

Item 4.  Submission of Matters to a Vote of Security Holders
-------  ---------------------------------------------------

         The Company did not submit any matters to a vote of its security
holders during the quarter ended September 30, 2005.

Item 4A.  Executive Officers of the Registrant
--------  ------------------------------------

         The name, age, position and principal occupation of each of the
executive officers of the Company is set forth below:

         Zsolt Rumy, age 63, is the founder of the Company and has served as
its Chairman, Chief Executive Officer and President and as a Director since
1975. Prior to founding the Company, Mr. Rumy served as Industrial Marketing
Manager and Process Engineer for Monsanto Company, Accounts Manager for
General Electric Company and Technical Sales Representative for W.R. Grace
Company. Mr. Rumy received a B.S. degree in Chemical Engineering from the
University of Minnesota in 1966. Mr. Rumy speaks fluent Hungarian.

         Kevin Schott, age 39, has served as the Chief Financial Officer of
the Company since April 2004. As an independent consultant since 2001, Mr.
Schott served a variety of publicly and privately owned companies, including
Zoltek, in different facets of financial planning and management. In years
prior, Mr. Schott worked for two years with Ernst & Young in St. Louis from
1988 to 1990, and then joined Bridge Information Systems, where he worked
for ten years from 1990 to 2000, including five as vice president and
corporate controller. Mr. Schott received a B.S. degree in Business
Administration from Washington University in 1988.

         David Harding, age 42, has served as the Chief Operating Officer of
the Company since February 2005. Prior to this position with the Company,
Mr. Harding served over 18 years with Air Products and Chemicals, Inc.
managing chemical operations in Europe and the United States. He joined Air
Products and Chemicals, Inc. after receiving a B.S. Degree in Chemical
Engineering from Drexel University in 1986. Mr. Harding was promoted to his
first manufacturing manager position in 1988 and continued in manufacturing
management with increasing responsibilities until 1999. He then became the
Director of European Operations; Operations Director, Integration - Global
Operations; and Director of Operations - North America Western Region prior
to joining the Company.


                                     17

<PAGE>
<PAGE>


                                   PART II

Item 5.  Market for Registrant's Common Equity, Related Shareholder Matters
------   ------------------------------------------------------------------
and Issuer Purchases of Equity Securities
-----------------------------------------

         The Company's Common Stock (symbol: "ZOLT") is traded in the Nasdaq
National Market. The number of beneficial holders of the Company's stock is
approximately 12,500, including shareholders whose shares are held in
"nominee" or "street" names. The Company has never paid dividends.

         Set forth below are the high and low bid quotations as reported by
the Nasdaq National Market for the periods indicated. Such prices reflect
interdealer prices, without retail mark-up, mark-down or commission:

<TABLE>
<CAPTION>
                                              Fiscal year ended          Fiscal year ended
                                             September 30, 2005          September 30, 2004
                                             ------------------          ------------------
                                             High           Low          High           Low
                                             ----           ---          ----           ---
<S>                                         <C>           <C>           <C>            <C>
         First Quarter..................    $15.10        $ 8.49        $ 6.99         $2.43
         Second Quarter.................     18.26         10.78         11.21          5.05
         Third Quarter..................     14.70          8.87         10.67          6.75
         Fourth Quarter.................     13.70          9.28          9.22          6.59
</TABLE>

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

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

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

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


                                     18

<PAGE>
<PAGE>

amortized over the life of the convertible debt. Proceeds from issuance of
these convertible debentures were used to repay mortgage debt of $6.0
million and the balance to expand the capacity of carbon fiber operations to
meet demand. The repayment of the $6.0 million mortgage note had a stated
maturity of three years and bore interest at a rate of LIBOR plus 11% with a
LIBOR floor of 2%. The Company paid a prepayment fee of $0.3 million, which
was expensed to the Company's statement of operations at the repayment date.
The Company also wrote off the unamortized amount of the deferred financing
cost related to the original issuances of the note of $0.4 million.

         In October 2004, the Company issued convertible debentures in the
aggregate principal amount of $20.0 million to institutional private equity
investors. The convertible debentures have a stated maturity of 42 months
and bear interest at 7.5% per annum and were initially convertible into
1,666,666 shares of common stock at a conversion price of $12.00 per share.
In connection with the September 2005 issuance the conversion price was
adjusted to $9.50 per share, resulting in the potential issuance of
2,105,263 shares upon conversion. The Company also issued to the investors
six-year warrants to purchase an aggregate of 500,000 shares of common stock
of the Company at an exercise price of $13.00 per share. The fair value of
the debt discount associated with the warrants and conversion feature of the
debt at the time of issuance was $10.2 million and will be amortized over
the life of the convertible debt. Proceeds from issuance of these
convertible debentures were used to reduce existing Hungarian bank debt by
$12.0 million and the balance for working capital purposes which allowed the
Company to refinance the remaining Hungarian bank debt to a three-year term
loan for $3.0 million with no financial covenants going forward.

         In March 2004, the Company issued and sold convertible debentures
in the aggregate principal amount of $5.75 million to institutional private
equity investors and Mr. Dill ($750,000) who is member of the Company's
board of directors. The convertible debentures have a stated maturity of 30
months and bear interest at 6% per annum and have been converted into
895,908 shares of common stock at a conversion price of $6.25 per share for
each investor other than Mr. Dill and $7.82 per share for Mr. Dill. The
Company also issued to the investors five-year warrants to purchase an
aggregate of 223,997 shares of common stock of the Company at an exercise
price of $7.50 per share for each investor other than Mr. Dill whose
warrants have an exercise price of $7.82 per share. The fair value of the
debt discount associated with the warrants and conversion feature, at the
time of issuance, was $5.7 million and will be amortized over the life of
the convertible debt. Proceeds from the issuance of these convertible
debentures are being used for working capital and capital expenditures.

         In January 2004, the Company issued and sold convertible debentures
in the aggregate principal amount of $7.0 million to institutional private
equity and other investors (including $250,000 to each of Mr. Rumy and Mr.
McDonnell who are members of the Company's Board of Directors). The
convertible debentures have a stated maturity of 30 months and bear interest
at 6% per annum and are convertible into 1,295,954 shares of common stock at
the date of issuance at a conversion price of $5.40 per share for each
investor other than Messrs. Rumy and McDonnell and $5.42 per share for each
of Messrs. Rumy and McDonnell. The Company also issued to the investors
five-year warrants to purchase an aggregate of 323,994 shares of common
stock of the Company at an exercise price of $5.40 per share for each
investor other than Messrs. Rumy and McDonnell and $5.42 per share for each
of Messrs. Rumy and McDonnell. The fair value of the debt discount
associated with the warrants and the conversion feature, at the time of
issuance, was $3.0 million and will be amortized over the life of the
convertible debt. Proceeds from the issuance of these convertible debentures
were used for working capital purposes.


                                     19

<PAGE>
<PAGE>

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

<TABLE>
<CAPTION>
                                                (1)FEBRUARY    JANUARY      MARCH      OCTOBER     FEBRUARY (1)SEPTEMBER
                                                     2003        2004       2004         2004        2005        2005
                                                     ----        ----       ----         ----        ----        ----
<S>                                               <C>         <C>         <C>         <C>         <C>         <C>
Amount of debenture (millions)..................  $8.1        $7.0        $5.75       $20.0       $20.0       $5.0
Per share conversion price on debenture.........  $3.25       $5.40       $6.25       $12.00      $20.00      $12.50
Interest rate...................................  7.5%        6.0%        6.0%        7.0%        7.5%        7.5%
Term of debenture...............................  60 months   30 months   30 months   42 months   42 months   42 months
Warrants issued.................................  405,000     323,995     230,000     500,000     457,142     140,000
Term of warrant.................................  60 months   48 months   48 months   72 months   48 months   60 months
Per share exercise price of warrants............  $5.00       $5.40       $7.50       $13.00      $17.50      $14.50
Fair value per warrant at issuance..............  $0.93       $2.27       $5.43       $6.02       $10.47      $9.34
Value per share conversion feature at issuance..  $3.11       $1.78       $5.06       $4.31       $10.47      $9.91
Stock price on date of agreement................  $1.58       $5.40       $9.53       $9.60       $16.68      $13.15
Stock volatility at issuance....................  100%        50%         61%         75%         84%         205%
Dividend yield..................................  0.0%        0.0%        0.0%        0.0%        0.0%        0.0%
Risk free interest rate at issuance.............  3.0%        2.78%       2.44%       3.71%       3.46%       4.25%

<FN>
--------
(1)    The warrants issued in connection with the February 2003 and
       September 2005 convertible issuance meet the criteria of EITF 00-19
       for equity classification as they do not contain similar registration
       rights obligations with respect to the underlying shares. The
       conversion feature on the related debt does not require derivative
       accounting and no beneficial conversion feature exists on the
       issuance of the February 2003, however a beneficial conversion
       existed on the September 2005 issuance and was accounted for as
       discount to the debt which will be amortized into expense over the
       life of the convertible issuance.
</TABLE>

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



                                     20

<PAGE>
<PAGE>

Item 6.  Selected Financial Data
-------  -----------------------

<TABLE>
                                                ZOLTEK COMPANIES, INC.
                                         SELECTED CONSOLIDATED FINANCIAL DATA
                                         (In thousands, except per share data)

<CAPTION>
Statement of Operations Data: (1)                                            Year Ended September 30,
----------------------------------------------------------------------------------------------------------------------

                                                              2005         2004         2003        2002        2001
                                                            --------     --------     --------    --------    --------

<S>                                                         <C>          <C>          <C>         <C>         <C>
Net sales.................................................  $ 60,204     $ 39,827     $ 33,683    $ 37,388    $ 43,423
Cost of sales, excluding available unused capacity costs..    56,836       33,401       28,497      30,044      45,074
Available unused capacity costs...........................     2,347        4,466        5,716       6,039       6,803
Selling, general and administrative expenses (2)..........     9,170        7,674        9,375       9,796      12,278
Operating loss from continuing operations.................    (8,149)      (5,714)      (9,905)     (8,491)    (20,732)
Other income (expense) and income tax expense benefit.....   (30,525)     (11,489)      (2,484)      1,699        (716)
Net loss from continuing operations.......................   (38,674)     (17,203)     (12,389)     (6,898)    (21,448)
Loss on discontinued operations...........................    (1,719)      (5,604)      (3,213)       (933)    (10,123)
Net loss..................................................  $(40,393)    $(22,807)    $(15,602)   $ (7,831)   $(31,571)
Net loss per share:

  Basic and diluted loss per share:
     Continuing operations................................  $  (2.14)    $  (1.05)    $  (0.76)   $  (0.43)   $  (1.30)
     Discontinued operations..............................     (0.09)       (0.35)       (0.20)      (0.05)      (0.61)
                                                            --------     --------     --------    --------    --------

     Total................................................  $  (2.23)    $  (1.40)    $  (0.96)   $  (0.48)   $  (1.91)
                                                            ========     ========     ========    ========    ========

Weighted average common shares outstanding................    18,050       16,372       16,307      16,289      16,515



<CAPTION>
Balance Sheet Data:                                                               September 30,
----------------------------------------------------------------------------------------------------------------------

                                                              2005         2004         2003        2002        2001
                                                            --------     --------     --------    --------    --------

<S>                                                         <C>          <C>          <C>         <C>         <C>
Working capital...........................................  $ 19,073     $ 16,802     $ 18,790    $  9,872    $ 22,891
Total assets..............................................   130,429      122,455      119,455     121,422     121,492
Short-term debt...........................................       374          570          933      14,014       2,073
Long-term debt, less current maturities...................    40,421       42,002       33,541      13,699      22,036
Shareholders' equity......................................    40,646       44,230       64,516      75,904      79,596

<FN>
--------
(1) Prior year amounts have been reclassified for discontinued operations as
discussed in Note 3 to Consolidated Financial Statements.

(2) Includes application and development costs of $3,324, $3,070, $3,453,
$3,750 and $3,533 for fiscal years 2005, 2004, 2003, 2002 and 2001,
respectively.
</TABLE>


                                     21

<PAGE>
<PAGE>


Item 7.  Management's Discussion and Analysis of Financial Condition and
------   ---------------------------------------------------------------
Results of Operations
---------------------

GENERAL
-------

         The Company's mission is to commercialize the use of carbon fibers
as a low-cost but high performance reinforcement for composites used as the
primary building material in everyday commercial products. The Company has
developed and is implementing a strategy to manufacture and sell carbon
fibers into commercial applications at costs competitive with other
materials. In addition, through its technical fibers segment the Company is
the leading supplier of carbon fibers to the aircraft brake industry, and
manufactures and markets oxidized acrylic fibers, an intermediate product of
the carbon fiber manufacturing process, for fire and heat resistance
applications.

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

         The carbon fiber market conditions began to change in fiscal 2004.
Two major aerospace programs, the Airbus A-380 and the Boeing 7E7, have
absorbed virtually all of the aerospace fiber capacity, and resulted in the
divergence of the aerospace and commercial markets for carbon fibers. Since
the beginning of fiscal 2004, the Company announced long-term supply
arrangements with the two largest manufacturers of wind turbines. The
Company expects that these supply arrangements will generate $80 to $100
million of sales over the next three years. Increasing sales of carbon fiber
products during fiscal 2005 confirmed this shift. The divergence of the two
markets was accelerated by the strength in the development of the carbon
fiber wind turbine blade market. Currently Zoltek believes it is in a unique
position of having installed capacity, the technical capability to increase
the scale of its productive capacity with relatively short lead times and
the fiber quality that can attract current available and future new
business.

         The recent increase in the demand for carbon fibers relates to
several different applications, including aerospace. During fiscal 2005, the
Company experienced growth in customer demand in the carbon and technical
fiber business units, as net sales of these segments increased $16.1 million
and $4.9 million, respectively, over fiscal 2004.

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

         With the new orders in place and indications for additional
significant orders, the Company restarted its major carbon fiber
manufacturing facility in Abilene, Texas which had been temporarily idled.
Maintaining the excess capacity has been costly, but the Company believes it
has been necessary to assure customers of adequate supply and encourage them
to shift to carbon fibers from other materials. As of September 30, 2005,
all five lines at the Company's Abilene facility were operational, however,
they have not reached the targeted production rates. The per-line production
has been improving and the Company believes the lines should reach desired
production rates during the second quarter of fiscal 2006.

         In October 2004 the Company moved its prepreg operations from San
Diego to Salt Lake City. The Company plans to bring the capacity back on
line during fiscal 2006 as carbon fiber becomes available to run the
production lines. Until that time, the Company will incur unused capacity
cost related to this facility.

                                     22

<PAGE>
<PAGE>

         In order to meet demand for carbon fibers for wind energy and other
commercial carbon fiber applications, Zoltek undertook a three-phase
capacity expansion program. First, in fiscal 2005 Zoltek initiated the
start-up of the five installed lines at its Abilene, Texas facility and
activated sufficient precursor capacity to support all of the Company's
carbon fiber capacity. Second, Zoltek has added two new carbon fiber lines
and added sufficient precursor capacity at the Company's Hungarian facility
which are expected to begin operating at targeted production rates during
the first quarter of 2006. The third phase of the expansion program calls
for a doubling of the carbon fiber and precursor capacity levels after the
second phase, expected to be operational December 31, 2006. The Company
expects that a $50.0 million convertible debt financing package entered into
in September 2005, of which $20.0 million has been funded to date, will
provide a substantial portion of the capital resources for the planned
capacity increase in fiscal 2006

         During the fourth quarter of fiscal 2004, the Company discontinued
the nylon fiber operation and the acrylic textile business. During the
fourth quarter of fiscal 2005, the Company discontinued the CMC operation.
These divisions were deemed not to be part of the long-term strategy of the
Company and not expected to be profitable in the foreseeable future due to
the continued pricing pressure from competitive manufacturers. The wind-down
of nylon fiber and acrylic textile product lines was substantially completed
by February 1, 2005, and the CMC operation was shut down at September 30,
2005. The Company is utilizing a portion of the acrylic fiber capacity to
supply precursor for its growing carbon fiber manufacturing operations. The
results from operations of these two divisions have been reclassified to
discontinued operations for fiscal 2005 and 2004.

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

FISCAL YEAR ENDED SEPTEMBER 30, 2005 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 2004

         The Company's sales increased 51%, or $20.4 million, to $60.2
million in fiscal 2005 from $39.8 million in fiscal 2004. Carbon fiber sales
increased 88%, or $16.1 million, to $34.5 million in fiscal 2005 from $18.4
million in fiscal 2004 as production and sales of wind energy orders
continued and the demand for the Company's milled and chopped products
significantly increased from prior years. Technical fiber sales increased
33%, or $4.9 million, to $19.7 million in fiscal 2005 from $14.8 million in
fiscal 2004. Technical fiber sales increased as the Company had a
significant increase in orders from aircraft brake customers. Sales of the
continuing components of the specialty products business segment decreased
9%, or $0.6 million, to $6.0 million in fiscal 2005 from $6.6 million in
fiscal 2004 as the sales of the Company's Netlon division in Hungary
decreased due to pricing pressures from competitors.

         The Company's cost of sales (including available unused capacity
costs) increased by 56%, or $21.2 million, to $59.1 million in fiscal 2005
from $37.9 million in fiscal 2004. Carbon fiber cost of sales increased by
94%, or $18.9 million, to $39.0 million for fiscal 2005 from $20.1 million
for fiscal 2004. The increase in carbon fiber cost of sales reflected
increased sales, as well as a significant amount of the cost of sales which
management estimates were attributable to start-up and post start-up
operating inefficiencies of the installed carbon fiber lines at its Abilene,
Texas facility. The difficulties were due in large part the inability to
recruit and train qualified workers and managers at the plant that had been
dormant for several years. The Company expects that the efficiency of the
manufacturing operation will improve during the first and second quarter of
fiscal 2006. Technical fiber cost of sales increased $2.9 million, or 23%,
to $15.4 million for fiscal 2005 from $12.5 million for fiscal 2004. The
increase in technical fiber cost of sales was a reflection of the increase
in sales. The cost of sales of the specialty products segment decreased $0.5
million to $4.8 million compared to fiscal 2004 as sales decreased $0.6
million. The reduced margin related to the increase in the cost of raw
materials for the specialty products segment.

         The Company continued to incur costs related to the unused
productive capacity for carbon fibers at the Abilene, Texas facility and
prepreg operation. These costs included depreciation and other overhead
associated with the unused capacity. These costs, which were separately
identified on the statement of operations, were approximately $2.3 million
during fiscal 2005 and $4.5 million in fiscal 2004. The Company believes it
has been necessary to maintain available capacity to encourage development
of significant new large-scale applications. With the increased orders
during fiscal 2005, unused capacity costs continued to decrease
significantly during the fiscal year and were substantially absorbed in
ongoing operations by the end of fiscal 2005. See additional discussion of
the Abilene facility under "--Liquidity and Capital Resources."

                                     23

<PAGE>
<PAGE>

         Application and market development costs were $3.3 million in
fiscal 2005 and $3.1 million in fiscal 2004. These costs included product
and market development efforts, product trials and sales and product
development personnel and related travel. Targeted emerging applications
include automobile components, fire/heat barrier and alternate energy
technologies.

         Selling, general and administrative expenses were $5.8 million in
fiscal 2005 compared to $4.6 million in fiscal 2004. The increase related to
staffing of management positions that have been filled to meet the new
demands of the growing sales and production volume and costs related to
become compliant with the Sarbanes-Oxley Act's requirements.

         Operating loss was $8.1 million in fiscal 2005 compared to a loss
of $5.7 million in fiscal 2004, an increase of $2.4 million. Carbon fiber
operating loss increased from a loss of $5.8 million in fiscal 2004 to a
loss of $8.2 million in fiscal 2005. These losses also included
approximately $7.5 million of costs which management estimates were
attributable to the start-up and post start-up operating inefficiencies of
the installed carbon fiber lines at its Abilene, Texas facility. The
operating income in technical fibers increased from $1.1 million in fiscal
2004 to $2.7 million in fiscal 2005 as sales of technical fibers in our core
aircraft brake business increased over fiscal 2004. Specialty products
operating income decreased from $1.3 million in fiscal 2004 to $0.9 million
in fiscal 2005 as lower sales related to the Company's Netlon division were
not offset by a decrease in cost. Corporate headquarters operating loss
increased by $1.1 million to a loss of $3.5 million in fiscal 2005 due to
staffing of management positions that have been filled to meet the new
demands of the growing sales and production volume and costs related to
become compliant with the Sarbanes-Oxley Act's requirements. The increase in
the Company's total operating loss was principally a result of the
inefficiencies of the Abilene, Texas facility and the effort to expand
production of Hungarian precursor lines.

         Interest expense was approximately $3.0 million in fiscal 2005
compared to $3.4 million in the corresponding period of fiscal 2004. The
decrease in interest resulted from higher debt levels after the Company's
refinancing transactions offset by the capitalization of interest cost of
$1.2 million related to the expansion of the Company's carbon fiber lines
(see "--Liquidity and Capital Resources"). Due to the limited variable rate
debt, the impact of the increase in interest rates was immaterial.

         Amortization of financing fees which are non-cash expenses, was
approximately $8.5 million in fiscal 2005 compared to $2.6 million in fiscal
2004. The increase in amortization resulted from the Company's issuing
additional convertible debt which increased expenses by $5.9 million,
refinancing transactions as the Company wrote off the unamortized portion of
deferred financing expense of $0.4 million and incurred a prepayment fee of
$0.3 million to pay off an existing mortgage note (see "--Liquidity and
Capital Resources").

         Loss on value of warrants and conversion feature, which is a
non-cash item, increased $11.7 million from a loss of $4.9 million in fiscal
2004 to a loss of $16.6 million in fiscal 2005 (see "--Liquidity--Financing").
The increase in the loss was attributable to the increase in the market
price of the Company's common stock during fiscal 2005 compared to fiscal
2004 and a larger balance of outstanding convertible notes and warrants.

         Other income/expense, net, was a loss of $1.8 million in fiscal
2005 compared to a loss of $0.2 million for fiscal 2004. The increase in the
foreign currency transactional loss during fiscal 2005 was due to the
Hungarian Forint becoming much weaker during 2005 compared to the Euro and
Pound in which the Company buys most raw material.

         Income tax expense was $0.7 million for fiscal 2005 compared to
$0.4 million for the corresponding period in the prior year. A valuation
allowance was recorded against the income tax benefit resulting from the
pre-tax loss in both fiscal 2005 and 2004 due to uncertainties in the
Company's ability to utilize net operating loss carryforward in the future.
The expense for fiscal 2005 related to local taxes for the Hungarian
facility.

         The foregoing resulted in a loss from continuing operations of
$38.7 million for fiscal 2005 compared to a loss of $17.2 million for fiscal
2004. Similarly, the Company reported a loss from continuing operations per
share of $(2.14) and $(1.05) on a basic and diluted basis for fiscal 2005
and 2004, respectively. The weighted average common shares outstanding were
18.1 million and 16.4 million for fiscal 2005 and 2004, respectively.

                                     24

<PAGE>
<PAGE>

         The loss from discontinued operations of $1.7 million for fiscal
2005 compares to a loss of $5.6 million for fiscal 2004. The significant
decrease in sales was offset by a significant decrease in cost during fiscal
2005 as the Company sold off its prior existing inventory balance of its
acrylic fiber business and slowed production of its CMC division as it shut
down at year-end fiscal 2005. The Company reported a loss from discontinued
operations per share of $(0.09) and $(0.35) on a basic and diluted basis for
fiscal 2005 and 2004, respectively.

FISCAL YEAR ENDED SEPTEMBER 30, 2004 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 2003

         The Company's sales increased by 18%, or $6.1 million, to $39.8
million in fiscal 2004 from $33.7 million in fiscal 2003, due to increases
in carbon fiber sales and technical fiber sales. Carbon fiber sales
increased 39%, or $5.2 million, to $18.4 million in fiscal 2004 from $13.2
million in fiscal 2003. The increase in carbon fiber sales in fiscal 2004
was achieved despite a decrease of $5.9 million from 2003 related to the
Company's decision to relocate its prepreg operations from California to
Utah to reduce costs by combining its operations with another of the
Company's facilities. Other carbon fibers sales increased by $11.1 million
in fiscal 2004 from fiscal 2003 as production and sales of sporting goods
and wind energy orders continued during the third and fourth quarters of
fiscal 2004 and the Company experienced a strong increase in the overall
demand for carbon fiber over prior years. Technical fiber sales (excluding
intersegment) increased 5%, or $0.7 million, to $14.8 million in fiscal 2004
from $14.1 million in 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
increased 3%, or $0.2 million, to $6.6 million in fiscal 2004 from $6.4
million in fiscal 2003. During the fourth quarter of fiscal 2004, the
Company discontinued the nylon fiber operation and the acrylic textile
business. The results from operations of these two divisions have been
reclassified to discontinued operations for fiscal 2004 and 2003. The
remaining specialty products division sales have remained flat from fiscal
2004 to 2003, however, the divisions remained profitable at these levels.

         The Company's cost of sales (including available unused capacity
costs) increased by 11%, or $3.7 million, to $37.9 million in fiscal 2004
from $34.2 million in fiscal 2003. Carbon and technical fiber cost of sales
increased by 9% or $2.7 million to $32.5 million in fiscal 2004 from $29.8
million in fiscal 2003 as sales of carbon and technical fiber increased 21%
for the year. The increase of 9% compared to an increase of 21% in sales
results from the Company's ability to absorb its fixed cost as manufacturing
activities increased. The cost of sales of the Company's specialty products
business segment increased 19% compared to the 3% increase in sales,
reflecting sales mix factors.

         The Company continued to incur costs related to the underutilized
productive capacity for carbon fibers at the Abilene, Texas facility,
including depreciation and other overhead associated with the unused
capacity. These costs, which were separately identified on the statement of
operations, were approximately $4.5 million during fiscal 2004 and $5.7
million in fiscal 2003. The decrease in 2004 was due to the start-up of the
carbon fiber lines in Abilene during the fourth quarter of fiscal 2004. The
Company believes it has been necessary to maintain available capacity to
encourage development of significant new large-scale applications. With the
increased orders in fiscal 2005, 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 as all installed
production lines began operating. See additional discussion of the Abilene
facility under "--Liquidity and Capital Resources."

         Application and market development costs were $3.1 million in
fiscal 2004 and $3.5 million in fiscal 2003 as the Company continued cost
containment measures implemented in 2003 related to personnel involved in
research and development. 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 $4.6 million in
fiscal 2004 compared to $5.9 million in fiscal 2003. Although sales for the
year increased 18% and carbon fiber sales increased 40% the Company has
continued cost containment measures related to personnel in non-operations
departments implemented during fiscal 2003.

                                     25

<PAGE>
<PAGE>

         Operating loss from continuing operations was $5.8 million in
fiscal 2004 compared to a loss of $9.9 million in fiscal 2003, an
improvement of $4.2 million. Carbon fiber operating loss improved from a
loss of $8.3 million in fiscal 2003 to a loss of $5.8 million in fiscal
2004. The operating income in technical fibers increased from income of $0.1
million in fiscal 2003 to $1.2 million in fiscal 2004. Specialty product
operating income increased from an income of $1.1 million in fiscal 2003 to
an income of $1.3 million in fiscal 2004. Corporate headquarters operating
loss decreased with a loss of $2.4 million in fiscal 2004 compared to a loss
of $2.9 million in fiscal 2003. 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 $3.4 million in fiscal 2004
compared to $1.9 million in fiscal 2003. The increase in interest resulted
from higher debt levels after the Company's refinancing transactions (see
"--Liquidity and Capital Resources"). The Company experienced little
fluctuation attributed to changes in interest rates as a substantial portion
of the debt portfolio consists of fixed rate.

         Amortization of debt discount from warrants, deferred financing and
beneficial conversion feature costs, which are non-cash expenses, was $2.6
million in fiscal 2004 compared to $0.1 million in fiscal 2003. The increase
in amortization resulted from the Company's refinancing transactions (see
"--Liquidity and Capital Resources").

         Loss on value of warrants and conversion feature, a non-cash item,
increased $4.9 million from no expense in fiscal 2003 to a loss of $4.9
million in fiscal 2004 (see "--Liquidity--Financing"). The increase in the
loss was attributable to an increase in our stock price during 2004 as the
Company had to mark to market the value of the warrants and conversion
feature following the issuance of convertible debt instruments in January
and March 2004. No such obligations existed in the prior year.

         Other income/expense, net, was immaterial in fiscal 2004 and fiscal
2003.

         Income tax expense was $0.4 million for fiscal 2004 compared to an
income tax expense of $0.5 million for fiscal 2003. A valuation allowance
was recorded against the income tax benefit resulting from the pre-tax loss
in both fiscal 2004 and 2003 due to uncertainties in the Company's ability
to utilize tax losses in the future and the expense related to local taxes
for the Hungarian facility.

         The foregoing resulted in a net loss from continuing operations of
$17.2 million for fiscal 2004 compared to a net loss of $12.4 million for
fiscal 2003. Similarly, the Company reported a net loss per share from
continuing operations of $(1.05) and $(0.76) on a basic and diluted basis
for fiscal 2004 and 2003, respectively. The weighted average common shares
outstanding were 16.4 million for fiscal 2004 and 16.3 million for fiscal
2003.

         In the fourth quarter of fiscal 2004, the Company formally adopted
a plan to discontinue and exit two divisions of its Zoltek Rt. operations
which manufacture acrylic and nylon fibers and yarns. These divisions are
not part of the long-term strategy of the Company and will not be profitable
in the foreseeable future due to the continued pricing pressure from
competitive manufacturers. In the fourth quarter of fiscal 2004, the Company
recorded an impairment loss on discontinued operations of $0.2 million
compared to zero in 2003. The operating loss related to those divisions was
$4.9 million for the fiscal year compared to $3.2 million in fiscal 2003.
The increase in the operating loss was due to sales decreasing by $8.1
million, or 27%, from $29.9 million in fiscal 2003 to $21.8 million in
fiscal 2004 while cost of sales only decreased $6.8 million, or 23%, from
$29.1 million in fiscal 2003 to $22.3 million in fiscal 2004, as the Company
did not decrease its fixed cost component of cost of sales at a rate equal
to the decline in sales. The Company also recorded a loss of $0.5 million
related to a legal judgment involving the Company's former Hardcore
subsidiary. The Company is vigorously defending this matter and has filed
counterclaims and an appeal. Management believes that the ultimate
resolution of this litigation will not have a material adverse effect on the
Company's results of operations or financial condition.

LIQUIDITY AND CAPITAL RESOURCES

         Due to the timing of development of markets for carbon fiber
products in each of the past few fiscal years, the Company has incurred
operating losses and the Company's operations have used cash in excess of
cash


                                     26

<PAGE>
<PAGE>

generated by operating activities. As a result, the Company has executed
refinancing arrangements and incurred borrowings under credit facilities,
multiple convertible debenture facilities, as well as long-term debt
financing utilizing the equity in the Company's real estate properties, to
maintain adequate liquidity to support the Company's operating and capital
activities.

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

         In September 2005, Zoltek entered into an agreement for a new
convertible debenture financing package of up to $50 million in a private
placement with a group of institutional investors. In order to match the
cash needs to support the Company's planned expansion, the financing
agreement provides for the funding to occur in four separate closings of
$5.0 million, $15.0 million, $20.0 million and $10.0 million, respectively,
of which the first two tranches have been drawn down. The agreement provides
for Zoltek to draw down the remaining financing over the next twelve months
subject to the Company registering the shares related to the prior
draw-downs. In December 2005, the Company extended the expiration of its
credit facility with the U.S. bank to January 1, 2007. The extended credit
facility consists of a term loan of $0.3 million and a revolving credit loan
with maximum available borrowings of $5.5 million, of which $1.7 million and
$5.5 million was available as of September 30 and December 31, 2005,
respectively. The Company anticipates it will require the remaining proceeds
of the $50.0 million financing package or other significant financing in
fiscal 2006 to support its previously announced capacity expansion program.
The Company believes this is sufficient to fund near-term liquidity needs
but there are no guarantees that changes in events and circumstances based
on the factors described above could lead to the need for additional
borrowings.

         The Company believes the financing package mentioned above of which
$20 million have been received along with the availability under the
Company's revolving credit facility is sufficient to fund Zoltek's
operations during 2006.

Warrant and Conversion Features
-------------------------------

         In January, March and October of 2004 and February 2005, the
Company issued convertible notes and warrants which would require the
Company to register the resale of the shares of common stock upon conversion
or exercise of these securities. The Company accounts for the fair value of
these outstanding warrants to purchase common stock and conversion feature
of its convertible notes in accordance with SFAS No. 133 "Accounting For
Derivative Instruments And Hedging Activities" and EITF Issue No. 00-19
"Accounting For Derivative Financial Instruments Indexed To And Potentially
Settled In A Company's Own Stock;" which requires the Company to bifurcate
and separately account for the conversion feature and warrants as embedded
derivatives contained in the Company's convertible notes. Pursuant to SFAS
No. 133, the Company bifurcated the fair value of the conversion feature
from the convertible notes, since the conversion feature was determined to
not be clearly and closely related to the debt host. In addition, since the
effective registration of the securities underlying the conversion feature
and warrants is an event outside of the control of the Company, pursuant to
EITF Issue No. 00-19, the Company recorded the fair value of the conversion
feature and warrants as long-term liabilities as it was assumed that the
Company would be required to net-cash settle the underlying securities. The
Company is required to carry these embedded derivatives on its balance sheet
at fair value and unrealized changes in the values of these embedded
derivatives are reflected in the consolidated statement of operations as
"Gain (Loss) on value of warrants and conversion feature." See table below
for impact on the financial results for the year ended September 30, 2005
and 2004.


                                     27

<PAGE>
<PAGE>

<TABLE>
<CAPTION>
                                                                      YEAR ENDED SEPTEMBER 30, 2005
                                                                      -----------------------------
                                                                               CONVERSION
                                                                   WARRANTS     FEATURES        TOTAL
                                                                   --------     --------        -----

<S>                                                                <C>          <C>           <C>
         January 2004 issuance - mark to market .................  $(1,083)     $ (8,164)     $ (9,247)
         March 2004 issuance - mark to market ...................     (775)       (5,684)       (6,459)
         October 2004 issuance - mark to market..................   (2,025)       (3,958)       (5,983)
         February 2005 issuance - mark to market.................    1,172         3,943         5,115
                                                                   -------      --------      --------
                  Totals.........................................  $(2,711)     $(13,863)     $(16,574)
                                                                   =======      ========      ========

<CAPTION>
                                                                      YEAR ENDED SEPTEMBER 30, 2004
                                                                      -----------------------------
                                                                               CONVERSION
                                                                   WARRANTS     FEATURES       TOTAL
                                                                   --------     --------       -----
<S>                                                                <C>          <C>           <C>
         January 2004 issuance - mark to market .................  $(1,109)     $ (4,039)     $(5,148)
         March 2004 issuance - mark to market ...................       18           210          228
                                                                   -------      --------      -------
                  Totals.........................................  $(1,091)     $ (3,829)     $(4,920)
                                                                   =======      ========      =======
</TABLE>

Fiscal 2005 Financing Transactions
----------------------------------

         In December 2005, the Company extended its credit facility with the
U.S. bank to January 1, 2007. The extended credit facility consists of a
term loan of $0.3 million and a revolving credit loan with maximum available
borrowings of $5.5 million. Total borrowings under the U.S. credit facility,
including the revolving line of credit and term loan, were $4.1 million at
September 30, 2005 leaving an availability of $1.7 million. After the
November 30, 2005 funding of $15.0 million, the Company had full
availability under the revolver.

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

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

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

                                     28

<PAGE>
<PAGE>

         In February 2005, the Company issued convertible debentures in the
aggregate principal amount of $20.0 million to institutional private equity
investors. The convertible debentures have a stated maturity of 42 months
and bear interest at a variable rate of six-month LIBOR plus 4% which was
7.5% at March 2005, and are presently convertible into 1,000,000 shares of
common stock at a conversion price of $20.00 per share. The Company also
issued to the investors four-year warrants to purchase an aggregate of
457,142 shares of common stock of the Company at an exercise price of $17.50
per share. The fair value of the debt discount associated with the warrants
and conversion feature of the debt at the time of issuance was $15.3 million
and will be amortized over the life of the convertible debt. Proceeds from
issuance of these convertible debentures were used to repay mortgage debt of
$6.0 million and the balance to expand the capacity of carbon fiber
operations to meet demand. The repayment of the $6.0 million mortgage note
had a stated maturity of three years and bore interest at a rate of LIBOR
plus 11% with a LIBOR floor of 2%. The Company paid a prepayment fee of $0.3
million, which was expensed to the Company's statement of operations at the
repayment date. The Company also wrote off the unamortized amount of the
deferred financing cost related to the original issuances of the note of
$0.4 million.

         In October 2004, the Company issued convertible debentures in the
aggregate principal amount of $20.0 million to institutional private equity
investors. The convertible debentures have a stated maturity of 42 months
and bear interest at 7.5% per annum and were intitially convertible into
1,666,666 shares of common stock at a conversion price of $12.00 per share.
In connection with the September 2005 issuance the conversion price was
adjusted to $9.50 per share, resulting in the potential issuance of
2,105,263 shares upon conversion. The Company also issued to the investors
six-year warrants to purchase an aggregate of 500,000 shares of common stock
of the Company at an exercise price of $13.00 per share. The fair value of
the debt discount associated with the warrants and conversion feature of the
debt at the time of issuance was $10.2 million and will be amortized over
the life of the convertible debt. Proceeds from issuance of these
convertible debentures were used to reduce existing Hungarian bank debt by
$12.0 million and the balance for working capital purposes which allowed the
Company to refinance the remaining Hungarian bank debt to a three-year term
loan for $3.0 million with no financial covenants going forward.

Fiscal 2004 Financing Transactions
----------------------------------

         In January 2004, the Company issued and sold convertible debentures
in the aggregate principal amount of $7.0 million to institutional private
equity and other investors (including $250,000 to each of Mr. Rumy and Mr.
McDonnell who are members of the Company's Board of Directors). The
convertible debentures have a stated maturity of 30 months and bear interest
at 6% per annum and are convertible into 1,295,954 shares of common stock at
the date of issuance at a conversion price of $5.40 per share for each
investor other than Messrs. Rumy and McDonnell and $5.42 per share for each
of Messrs. Rumy and McDonnell. The Company also issued to the investors
five-year warrants to purchase an aggregate of 323,994 shares of common
stock of the Company at an exercise price of $5.40 per share for each
investor other than Messrs. Rumy and McDonnell and $5.42 per share for each
of Messrs. Rumy and McDonnell. The fair value of the debt discount
associated with the warrants and the conversion feature, at the time of
issuance, was $3.0 million and will be amortized over the life of the
convertible debt. Proceeds from the issuance of these convertible debentures
were used for working capital purposes.

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


                                     29

<PAGE>
<PAGE>

As a result of the Company completing the refinancing transactions making
available the cash to settle the intercompany accounts, the letter of credit
was released. After converting $250,000 into convertible debt as part of the
January 2004 financing, the remaining $1.15 million loan was repaid during
the third quarter of fiscal 2004.

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

         In March 2004, the Company issued and sold convertible debentures
in the aggregate principal amount of $5.75 million to institutional private
equity investors and Mr. Dill ($750,000) who is member of the Company's
board of directors. The convertible debentures have a stated maturity of 30
months and bear interest at 6% per annum and have been converted into
895,908 shares of common stock at a conversion price of $6.25 per share for
each investor other than Mr. Dill and $7.82 per share for Mr. Dill. The
Company also issued to the investors five-year warrants to purchase an
aggregate of 223,997 shares of common stock of the Company at an exercise
price of $7.50 per share for each investor other than Mr. Dill whose
warrants have an exercise price of $7.82 per share. The fair value of the
debt discount associated with the warrants and conversion feature, at the
time of issuance, was $5.7 million and will be amortized over the life of
the convertible debt. Proceeds from the issuance of these convertible
debentures are being used for working capital and capital expenditures.

Fiscal 2003 Refinancing Transactions
------------------------------------

         The Company executed an amended credit facility agreement, dated as
of February 13, 2003, with the U.S. bank. The amended credit facility
agreement is structured as a term loan in the amount of $3.5 million
(originally due February 13, 2005) and a revolving credit loan in the amount
of $5.0 million (originally due January 31, 2004). The Company repaid $5.0
million of this loan from the proceeds of the sale of subordinated
convertible debentures as discussed above. Borrowings under the amended
facility were 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. The loan agreement contains quarterly financial covenants related to
borrowings, working capital, debt coverage, current ratio and capital
expenditures. Total borrowings under the revolving credit agreement were
$3.8 million and the available credit under this agreement was $1.7 million
at September 30, 2005.

         The Company also entered into a debenture purchase agreement, dated
as of February 13, 2003, under which the Company issued and sold to 14
investors, including certain directors, subordinated convertible debentures
in the aggregate principal amount of $8.1 million. The subordinated
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 warrants, at the time of
issuance, was estimated to be $376,650. Proceeds from the issuance of these
convertible debentures were used to repay existing borrowings as well as for
working capital.



                                     30

<PAGE>
<PAGE>

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

<TABLE>
<CAPTION>
                                                (1)FEBRUARY    JANUARY      MARCH      OCTOBER     FEBRUARY (1)SEPTEMBER
                                                     2003        2004        2004        2004        2005        2005
                                                     ----        ----        ----        ----        ----        ----
<S>                                               <C>         <C>         <C>         <C>         <C>         <C>
Amount of debenture (millions)..................  $8.1        $7.0        $5.75       $20.0       $20.0       $5.0
Per share conversion price on debenture.........  $3.25       $5.40       $6.25       $12.00      $20.00      $12.50
Interest rate...................................  7.5%        6.0%        6.0%        7.0%        7.5%        7.5%
Term of debenture...............................  60 months   30 months   30 months   42 months   42 months   42 months
Warrants issued.................................  405,000     323,995     230,000     500,000     457,142     140,000
Term of warrant.................................  60 months   48 months   48 months   72 months   48 months   60 months
Per share exercise price of warrants............  $5.00       $5.40       $7.50       $13.00      $17.50      $14.50
Fair value per warrant at issuance..............  $0.93       $2.27       $5.43       $6.02       $10.47      $9.34
Value per share conversion feature at issuance..  $3.11       $1.78       $5.06       $4.31       $10.47      $9.91
Stock price on date of agreement................  $1.58       $5.40       $9.53       $9.60       $16.68      $13.15
Stock volatility at issuance....................  100%        50%         61%         75%         84%         205%
Dividend yield..................................  0.0%        0.0%        0.0%        0.0%        0.0%        0.0%
Risk free interest rate at issuance.............  3.0%        2.78%       2.44%       3.71%       3.46%       4.25%

<FN>
--------
(1)    The warrants issued in connection with the February 2003 and
       September 2005 convertible issuance meet the criteria of EITF 00-19
       for equity classification as they do not contain similar registration
       rights obligations with respect to the underlying shares. The
       conversion feature on the related debt does not require derivative
       accounting and no beneficial conversion feature exists on the
       issuance of the February 2003, however a beneficial conversion
       existed on the September 2005 issuance and was accounted for as
       discount to the debt which will be amortized into expense over the
       life of the convertible issuance.
</TABLE>

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

         In accordance with SFAS No. 128, "Earnings per Share", the Company
calculates diluted earnings per share including the impact of the Company's
potential stock equivalents. The Company has outstanding stock options,
warrants and convertible debt outstanding at September 30, 2005 and 2004
which are not included in the determination of diluted earnings per share
because the impact of these potential additional shares is anti-dilutive.
Had these securities been dilutive, an additional 6.6 million shares for
fiscal 2005 and 4.8 million shares for fiscal 2004 would have been included
in the Company's diluted earnings per share calculation.

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

         US Operations - The Company's current credit facility with its U.S.
bank is described above under "--Fiscal 2005 Refinancing." No financial
covenants apply to the credit facility from the U.S. bank, which mature on
January 1, 2007. Total borrowings under the U.S. credit facility, including
the revolving line of credit and term loan, were $4.1 million at September
30, 2005 leaving an availability of $1.7 million, and are classified as
long-term on the consolidated balance sheet. The Company expects the
revolving line of credit and term loan to be renewed when it matures on
January 1, 2007, similar to past years.

         Hungarian Operations - The Company's Hungarian subsidiary has a
credit facility with a Hungarian bank. Total borrowings under this credit
facility were $2.8 million at September 30, 2005. Due to the fiscal 2005
refinancing (see "--Fiscal 2005 Refinancing Transactions"), the credit
facility is a term loan with interest payments over the next three years and
repayment of principal at the maturity date on December 31, 2007.

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

         In the third quarter of fiscal 2001, the Company elected to
temporarily idle a significant part of the operations located at the
Abilene, Texas facility. The Company resumed manufacturing at this facility
during fiscal 2005. The Company determined that no impairment of its
carrying value existed at September 30, 2005 and 2004.


                                     31

<PAGE>
<PAGE>

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

         The $0.3 million decrease in cash used in continuing operations was
the result of an $4.5 million increase in cash operating loss due to the
inefficiencies cost from the Abilene manufacturing facilities offset by a
decrease in working capital requirements of $4.8 million. The $4.8 million
decrease in working capital requirements was attributable to a decrease in
the increase of receivable levels of $3.2 million and an increase in
payables of $0.6 million. The Company anticipates improving future cash
flows from operations as it gains operating efficiency at the Abilene and
Hungarian manufacturing facilities and a continued aggressive approach to
selling the milled and chopped inventory.

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

         Net cash used by discontinued operating activities was $1.6 million
for fiscal 2005. The cash flow used by discontinued operating activities
during 2005 was primarily related to the net loss of $1.7 million plus
decreases in net operating assets of $0.1 million. The decrease in net
operating assets consisted of a decrease in receivables and inventory of
$1.3 million and $1.6 million, respectively, offset by decreases in payables
of $2.8 million. The decrease in receivables and inventory related to the
discontinuation of the textile acrylic division as the sales and inventory
purchases decreased significantly from the prior year.

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

         Net cash used for investing activities for fiscal year 2005 was
$14.5 million which primarily consisted of capital expenditures. These
expenditures related to the expansion of the Company's precursor facility
and carbon fiber operations to meet the additional demand for carbon fiber
products.

         Net cash used for investing activities for fiscal 2004 was $5.9
million which included capital expenditures primarily at the Hungarian
subsidiary related to expansion of its precursor facility.

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

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

         Net cash provided by financing activities was $23.9 million and
$12.5 million for the fiscal years ended 2005 and 2004, respectively. The
various financing transactions are described above.


                                     32

<PAGE>
<PAGE>

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

         A summary of significant contractual obligations is shown below.
See Notes 7 and 8 to the consolidated financial statements for discussion of
the Company's debt agreements and lease obligations, respectively.

<TABLE>
<CAPTION>
                                                                LESS THAN               4-5      MORE THAN
                                                       TOTAL     1 YEAR   1-3 YEARS    YEARS      5 YEARS
                                                      -------   --------- ---------    ------    ---------
<S>                                                   <C>        <C>       <C>         <C>        <C>
Notes payable.......................................  $   442    $  442
Convertible debentures..............................   52,800         -    $52,800
Long-term debt, including current maturities........   10,161       374      9,787     $    -     $    -
                                                      -------    ------    -------     ------     ------
     Total debt.....................................   63,403       816     62,587          -          -
Operating leases....................................      348        58        174        116          -
                                                      -------    ------    -------     ------     ------
     Total debt and operating leases................   63,751       874     62,761        116          -
Contractual interest payments.......................   11,897     4,601      7,296          -          -
Lawsuit judgment....................................    1,188     1,188          -          -          -
Purchase obligations................................    1,403     1,403          -          -          -
                                                      -------    ------    -------     ------     ------
     Total contractual obligations..................  $78,239    $8,066    $70,057     $  116     $    -
                                                      =======    ======    =======     ======     ======
</TABLE>

         The future debt obligations and interest would be reduced by $52.8
million and $10.8 million, respectively, in exchange for 6.6 million shares
of common stock if all the convertible debt was converted.

         The pro-forma effect on total contractual obligations assuming such
conversion occurred as of October 1, 2005 is as follows:

<TABLE>
<CAPTION>
                                                   CONVERSION               LESS THAN                4-5      MORE THAN
                                                     PRICE        TOTAL      1 YEAR    1-3 YEARS    YEARS      5 YEARS
                                                   ----------   ---------    ------    ---------    -----     ---------

<S>                                                  <C>        <C>         <C>        <C>          <C>        <C>
Total contractual obligation.......................             $ 78,239    $ 8,066    $ 70,057     $  116     $    -

February 2003 issuance.............................  $ 3.25       (7,800)         -      (7,800)         -          -
October 2004 issuance..............................    9.50      (20,000)         -     (20,000)         -          -
February 2005 issuance.............................   20.00      (20,000)         -     (20,000)         -          -
September 2005 issuance............................   12.50       (5,000)         -      (5,000)         -          -
Interest payments..................................              (10,801)    (3,921)     (6,880)         -          -
                                                                --------    -------    --------     ------     ------

     Total pro forma contractual obligations.......             $ 14,638    $ 4,145    $ 10,377     $  116     $    -
                                                                ========    =======    ========     ======     ======
</TABLE>

         The closing price of the Company's stock on December 28, 2005 as
reported by Nasdaq was $8.65 per share.

         In October 2003, the Company was named as a defendant in a civil
action filed in the Court of Common Pleas for Cuyahoga County, Ohio by the
former owner of Hardcore Composites Operations, LLC ("Hardcore") alleging
breach by Hardcore and the Company of their respective obligations under a
sublease, the Company's guaranty of the sublease, and prior settlement
agreement among the parties. The Company executed a guaranty of Hardcore
Composite's lease obligations of approximately $30,000 per month to the
former owner. The former owner's action claimed damages in the amount of
$0.3 million for breaches by the Company of its obligations under the
guaranty and the settlement agreement and, in addition, demanded $0.5
million in damages from Hardcore and the Company, jointly and severally,
under the terms of the settlement agreement. In October 2004, the Court of
Common Pleas for Cuyahoga County, Ohio ruled in favor of the former owner of
Hardcore Composites in the amount of $1.1 million. In prior periods, the
Company has accrued $1.1 million in respect of the possible liability in
this matter, which it believes is its maximum obligation under this
guaranty. The Company is vigorously defending this matter, has filed
counterclaims and filed an appeal that represents its only recourse
regarding this guaranty. Management believes that the ultimate resolution of
this litigation will not have a further material adverse effect on the
Company's results of operations, financial condition or cash flow. To date,
the Company has not made any payments of any portion of this obligation,
although it posted an appeal bond in the amount of $1.3 million. The lease
of the Hardcore Composites manufacturing facility expires March 31, 2008.
Hardcore no longer occupies the facility and, accordingly, in connection
with the ongoing litigation with the former owner, Zoltek is asserting that
Zoltek has no further ongoing guarantee obligation with respect to


                                     33

<PAGE>
<PAGE>

the lease. The Company also is the obligee on aggregate original value of
unsecured promissory notes of $9.3 million in connection with the sale of
Hardcore, for which a full valuation allowance has been recorded. Management
of the Company concluded that a full valuation allowance is appropriate in
light of Hardcore's current financial condition which, among other relevant
factors, make the collection of the promissory notes doubtful.

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

         Sales transactions are initiated through customer purchase order or
sales agreement which includes fixed pricing terms. The Company recognizes
sales for manufactured products on the date title to the sold product
transfers to the customer, which is either the shipping date or the date
consumed by the customer if sold on consignment. Manufactured products are
accepted prior to shipment and thus an allowance for returns is not accrued
as historical returns have not been material. The Company reviews its
accounts receivable on a monthly basis to identify any specific customers
for collectibility issues. If the Company deems that an amount due from a
customer is uncollectible, the amount is recorded as expense in the
statement of operations.

         During fiscal 2005, 2004 and 2003, approximately $8.6 million, $7.2
million and $8.0 million, respectively, of sales were earned from one
customer in the technical fiber segment.

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 (excluding available unused
capacity costs) on the Company's statement of operations in the period in
which the revision is made.

         For several years prior to fiscal 2004, carbon fiber sales were
depressed by excess capacity across the industry, distressed pricing across
most existing markets and weakening economic conditions globally. These
factors combined with the high level of inventories maintained by the
Company, resulted in the Company reducing the cost of certain carbon fiber
inventories to their lower estimated market values. It is possible that the
market value of these carbon fiber inventories may further decrease
resulting in additional charges to cost of sales (excluding available unused
capacity costs).

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 $3.3 million in fiscal 2005,
$3.1 million in fiscal 2004 and $3.5 million in fiscal 2003. 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.


                                     34

<PAGE>
<PAGE>

UNUSED CAPACITY COSTS

         Prior to fiscal 2005, the Company was not operating its Abilene,
Texas facility at full capacity. As a result, the Company has elected to
categorize certain costs related to these idle assets as unused capacity
costs. Such costs totaled $2.3 million, $4.5 million and $5.7 million for
fiscal 2005, 2004 and 2003, respectively, and include depreciation and other
overhead expenses associated with unused capacity. The unused capacity costs
are presented as an operating item on the Company's consolidated statement
of operations. As discussed above, the Company has resumed certain levels of
manufacturing at this facility during fiscal 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.

RECENT ACCOUNTING PRONOUNCEMENTS

         See Note 1 to the Company's Consolidated Financial Statements.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
-------   ----------------------------------------------------------

         The Company is exposed to changes in interest rates primarily as a
result of borrowing activities under its credit facility. The nature and
amount of the Company's debt may vary as a result of future business
requirements, market conditions and other factors. The extent of the
Company's interest rate risk is not quantifiable or predictable because of
the variability of future interest rates and business financing
requirements. The Company does not believe such risk is material because a
significant amount of the Company's current debt is at fixed rates. However,
the February 2005 convertible debt issuance of $20.0 million bears interest
at a variable rate and the Company plans to address the risk issue. At
September 30, 2005, the Company did not have any interest rate swap
agreements outstanding. However, a one percent increase in the weighted
average interest rate of the Company's debt would result in a $0.3 million
increase in interest expense based on the debt levels at September 30, 2005.

         The Company views as long-term its investment in Zoltek Rt., which
has a functional currency other than the U.S. dollar. As a result, the
Company does not hedge this net investment. In terms of foreign currency
translation risk, the Company is exposed to Zoltek Rt.'s functional
currency, which is the Hungarian Forint. The Company's net foreign currency
investment in Zoltek Rt. translated into U.S. dollars using period-end
exchange rates was $35.3 million at September 30, 2005 and 2004,
respectively. The potential loss in value of the Company's net foreign
currency investment in Zoltek Rt. resulting from a hypothetical 10% adverse
change in quoted foreign currency exchange rate of the Hungarian Forint at
September 30, 2004 and 2003 amounted to $3.5 million. In addition, as of
September 30, 2005, the Company has a long-term loan with its Zoltek Rt.
subsidiary of $25.0 million. The Company does not expect the loan to be
repaid in the near future, in fact the Company


                                     35

<PAGE>
<PAGE>

expects the loan to increase as the Company continues to invest in the
expansion of its carbon fiber operations at its Hungarian facility. As such,
the Company considers this loan as a permanent investment. The Company could
have unrealized gains or losses on the loan as the value of the Forint
increases or decreases against the U.S. Dollar, which will be recognized
through cumulative translation adjustment of equity. In addition, Zoltek Rt.
routinely sells its products to customers located primarily throughout
Europe in sales transactions that are denominated in foreign currencies
other than the Hungarian Forint. Also, Zoltek Rt. has debt that is
denominated in foreign currencies other than the Hungarian Forint. As a
result, Zoltek Rt. is exposed to foreign currency risks related to these
transactions. The Company does not currently employ a foreign currency
hedging strategy related to the sales of Zoltek Rt.

         In January, March and October of 2004 and February 2005, the
Company issued convertible notes and warrants which would require the
Company to register the resale of the shares of common stock upon conversion
or exercise of these securities. The Company accounts for the fair value of
these outstanding warrants to purchase common stock and conversion feature
of its convertible notes in accordance with SFAS No. 133 "Accounting For
Derivative Instruments And Hedging Activities" and EITF Issue No. 00-19
"Accounting For Derivative Financial Instruments Indexed To And Potentially
Settled In A Company's Own Stock;" which requires the Company to bifurcate
and separately account for the conversion feature and warrants as embedded
derivatives contained in the Company's convertible notes. Pursuant to SFAS
No. 133, the Company bifurcated the fair value of the conversion feature
from the convertible notes, since the conversion feature was determined to
not be clearly and closely related to the debt host. In addition, since the
effective registration of the securities underlying the conversion feature
and warrants is an event outside of the control of the Company, pursuant to
EITF Issue No. 00-19, the Company recorded the fair value of the conversion
feature and warrants as long-term liabilities as it was assumed that the
Company would be required to net-cash settle the underlying securities. The
Company is required to carry these embedded derivatives on its balance sheet
at fair value, which was $29.0 million and $13.7 million at September 30,
2005 and 2004 respectively. Any unrealized changes, which is an inverse
relation to changes in the Company's stock price, in the values of these
embedded derivatives are reflected in the consolidated statement of
operations as "Gain (Loss) on value of warrants and conversion feature."
Since these gains and loss are non-cash in nature the Company does not
expect to employ a type of hedging strategy related to these transactions.


                                     36

<PAGE>
<PAGE>

Item 8.  Financial Statements and Supplementary Data
-------  -------------------------------------------

                           ZOLTEK COMPANIES, INC.
                            REPORT OF MANAGEMENT

         Management of Zoltek Companies, Inc. is responsible for the
preparation and integrity of the Company's financial statements. These
statements have been prepared in accordance with generally accepted
accounting principles and in the opinion of management fairly present the
Company's financial position, results of operations, and cash flow.

         The Company maintains accounting and internal control systems to
provide reasonable assurance that assets are safeguarded against loss from
unauthorized use or disposition and that the financial records are reliable
for preparing financial statements. The selection and training of qualified
personnel and the establishment and communication of accounting and
administrative policies and procedures are important elements of these
control systems. As set forth under "Item 9A. Controls and Procedures" of
this Annual Report on Form 10-K, as amended, the Company's Chief Executive
Officer and Chief Financial Officer concluded that various material
weaknesses existed as of September 30, 2005.

         The Board of Directors, through its Audit Committee consisting
solely of non-management directors, meets periodically with management and
the Independent Registered Public Accounting Firm to discuss audit and
financial reporting matters. To ensure independence, PricewaterhouseCoopers
LLP has direct access to the Audit Committee.

         The Report of PricewaterhouseCoopers LLP, Independent Registered
Public Accounting Firm, on their audits of the accompanying financial
statements follows. This report states that their audits were performed in
accordance with the Standards of the Public Company Accounting Oversight
Board (United States). These standards include consideration of internal
control over financial reporting controls for the purpose of determining the
nature, timing, and extent of auditing procedures necessary for expressing
their opinion on the financial statements.

/s/ Zsolt Rumy
-----------------
Zsolt Rumy
January 3, 2006


                                     37


<PAGE>
<PAGE>


           REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders
 of Zoltek Companies, Inc.:

We have completed an integrated audit of Zoltek Companies, Inc.'s 2005
consolidated financial statements and of its internal control over financial
reporting as of September 30, 2005, and audits of its 2004 and 2003
consolidated financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our opinions,
based on our audits, are presented below.

Consolidated financial statements
---------------------------------

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Zoltek
Companies, Inc. and its subsidiaries at September 30, 2005 and 2004, and the
results of their operations and their cash flows for each of the three years
in the period ended September 30, 2005 in conformity with accounting
principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

Internal control over financial reporting
-----------------------------------------

Also, we have audited management's assessment, included in Management's
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that Zoltek Companies, Inc. did not maintain effective internal control over
financial reporting as of September 30, 2005, because of the effects of: (1)
an ineffective control environment due to a) the lack of a sufficient
complement of personnel to maintain an appropriate accounting and financial
reporting organizational structure to support the activities of the Company
and b) the lack of an appropriate level of control consciousness as it
relates to the establishment and maintenance of policies and procedures with
respect to the primary components of information technology

                                     38

<PAGE>
<PAGE>

general controls; (2) ineffective controls over certain of its period-end
financial reporting processes related to a) the completeness, accuracy and
validity of the period-end consolidation process, b) the preparation and
review of the interim and annual consolidated financial statements and
disclosures, and c) the completeness and accuracy of foreign currency
translations related to the Company's investment in its Hungarian
subsidiary; (3) ineffective controls over the preparation, review and
approval of journal entries; (4) ineffective controls over the preparation,
review and approval of certain account reconciliations; (5) ineffective
controls over the determination of the allowance for doubtful accounts; (6)
ineffective controls over the accounting for inventory related to a) the
completeness and accuracy of physical inventory quantities and b) the
accuracy and valuation of inventory; (7) ineffective controls over the
completeness and accuracy of property, plant and equipment; (8) ineffective
controls over the completeness and accuracy of its accounting for
derivatives associated with convertible debt and the related amortization of
financing fees and debt discount and gain (loss) on value of warrants and
conversion feature; (9) ineffective controls over the completeness and
accuracy of its earnings per share calculation and related disclosures; and
(10) ineffective controls over segregation of duties (both manual and
automated), including access to financial applications and data, based on
criteria established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility is to
express opinions on management's assessment and on the effectiveness of the
Company's internal control over financial reporting based on our audit.

We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes obtaining an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as
we consider necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with

                                     39

<PAGE>
<PAGE>

authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.

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

A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be
prevented or detected. The following material weaknesses as of September 30,
2005 have been identified and included in management's assessment.

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

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

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

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

                                     40

<PAGE>
<PAGE>

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

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

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

     b)   The Company did not maintain effective controls over the
          preparation and review of the interim and annual consolidated
          financial statements and disclosures. Specifically, effective
          controls were not designed and in place over the process related
          to (i) identifying and accumulating all required supporting
          information to ensure the completeness and accuracy of the
          consolidated financial statements and disclosures, and (ii) the
          performance of period-end financial analyses including analytical
          reviews. This control deficiency resulted in audit adjustments to
          the Company's 2005 annual consolidated financial statements and
          the interim consolidated financial statements for each of the 2005
          quarters.

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

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

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

                                     41

<PAGE>
<PAGE>

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

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

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

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

     a)   The Company did not maintain effective controls over the
          completeness and accuracy of physical inventory quantities.
          Specifically, effective controls were not designed and in place to
          ensure that (i) the Company's perpetual inventory records were
          appropriately

                                     42

<PAGE>
<PAGE>

          updated for the results of cycle counts performed and (ii) an
          accurate and complete physical inventory was achieved and that the
          Company's perpetual inventory records were appropriately updated
          for the results of the annual physical inventory. These control
          deficiencies resulted in audit adjustments to the Company's 2005
          annual consolidated financial statements and the interim
          consolidated financial statements for each of the 2005 quarters.

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

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

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

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

8)   The Company did not maintain effective controls over the completeness
     and accuracy of its accounting for derivatives associated with
     convertible debt and the related amortization of financing fees and
     debt discount and gain (loss) on value of warrants and conversion
     feature. Specifically, effective controls were not designed and in
     place over the accounting for derivatives in connection with the
     Company's convertible debt issued in January, March and October 2004,
     and February and September 2005 to ensure the completeness and accuracy
     of the accounting for (i) the beneficial conversion feature embedded in
     the

                                     43

<PAGE>
<PAGE>

     Company's convertible debt, or (ii) the common stock purchase warrants
     issued in connection with the Company's convertible debt. This control
     deficiency resulted in misstatements to long-term liabilities,
     shareholders' equity, interest expense, amortization expense, and fair
     value gains and losses which resulted in the restatement of the
     Company's 2004 annual consolidated financial statements, as well as the
     Company's interim consolidated financial statements for the quarters
     ended March 31, 2004, June 30, 2004, and the 2005 interim consolidated
     financial statements for the quarters ending December 31, 2004 and
     March 31, 2005, as well as audit adjustments to the Company's quarter
     ended September 30, 2005 consolidated financial statements. In
     addition, this control deficiency could result in a misstatement of the
     aforementioned accounts and disclosures that would result in a material
     misstatement to the annual or interim consolidated financial statements
     that would not be prevented or detected. Accordingly, management
     determined that this control deficiency constitutes a material
     weakness.

9)   The Company did not maintain effective controls over the completeness
     and accuracy of its earnings per share calculation and the related
     disclosures. Specifically, the Company did not maintain effective
     controls over the appropriate sequencing of warrants and convertible
     debt instruments for determining diluted earnings per share. This
     control deficiency resulted in the restatement of the Company's interim
     consolidated financial statements for the quarter ended March 31, 2005.
     In addition, this control deficiency could result in a material
     misstatement to earnings per share that would result in a material
     misstatement to the Company's annual or interim consolidated financial
     statements that would not be prevented or detected. Accordingly,
     management determined that this control deficiency constitutes a
     material weakness.

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

These material weaknesses were considered in determining the nature, timing,
and extent of audit tests applied in our audit of the 2005 consolidated
financial statements, and our opinion

                                     44

<PAGE>
<PAGE>

regarding the effectiveness of the Company's internal control over financial
reporting does not affect our opinion on those consolidated financial
statements.

In our opinion, management's assessment that Zoltek Companies, Inc. did not
maintain effective internal control over financial reporting as of September
30, 2005 is fairly stated, in all material respects, based on criteria
established in Internal Control - Integrated Framework issued by the COSO.
Also, in our opinion, because of the effects of the material weaknesses
described above on the achievement of the objectives of the control
criteria, Zoltek Companies, Inc. has not maintained effective internal
control over financial reporting as of September 30, 2005, based on criteria
established in Internal Control - Integrated Framework issued by the COSO.


/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
St. Louis, Missouri
January 3, 2006





                                     45

<PAGE>
<PAGE>

<TABLE>
                                                   ZOLTEK COMPANIES, INC.
                                                 CONSOLIDATED BALANCE SHEET
                                  (Amounts in thousands, except share and per share data)

<CAPTION>
ASSETS                                                                                                  September 30,
--------------------------------------------------------------------------------------------------------------------------
                                                                                                    2005            2004
                                                                                                  --------        --------
<S>                                                                                               <C>             <C>
Current assets:
     Cash and cash equivalents.................................................................   $    255        $    267
     Accounts receivable, less allowance for doubtful accounts of $718 and $981, respectively..     11,101          11,611
     Inventories...............................................................................     24,753          25,902
     Other current assets......................................................................      3,195           1,167
                                                                                                  --------        --------
          Total current assets.................................................................     39,304          38,947
Property and equipment, net....................................................................     88,018          80,414
Other assets...................................................................................      3,107           3,094
                                                                                                  --------        --------
          Total assets.........................................................................   $130,429        $122,455
                                                                                                  ========        ========

LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------------------------------
Current liabilities:
     Current maturities of long-term debt......................................................   $    374        $    570
     Trade accounts payable....................................................................     13,267          13,257
     Notes payable.............................................................................        442           2,441
     Accrued expenses and other liabilities....................................................      6,149           5,877
                                                                                                  --------        --------
          Total current liabilities............................................................     20,232          22,145
Other long-term liabilities....................................................................        107             357
Value of warrants and conversion feature associated with convertible debenture.................     29,024          13,721
Long-term debt, less current maturities........................................................     40,421          42,002
                                                                                                  --------        --------
          Total liabilities....................................................................     89,784          78,225
                                                                                                  --------        --------
Commitments and contingencies (see Note 8)
Shareholders' equity:
     Preferred stock, $.01 par value, 1,000,000 shares authorized,
       no shares issued and outstanding........................................................          -               -
     Common stock, $.01 par value, 50,000,000 shares authorized,
       19,213,384 and 16,307,338 shares issued and outstanding, respectively...................        189             163
     Additional paid-in capital................................................................    148,982         109,524
     Accumulated deficit ......................................................................    (95,705)        (55,312)
     Accumulated other comprehensive loss......................................................    (12,821)        (10,145)
                                                                                                  --------        --------
          Total shareholders' equity...........................................................     40,645          44,230
                                                                                                  --------        --------
          Total liabilities and shareholders' equity...........................................   $130,429        $122,455
                                                                                                  ========        ========

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

                                     46

<PAGE>
<PAGE>


<TABLE>
                                                ZOLTEK COMPANIES, INC.
                                         CONSOLIDATED STATEMENT OF OPERATIONS
                                     (Amounts in thousands, except per share data)

<CAPTION>
                                                                                        Year Ended September 30,
------------------------------------------------------------------------------------------------------------------------
                                                                                  2005           2004             2003
                                                                                --------       --------         --------
<S>                                                                             <C>            <C>              <C>
Net sales...................................................................    $ 60,204       $ 39,827         $ 33,683
Cost of sales, excluding available unused capacity costs....................      56,836         33,401           28,497
Available unused capacity costs.............................................       2,347          4,466            5,716
Application and development costs...........................................       3,324          3,070            3,453
Selling, general and administrative expenses................................       5,846          4,604            5,922
                                                                                --------       --------         --------
     Operating loss from continuing operations..............................      (8,149)        (5,714)          (9,905)
Other income (expense):
     Interest expense, excluding amortization of financing fees, debt
       discount and beneficial conversion feature...........................      (3,000)        (3,429)          (1,875)
     Amortization of financing fees, debt discount and beneficial
       conversion feature...................................................      (8,469)        (2,577)             (84)

     Loss on value of warrants and conversion feature.......................     (16,574)        (4,920)               -
     Interest income........................................................           2             21               57
     Other, net.............................................................      (1,776)          (150)             (47)
                                                                                --------       --------         --------
          Loss from continuing operations before income taxes...............     (37,966)       (16,769)         (11,854)
Income tax expense..........................................................         708            434              535
                                                                                --------       --------         --------
     Net loss from continuing operations....................................     (38,674)       (17,203)         (12,389)
                                                                                --------       --------         --------
Discontinued operations:
     Operating loss.........................................................      (1,719)        (4,945)          (3,213)
     Loss on disposal of discontinued operations............................           -           (659)               -
                                                                                --------       --------         --------
          Net loss on discontinued operations ..............................      (1,719)        (5,604)          (3,213)
                                                                                --------       --------         --------
Net loss....................................................................    $(40,393)      $(22,807)        $(15,602)
                                                                                ========       ========         ========
Net loss per share:
     Basic and diluted loss per share:
          Continuing operations - basic and diluted.........................    $  (2.14)      $  (1.05)        $  (0.76)
          Discontinued operations - basic and diluted.......................       (0.09)         (0.35)           (0.20)
                                                                                --------       --------         --------
               Total........................................................    $  (2.23)      $  (1.40)        $  (0.96)
                                                                                ========       ========         ========

Weighted average common shares outstanding..................................      18,050         16,372           16,307


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

                                     47

<PAGE>
<PAGE>

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

<CAPTION>
                                      Total Share-              Add'l    Accumulated Other
                                        holders'    Common     Paid-In     Comprehensive   Treasury   Accumulated   Comprehensive
                                         Equity     Stock      Capital     Income (Loss)    Stock      (Deficit)     Income (Loss)
---------------------------------------------------------------------------------------------------------------------------------

<S>                                     <C>         <C>       <C>            <C>           <C>         <C>            <C>
Balance, September 30, 2002...........  $ 75,904    $ 163     $ 108,897      $(16,253)     $     -     $(16,903)
Net loss..............................   (15,602)                                                       (15,602)      $(15,602)
Foreign currency translation
  adjustment..........................     3,821                                3,821                                    3,821
                                                                                                                      --------
         Comprehensive loss...........                                                                                $(11,781)
                                                                                                                      ========
Warrants issued with sub-debt.........       372                    372
Exercise of stock options.............        21                     21
                                        --------    -----     ---------      --------      -------     --------
Balance, September 30, 2003...........    64,516      163       109,290       (12,432)           -      (32,505)
Net loss..............................   (22,807)                                                       (22,807)      $(22,807)
Foreign currency translation
  adjustment..........................     2,287                                2,287                                    2,287
                                                                                                                      --------
         Comprehensive loss...........                                                                                $(20,520)
                                                                                                                      ========
Exercise of stock options
  and warrants........................       234        -           234
                                        --------    -----     ---------      --------      -------     --------
Balance, September 30, 2004...........    44,230      163       109,524       (10,145)           -      (55,312)
Net loss..............................   (40,393)                                                       (40,393)      $(40,393)
Foreign currency translation
  adjustment..........................    (2,676)                              (2,676)                                  (2,676)
                                                                                                                      --------
         Comprehensive loss...........                                                                                $(43,069)
                                                                                                                      ========
Value of warrants and conversion
  feature at time of conversion.......    26,845                 26,845
Unamortized value of convertible debt
  discount at time of conversion......    (5,463)                (5,463)
Warrants exercised....................     2,525        3         2,522
Value of warrants and beneficial
  conversion feature issued
  with convertible debt...............     2,303                  2,303
Convertible debt converted............    13,161       22        13,139
Interest paid in stock................        92                     92
Issuance cost related to convertible
  debt conversions....................      (401)                  (401)
Exercise of stock options.............       422        1           421
                                        --------    -----     ---------      --------      -------     --------
Balance, September 30, 2005...........  $ 40,645    $ 189     $ 148,982      $(12,821)     $     -     $(95,705)
                                        ========    =====     =========      ========      =======     ========


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

                                     48

<PAGE>
<PAGE>

<TABLE>
                                                 ZOLTEK COMPANIES, INC.
                                         CONSOLIDATED STATEMENT OF CASH FLOWS
                                                (Amounts in thousands)

<CAPTION>
                                                                                        Year Ended September 30,
-----------------------------------------------------------------------------------------------------------------------
                                                                                  2005           2004            2003
                                                                                --------       --------        --------

<S>                                                                             <C>            <C>             <C>
Cash flows from operating activities:
     Net loss..............................................................     $(40,393)      $(22,807)       $(15,602)
     Adjustments to reconcile net loss to net cash
      used by operating activities:
          Loss from discontinued operations................................        1,719          5,604           3,213
          Depreciation and amortization....................................        5,232          5,567           5,842
          Amortization of financing and warrants...........................        8,469          2,577              84
          Change in value of warrant and conversion feature................       16,574          4,920               -
          Foreign currency transaction (gains) losses......................            -            128             787
          Other, net.......................................................          117            (38)            (36)
          Changes in assets and liabilities:
              (Increase) decrease in accounts receivable...................       (1,234)        (4,467)          1,520
              (Increase) decrease in inventories...........................         (147)          (170)            783
              (Increase) decrease in prepaid expenses and other assets.....         (795)           170             342
              Increase (decrease) in trade accounts payable................        3,053          2,433          (1,473)
              Increase (decrease) in accrued expenses and other liabilities          295         (1,646)          2,960
              Decrease in other long-term liabilities......................         (366)            (1)           (669)
                                                                                --------       --------        --------
                  Total adjustments........................................       32,916         15,077          13,353
                                                                                --------       --------        --------
     Net cash used by continuing operations................................       (7,476)        (7,730)         (2,249)
     Net cash provided (used) by discontinued operations...................       (1,624)           512          (2,196)
                                                                                --------       --------        --------
Net cash used by operating activities......................................       (9,100)        (7,218)         (4,445)
                                                                                --------       --------        --------
Cash flows from investing activities:
     Proceeds from sale of long-term investment............................                           -             641
     Payments for purchase of property and equipment.......................      (14,790)        (6,001)         (1,430)
     Proceeds from sale of property and equipment..........................            1            137             121
                                                                                --------       --------        --------
   Net cash used by continuing operations..................................      (14,789)        (5,866)           (668)
   Net cash used by discontinued operations................................           (2)            (9)           (147)
                                                                                --------       --------        --------
Net cash used by investing activities......................................      (14,491)        (5,872)           (815)
                                                                                --------       --------        --------
Cash flows from financing activities:
     Proceeds from exercise of common stock options and warrants...........        2,947            255              21
     Proceeds from issuance of convertible debt and warrants...............       45,000         12,750           8,100
     Proceeds from issuance of notes payable...............................            -         12,581           8,140
     Proceeds from issuance of note payable to related party...............            -          1,400               -
     Payment of financing fees.............................................       (1,693)        (1,249)              -
     Repayment of notes payable and long-term debt.........................      (22,349)       (11,811)        (10,880)
     Repayment of note payable to related party............................            -         (1,400)              -
                                                                                --------       --------        --------
Net cash provided by financing activities..................................       23,905         12,526           5,381
                                                                                --------       --------        --------
Effect of exchange rate changes on cash....................................          (26)            (7)             32
                                                                                --------       --------        --------
Net increase (decrease) in cash............................................          (12)          (571)            153
Cash and cash equivalents at beginning of period...........................          267            838             685
                                                                                --------       --------        --------
Cash and cash equivalents at end of period.................................     $    255       $    267        $    838
                                                                                ========       ========        ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid (refunded) during the year for:
     Interest..............................................................     $  3,679       $  3,436        $  1,875
     Income taxes..........................................................            -              -               -
Non-cash conversion of convertible securities..............................     $ 13,161              -               -

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


                                     49

<PAGE>
<PAGE>




                           ZOLTEK COMPANIES, INC.
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------------------------------------------

PRINCIPLES OF CONSOLIDATION

         Zoltek Companies, Inc. (the "Company") is a holding company, which
operates through wholly owned subsidiaries, Zoltek Corporation, Zoltek
Properties Inc., Zoltek Rt., and Engineering Technology Corporation ("Entec
Composite Machines"). Zoltek Corporation ("Zoltek") develops, manufactures
and markets carbon fibers, a low-cost but high performance reinforcement for
composites used as the primary building material in everyday commercial
products. Entec Composite Machines manufactures and sells filament winding
and pultrusion equipment used in the production of large volume composite
parts. Zoltek Rt. manufactures and markets acrylic fibers for the carbon
fiber industry. Other Zoltek Rt. products include nylon granules, plastic
grids and nets, and carboxymethyl cellulose. During the fourth quarter of
fiscal 2005, the Company formally adopted a plan to discontinue and exit its
CMC division. This division is not part of the long-term strategy of the
Company and is not expected to be profitable in the foreseeable future due
to the continued pricing pressure from competitive manufacturers. These
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles. All significant inter-company transactions
and balances have been eliminated upon consolidation.

LIQUIDITY AND BASIS OF PRESENTATION

         Due to the timing of development of markets for carbon fiber
products in each of the past five fiscal years, the Company has incurred
significant operating losses and the Company's operations have used cash in
excess of cash generated by operating activities. As a result, the Company
has executed refinancing arrangements and incurred borrowings under credit
facilities, multiple convertible debenture facilities, as well as long-term
debt financing utilizing the equity in the Company's real estate properties,
to maintain adequate liquidity to support the Company's operating and
capital activities.

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

         In September 2005, Zoltek entered into an agreement for a new
convertible debenture financing package of up to $50 million in a private
placement with a group of institutional investors. In order to match the
cash needs to support the Company's planned expansion, the financing
agreement provides for the funding to occur in four separate closings of
$5.0 million, $15.0 million, $20.0 million and $10.0 million, respectively,
of which the first two tranches have been drawn down. The agreement provides
for Zoltek to draw down the remaining financing over the next twelve months
subject to the Company registering the shares related to the prior
draw-downs. In December 2005, the Company extended the expiration of its
credit facility with the U.S. bank to January 1, 2007. The extended credit
facility consists of a term loan of $0.3 million and a revolving credit loan
with maximum available borrowings of $5.5 million, of which $1.7 million and
$5.5 million was available as of September 30 and December 31, 2005,
respectively. The Company anticipates it will require the remaining proceeds
of the $50.0 million financing package or other significant financing in
fiscal 2006 to support its previously announced capacity expansion program.
The Company believes this is sufficient to fund near-term liquidity needs
but there are no guarantees that changes in events and circumstances based
on the factors described above could lead to the need for additional
borrowings.

         The Company believes the financing package mentioned above of which
$20 million have been received along with the availability under the
Company's revolving credit facility is sufficient to fund Zoltek's
operations during 2006.


                                     50

<PAGE>
<PAGE>

USE OF ESTIMATES

         The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires that management make estimates and assumptions that affect amounts
reported in the financial statements and accompanying notes. Actual results
may differ from those estimates and assumptions.

REVENUE RECOGNITION

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

CONCENTRATION OF CREDIT RISK

         Zoltek's carbon fiber products are primarily sold to customers in
the composite industry and its technical fibers are primarily sold to
customers in the aerospace industry. Zoltek Rt.'s acrylic products are
primarily sold to customers in the textile industry. Entec Composite
Machines' products are primarily sold in the composite industry. While the
markets for the Company's products are geographically unlimited, most of
Zoltek's business is with customers located in North America and Asia and
most of Zoltek Rt.'s sales are to customers in Europe, while Entec Composite
Machines' sales are worldwide. The Company performs ongoing credit
evaluations and generally requires collateral for significant export sales
to new customers. The Company maintains reserves for potential credit losses
and such losses have been within management's expectations.

         In the fiscal years ended September 30, 2005 and 2004, the Company
reported sales of $8.6 million and $7.2 million, respectively, to a major
aircraft brake manufacturer which was the only customer that represented
greater than 10% of the Company's total consolidated revenues.

CASH AND CASH EQUIVALENTS

         All highly liquid investments purchased with a maturity of three
months or less are considered to be cash equivalents. The subordinated debt
agreements of 2004 and 2005 require that the Company maintain cash plus
borrowing capacity under credit facilities of at least $0.5 million, which
the Company was in compliance with as of September 30, 2005.

INVENTORIES

         Inventories are valued at the lower of cost, determined on the
first-in, first-out method, or market. Cost includes material, labor and
overhead. The Company has recorded an inventory valuation reserve of $3.1
million and $3.9 million as of September 30, 2005 and 2004, respectively, to
reduce the carrying value of inventories to a net realizable value. No
material adjustments to the reserve were required in the current year. The
reserves were established primarily due to intensified overcapacity for
certain carbon fiber products in prior years.

                                     51

<PAGE>
<PAGE>

PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost. Cost includes
expenditures necessary to make the property and equipment ready for its
intended use. Expenditures, which improve the asset or extend the useful
life, are capitalized, including interest on funds borrowed to finance the
acquisition or construction of major capital additions. The Company
capitalized interest during fiscal 2005 of $1.2 million as it started its
carbon fiber expansion in Hungary. Maintenance and repairs are expensed as
incurred. When property is retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the accounts and any
profit or loss on disposition is credited or charged to income.

         The Company provides for depreciation by charging amounts
sufficient to amortize the cost of properties placed in service over their
estimated useful lives using straight-line methods. The range of estimated
useful lives used in computing depreciation is as follows:

              Buildings and improvements.................10 to 20 years
              Machinery and equipment....................3 to 20 years
              Furniture, fixtures and software...........7 to 10 years

         Depreciation expense was $5.2 million, $5.6 million and $5.8
million for the fiscal years ended 2005, 2004 and 2003, respectively.

         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 the third quarter of fiscal 2001, the Company elected to
temporarily idle a significant part of the operations located at the
Abilene, Texas facility. The Company resumed manufacturing at this facility
during fiscal 2005. The Company determined that no impairment of its
carrying value existed at September 30, 2005 and 2004.

FOREIGN CURRENCY TRANSLATION

         The consolidated balance sheet of the Company's current
international subsidiary, Zoltek Rt., was translated from Hungarian Forints
to U.S. Dollars at the exchange rate in effect at the applicable balance
sheet date, while its consolidated statements of operations were translated
using the average exchange rates in effect for the periods presented. The
related translation adjustments are reported as other comprehensive income
(loss) within shareholders' equity. Gains and losses from foreign currency
transactions of Zoltek Rt. are included in the results of operations in
other expenses.

FINANCIAL INSTRUMENTS

         The Company does not hold any financial instruments for trading
purposes. The carrying value of cash, accounts receivable and accounts
payable approximated their fair value at September 30, 2005 and 2004.

         The Company has debt obligations that bear interest at a variable
rate. The carrying value of debt with a variable rate approximated its fair
value at September 30, 2005 and 2004.

         In January, March and October of 2004 and February 2005, the
Company issued convertible notes and warrants which would require the
Company to register the resale of the shares of common


                                     52

<PAGE>
<PAGE>

stock upon conversion or exercise of these securities. The Company accounts
for the fair value of these outstanding warrants to purchase common stock
and conversion feature of its convertible notes in accordance with SFAS No.
133 "Accounting For Derivative Instruments And Hedging Activities" and EITF
Issue No. 00-19 "Accounting For Derivative Financial Instruments Indexed To
And Potentially Settled In A Company's Own Stock;" which requires the
Company to bifurcate and separately account for the conversion feature and
warrants as embedded derivatives contained in the Company's convertible
notes. Pursuant to SFAS No. 133, the Company bifurcated the fair value of
the conversion feature from the convertible notes, since the conversion
feature was determined to not be clearly and closely related to the debt
host. In addition, since the effective registration of the securities
underlying the conversion feature and warrants is an event outside of the
control of the Company, pursuant to EITF Issue No. 00-19, the Company
recorded the fair value of the conversion feature and warrants as long-term
liabilities as it was assumed that the Company would be required to net-cash
settle the underlying securities. The Company is required to carry these
embedded derivatives on its balance sheet at fair value, which was $29.0
million and $13.7 million at September 30, 2005 and 2004 respectively.

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 $3.3 million in fiscal 2005,
$3.1 million in fiscal 2004 and $3.5 million in fiscal 2003. 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.

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.

EARNINGS PER SHARE


         In accordance with SFAS No. 128, "Earnings per Share," the Company
calculates diluted earnings per share including the impact of the Company's
potential stock equivalents. The Company has outstanding stock options,
warrants and convertible debt outstanding at September 30, 2005 and 2004
which are not included in the determination of diluted earnings per share
because the impact of these potential additional shares is anti-dilutive.
Had these securities been dilutive, an additional 6.6 million shares for
fiscal 2005 and 4.8 million shares for fiscal 2004 would have been included
in the Company's diluted earnings per share calculation.

                                     53

<PAGE>
<PAGE>

STOCK-BASED COMPENSATION

         At September 30, 2005, the Company had stock-based employee
compensation plans. The Company accounts for those plans under the
recognition and measurement principles of Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees", and
its related interpretations. No stock-based employee compensation costs are
reflected in net loss, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on
the date of grant. The Company granted 187,500, 77,500 and 112,500 employee
stock options with an exercise price that equaled the Company's stock price
on the applicable date of grant in fiscal 2005, 2004 and 2003, respectively.
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>
                                                                          2005            2004            2003
                                                                        --------        --------        --------
<S>                                                                     <C>             <C>             <C>
         Net loss:
             As reported..........................................      $(40,393)       $(22,807)       $(15,602)
             Total stock-based employee compensation
               expense determined under fair value-based
               method for all awards, net of tax effects..........          (294)           (168)            (71)
                                                                        --------        --------        --------
             Pro forma............................................      $(40,687)       $(22,975)       $(15,673)

         Basic and diluted loss per share:
             As reported..........................................      $  (2.23)       $  (1.40)       $  (0.96)
             Pro forma............................................      $  (2.25)       $  (1.41)       $  (0.96)
</TABLE>

         The pro forma information required by FAS 123 regarding net income
and earnings per share has been presented as if the Company had accounted
for its stock option plans under the fair value method. The fair value of
each option grant is estimated on the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:

<TABLE>
<CAPTION>
         Assumptions:                                                      2005           2004            2003
         -----------                                                     -------         -------        -------
<S>                                                                      <C>             <C>            <C>
         Expected life of options.................................       6 years         6 years        6 years
         Risk-free interest rate..................................         4.19%           4.25%          4.25%
         Volatility of stock......................................           68%             77%            96%
         Expected dividend yield..................................            --              --             --
</TABLE>

         The fair value of the options granted during 2005, 2004 and 2003
was $684,221, $159,961 and $119,513, respectively.

         In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123-R "Accounting for Stock-Based Compensation" (FAS No.
123-R), which addressed the requirement for expensing the cost of employee
services received in exchange for an award of equity instrument. FAS No.
123-R will apply to all equity instruments awarded, modified or repurchased
for fiscal years beginning after June 15, 2005. Management expects the
compensation expense impact on future results of operations will be an
immaterial difference from the $0.3 million disclosed in above footnote.


                                     54

<PAGE>
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENT

         On November 24, 2004, the Financial Accounting Standards Board
(FASB or the "Board") issued Statement No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4 (FAS 151). The standard adopts the IASB
view related to inventories that abnormal amounts of idle capacity and
spoilage costs should be excluded from the cost of inventory and expensed
when incurred. Additionally, the Board made the decision to clarify the
meaning of the term "normal capacity". The provisions of FAS 151 are
applicable to inventory costs incurred during fiscal years beginning after
June 15, 2005. The Company believes this new pronouncement will have an
immaterial impact on the Company's financial statements in future periods.

2.       FINANCING TRANSACTIONS
------------------------------------------------------------------------------

Warrant and Conversion Features
-------------------------------

         In January, March and October of 2004 and February 2005, the
Company issued convertible notes and warrants which would require the
Company to register the resale of the shares of common stock upon conversion
or exercise of these securities. The Company accounts for the fair value of
these outstanding warrants to purchase common stock and conversion feature
of its convertible notes in accordance with SFAS No. 133 "Accounting For
Derivative Instruments And Hedging Activities" and EITF Issue No. 00-19
"Accounting For Derivative Financial Instruments Indexed To And Potentially
Settled In A Company's Own Stock;" which requires the Company to bifurcate
and separately account for the conversion feature and warrants as embedded
derivatives contained in the Company's convertible notes. Pursuant to SFAS
No. 133, the Company bifurcated the fair value of the conversion feature
from the convertible notes, since the conversion features were determined to
not be clearly and closely related to the debt host. In addition, since the
effective registration of the securities underlying the conversion feature
and warrants is an event outside of the control of the Company, pursuant to
EITF Issue No. 00-19, the Company recorded the fair value of the conversion
feature and warrants as long-term liabilities as it was assumed that the
Company would be required to net-cash settle the underlying securities. The
Company is required to carry these embedded derivatives on its balance sheet
at fair value and unrealized changes in the values of these embedded
derivatives are reflected in the consolidated statement of operation as
"Gain (loss) on value of warrants and conversion feature." See table below
for impact on the fiscal results ended September 30, 2005 and 2004.

<TABLE>
<CAPTION>
                                                                      YEAR ENDED SEPTEMBER 30, 2005
                                                                      -----------------------------
                                                                               CONVERSION
                                                                   WARRANTS     FEATURES         TOTAL
                                                                   --------     --------         -----
<S>                                                                <C>          <C>            <C>
         January 2004 issuance - mark to market .................  $(1,083)     $ (8,164)      $ (9,247)
         February 2004 issuance - mark to market.................     (775)       (5,684)        (6,459)
         October 2004 issuance - mark to market..................   (2,025)       (3,958)        (5,983)
         February 2005 issuance - mark to market.................    1,172         3,943          5,115
                                                                   -------      --------       --------
                  Gain or loss on value of warrants and
                    conversion feature...........................  $(2,711)     $(13,863)      $(16,574)
                                                                   =======      ========       ========
</TABLE>


                                     55

<PAGE>
<PAGE>

<TABLE>
<CAPTION>
                                                                      YEAR ENDED SEPTEMBER 30, 2004
                                                                      -----------------------------
                                                                               CONVERSION
                                                                   WARRANTS     FEATURES         TOTAL
                                                                   --------     --------         -----
<S>                                                                <C>          <C>             <C>
         January 2004 issuance - mark to market .................  $(1,109)     $(4,039)        $(5,148)
         March 2004 issuance - mark to market ...................       18          210             228
                                                                   -------      -------         -------
                  Gain or loss on value of warrants and
                    conversion feature...........................  $(1,091)     $(3,829)        $(4,920)
                                                                   =======      =======         =======
</TABLE>

2005 Refinancing
----------------

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

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

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

         In February 2005, the Company issued convertible debentures in the
aggregate principal amount of $20.0 million to institutional private equity
investors. The convertible debentures have a stated maturity of 42 months
and bear interest at a variable rate of six-month LIBOR plus 4% which was
7.5% at March 2005, and are presently convertible into 1,000,000 shares of
common stock at a conversion price of $20.00 per share. The Company also
issued to the investors four-year warrants to purchase an aggregate of
457,142 shares of common stock of the Company at an exercise price of $17.50
per share. The fair value of the debt discount associated with the warrants
and conversion feature of the debt at the

                                     56

<PAGE>
<PAGE>

time of issuance was $15.3 million and will be amortized over the life of
the convertible debt. Proceeds from issuance of these convertible debentures
were used to repay mortgage debt of $6.0 million and the balance to expand
the capacity of carbon fiber operations to meet demand. The repayment of the
$6.0 million mortgage note had a stated maturity of three years and bore
interest at a rate of LIBOR plus 11% with a LIBOR floor of 2%. The Company
paid a prepayment fee of $0.3 million, which was expensed to the Company's
statement of operations at the repayment date. The Company also wrote off
the unamortized amount of the deferred financing cost related to the
original issuances of the note of $0.4 million.

         In October 2004, the Company issued convertible debentures in the
aggregate principal amount of $20.0 million to institutional private equity
investors. The convertible debentures have a stated maturity of 42 months
and bear interest at 7.5% per annum and were initially convertible into
1,666,666 shares of common stock at a conversion price of $12.00 per share.
In connection with the September 2005 issuance the conversion price was
adjusted to $9.50 per share, resulting in the potential issuance of
2,105,263 shares upon conversion. The Company also issued to the investors
six-year warrants to purchase an aggregate of 500,000 shares of common stock
of the Company at an exercise price of $13.00 per share. The fair value of
the debt discount associated with the warrants and conversion feature of the
debt at the time of issuance was $10.2 million and will be amortized over
the life of the convertible debt. Proceeds from issuance of these
convertible debentures were used to reduce existing Hungarian bank debt by
$12.0 million and the balance for working capital purposes which allowed the
Company to refinance the remaining Hungarian bank debt to a three-year term
loan for $3.0 million with no financial covenants going forward.

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

         In January 2004, the Company issued and sold convertible debentures
in the aggregate principal amount of $7.0 million to institutional private
equity and other investors (including $250,000 to each of Mr. Rumy and Mr.
McDonnell who are members of the Company's Board of Directors). The
convertible debentures have a stated maturity of 30 months and bear interest
at 6% per annum and are convertible into 1,295,954 shares of common stock at
the date of issuance at a conversion price of $5.40 per share for each
investor other than Messrs. Rumy and McDonnell and $5.42 per share for each
of Messrs. Rumy and McDonnell. The Company also issued to the investors
five-year warrants to purchase an aggregate of 323,994 shares of common
stock of the Company at an exercise price of $5.40 per share for each
investor other than Messrs. Rumy and McDonnell and $5.42 per share for each
of Messrs. Rumy and McDonnell. The fair value of the debt discount
associated with the warrants and the conversion feature, at the time of
issuance, was $3.0 million and will be amortized over the life of the
convertible debt. Proceeds from the issuance of these convertible debentures
were used for working capital purposes. These convertible debentures have
been converted into the Company's stock.

         As part of the Company's January 2004 refinancing, the bank lender
to the Company's Hungarian subsidiary amended certain financial covenants
and extended the maturity date of its loan to December 31, 2004. In
connection with such actions, the bank required that the Company make
arrangements to settle intercompany accounts payable by Zoltek U.S.
operations to its Hungarian subsidiary in the amount of approximately $2.8
million. The bank was unwilling to keep open its offer to restructure Zoltek
Rt.'s loans until after the Company's January 2004 refinancing package was
completed. Prior to the refinancing, the Company did not have cash on hand
or available borrowings that would enable it to make the settlement of the
intercompany accounts required by the Hungarian bank. In order to proceed
expeditiously to resolve the Company's financing requirements, Zsolt Rumy,
the Company's Chief Executive Officer and a director of the Company, in
December 2003 loaned the Company $1.4 million in cash and posted a $1.4
million letter of credit for the benefit of the Company. This arrangement
was approved by the Company's board of directors and audit committee. The
loan by


                                     57

<PAGE>
<PAGE>

Mr. Rumy bore interest on the amount advanced and the notional amount of the
letter of credit at a rate per annum equal to LIBOR plus 11% with a LIBOR
floor of 2%, the same interest rate as the mortgage financing discussed
below. As a result of the Company completing the refinancing transactions
making available the cash to settle the intercompany accounts, the letter of
credit was released. After converting $250,000 into convertible debt as part
of the January 2004 financing, the remaining $1.15 million loan was repaid
during the third quarter of fiscal 2004.

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

         In March 2004, the Company issued and sold convertible debentures
in the aggregate principal amount of $5.75 million to institutional private
equity investors and Mr. Dill ($750,000) who is member of the Company's
board of directors. The convertible debentures have a stated maturity of 30
months and bear interest at 6% per annum and have been converted into
895,908 shares of common stock at a conversion price of $6.25 per share for
each investor other than Mr. Dill and $7.82 per share for Mr. Dill. The
Company also issued to the investors five-year warrants to purchase an
aggregate of 223,997 shares of common stock of the Company at an exercise
price of $7.50 per share for each investor other than Mr. Dill whose
warrants have an exercise price of $7.82 per share. The fair value of the
debt discount associated with the warrants and conversion feature, at the
time of issuance, was $5.7 million and will be amortized over the life of
the convertible debt. Proceeds from the issuance of these convertible
debentures are being used for working capital and capital expenditures.
These convertible debentures have been converted into the Company's stock.

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

         The Company executed an amended credit facility agreement, dated as
of February 13, 2003, with the U.S. bank. The amended credit facility
agreement is structured as a term loan in the amount of $3.5 million
(originally due February 13, 2005) and a revolving credit loan in the amount
of $5.0 million (originally due January 31, 2004). The Company repaid $5.0
million of this loan from the proceeds of the sale of subordinated
convertible debentures as discussed above. 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. The loan agreement contains quarterly financial covenants related to
borrowings, working capital, debt coverage, current ratio and capital
expenditures. Total borrowings under the revolving credit agreement were
$3.8 million and the available credit under this agreement was $1.7 million
at September 30, 2005.

         The Company also entered into a debenture purchase agreement, dated
as of February 13, 2003, under which the Company issued and sold to 14
investors, including certain directors, subordinated convertible debentures
in the aggregate principal amount of $8.1 million. The subordinated
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


                                     58

<PAGE>
<PAGE>

of common stock of the Company at an exercise price of $5.00 per share. The
fair value of the warrants, at the time of issuance, was estimated to be
$376,650. Proceeds from the issuance of these convertible debentures were
used to repay existing borrowings as well as for working capital.

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

<TABLE>
<CAPTION>
                                               (1)FEBRUARY     JANUARY      MARCH      OCTOBER     FEBRUARY   SEPTEMBER
                                                    2003        2004        2004        2004         2005       2005
                                                    ----        ----        ----        ----         ----       ----
<S>                                               <C>         <C>         <C>         <C>         <C>         <C>
Amount of debenture (millions)..................  $8.1        $7.0        $5.75       $20.0       $20.0       $5.0
Per share conversion price on debenture.........  $3.25       $5.40       $6.25       $12.00      $20.00      $12.50
Interest rate...................................  7.5%        6.0%        6.0%        7.0%        7.5%        7.5%
Term of debenture...............................  60 months   30 months   30 months   42 months   42 months   42 months
Warrants issued.................................  405,000     323,995     230,000     500,000     457,142     140,000
Term of warrant.................................  60 months   48 months   48 months   72 months   48 months   60 months
Per share exercise price of warrants............  $5.00       $5.40       $7.50       $13.00      $17.50      $14.50
Fair value per warrant at issuance..............  $0.93       $2.27       $5.43       $6.02       $10.47      $9.34
Value per share conversion feature at issuance..  $3.11       $1.78       $5.06       $4.31       $10.47      $9.91
Stock price on date of agreement................  $1.58       $5.40       $9.53       $9.60       $16.68      $13.15
Stock volatility at issuance....................  100%        50%         61%         75%         84%         205%
Dividend yield..................................  0.0%        0.0%        0.0%        0.0%        0.0%        0.0%
Risk free interest rate at issuance.............  3.0%        2.78%       2.44%       3.71%       3.46%       4.25%

<FN>
--------
       (1) The warrants issued in connection with the February 2003 and
       September 2005 convertible issuance meet the criteria of EITF 00-19
       for equity classification as they do not contain similar registration
       rights obligations with respect to the underlying shares. The
       conversion feature on the related debt does not require derivative
       accounting and no beneficial conversion feature exists on the
       issuance of the February 2003, however, a beneficial conversion
       existed on the September 2005 issuance and was accounted for as
       discount to the debt which will be amortized into expense over the
       life of the convertible issuance.
</TABLE>

                                     59

<PAGE>
<PAGE>

3.       DISCONTINUED OPERATIONS
------------------------------------------------------------------------------

         In the fourth quarter of fiscal 2004, the Company formally adopted
a plan to discontinue and exit two divisions of its Zoltek Rt. operations
which manufacture acrylic and nylon fibers and yarns. In the fourth quarter
of fiscal 2005, the Company formally adopted a plan to discontinue the CMC
division of its Zoltek Rt. operations. These divisions are not part of the
long-term strategy of the Company and were not expected to be profitable in
the foreseeable future due to the continued pricing pressure from
competitive manufacturers. These divisions had been included in the
Specialty Products segment (see Note 11).

Certain information with respect to the discontinued operations of the
acrylic and nylon fibers divisions for the years ended September 30, 2005,
2004 and 2003 is summarized as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                               2005         2004           2003
                                                              -------      -------       -------
<S>                                                           <C>          <C>           <C>
         Net sales..........................................  $ 8,181      $21,791       $29,856
         Cost of sales......................................    7,397       22,308        29,131
                                                              -------      -------       -------
              Gross profit..................................      783         (517)          725
         Selling, general and administrative expenses.......   (2,412)      (4,609)       (3,494)
                                                              -------      -------       -------
              Loss from operations..........................   (1,629)      (5,126)       (2,769)
         Other income (expense).............................      (90)         181          (444)
                                                              -------      -------       -------
              Net loss from operations......................   (1,719)      (4,945)       (3,213)
         Loss on disposal of discontinued operations........        -         (659)            -
                                                              -------      -------       -------
         Loss on discontinued operations....................  $(1,719)     $(5,604)      $(3,213)
                                                              =======      =======       =======
</TABLE>

         In October 2003, the Company was named as a defendant in a civil
action filed in the Court of Common Pleas for Cuyahoga County, Ohio by the
former owner of Hardcore Composites Operations, LLC ("Hardcore") alleging
breach by Hardcore and the Company of their respective obligations under a
sublease, the Company's guaranty of the sublease, and prior settlement
agreement among the parties. The former owner's action claimed damages in
the amount of $0.3 million for breaches by the Company of its obligations
under the guaranty and the settlement agreement and, in addition, demanded
$0.5 million in damages from Hardcore and the Company, jointly and
severally, under the terms of the settlement agreement. During the third
quarter of fiscal 2004, Hardcore filed a petition under Chapter 11 of the
U.S. Bankruptcy Code. In October 2004, the Court of Common Pleas for
Cuyahoga County, Ohio ruled in favor of the former owner of Hardcore
Composites in the amount of $1.1 million. The Company recorded an additional
accrual of $0.5 million, which was recorded in discontinued operations to
fully accrue the liability under the judgment. The Company is vigorously
defending this matter, has filed counterclaims and filed an appeal.
Management believes that the ultimate resolution of this litigation will not
have further material adverse effect on the Company's results of operations
or financial condition. For additional information, see Note 9 to the
Company's Consolidated Financial Statements.

                                     60

<PAGE>
<PAGE>

4.       INVENTORIES
------------------------------------------------------------------------------

Inventories consist of the following (amounts in thousands):

                                                         September 30,
                                                      2005           2004
                                                    --------       --------
         Raw materials...........................   $ 11,872       $  5,462
         Work-in-process.........................        430          1,177
         Finished goods..........................     11,638         18,317
         Supplies, spares and other..............        813            946
                                                    --------       --------
                                                    $ 24,753       $ 25,902
                                                    ========       ========

         Inventories are valued at the lower of cost, determined on the
first-in, first-out method, or market. Cost includes material, labor and
overhead. The Company has recorded an inventory valuation reserve of $3.1
million and $5.1 million as of September 30, 2005 and 2004, respectively, to
reduce the carrying value of inventories to net realizable value. No
material adjustments to the reserve were required in the current year. The
reserves were established primarily due to intensified overcapacity for
certain carbon fiber products.

5.       PROPERTY AND EQUIPMENT
------------------------------------------------------------------------------

Property and equipment consists of the following (amounts in thousands):

                                                          September 30,
                                                      2005           2004
                                                    --------       --------
Land.............................................   $  1,706       $  1,732
Buildings and improvements.......................     32,744         32,696
Machinery and equipment..........................     87,887         82,282
Furniture, fixtures and software.................      5,493          5,563
Construction in progress.........................     10,842          7,049
                                                    --------       --------
                                                     138,662        129,322
Less:  accumulated depreciation..................    (50,644)       (48,908)
                                                    --------       --------
                                                    $ 88,018       $ 80,414
                                                    ========       ========

         During 2004, the Company was not operating its Abilene, Texas
facility at full capacity. As a result, the Company has elected to
categorize certain costs related to these idle assets as unused capacity
costs. Such costs totaled $2.3 million, $4.5 million and $5.7 million for
fiscal 2005, 2004 and 2003, respectively, and include depreciation and other
overhead expenses associated with unused capacity. The unused capacity costs
are presented as an operating item on the Company's consolidated statement
of operations. As discussed above, the Company has resumed certain levels of
manufacturing at this facility during fiscal 2005. With the reactivation of
the Abilene plant, unused capacity costs are expected to diminish and,
ultimately, be fully absorbed in ongoing production once all the carbon
fiber lines start operating in fiscal 2006.


                                     61

<PAGE>
<PAGE>

6.       INCOME TAXES
------------------------------------------------------------------------------

         The components of income tax expense for the years ended September 30,
are as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                            2005           2004           2003
                                                          --------       --------       --------
<S>                                                       <C>            <C>            <C>
From continuing operations:
     Current:
         Federal.....................................     $      -       $      -       $      -
         State.......................................            -              -              -
         Non-U.S. local..............................          708            434            171
                                                          --------       --------       --------
                                                               708            434            171
                                                          --------       --------       --------
     Deferred:
         Federal.....................................            -              -            203
         State.......................................            -              -             17
         Non-U.S. ...................................            -              -            144
                                                          --------       --------       --------
                                                                 -              -            364
                                                          --------       --------       --------
              Total .................................     $    708       $    434       $    535
                                                          ========       ========       ========
</TABLE>

         Deferred income taxes reflect the tax impact of carryforwards and
temporary differences between the amount of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws and
regulations. Cumulative carryforwards and temporary differences giving rise
to the net deferred income tax asset at September 30 are as follows (amounts
in thousands):

<TABLE>
<CAPTION>
                                                                        2005                2004
                                                                     -----------        -----------
<S>                                                                  <C>                <C>
     Tax effect of regular net operating loss carry-forwards......   $   (23,758)       $   (18,134)
     Valuation allowance on net operating loss carry-forwards.....        18,889             13,971
     Tax effect of capital loss carry-forward.....................          (523)              (526)
     Valuation allowance on capital loss carry-forward............           523                526
     Depreciation.................................................         5,029              4,407
     Employee related costs.......................................           (79)               (88)
     Prepaids ....................................................            49                  -
     Bad debt accrual.............................................          (125)              (127)
     Other........................................................           (15)               (29)
                                                                     -----------        -----------
              Total net deferred tax asset........................   $         0        $         0
                                                                     ===========        ===========
</TABLE>

         The benefit for income taxes at September 30 differs from the
amount using the statutory federal income tax rate (34%) as follows (amounts
in thousands):

<TABLE>
<CAPTION>
                                                                         2005          2004           2003
                                                                      ----------    ----------     ----------
<S>                                                                   <C>           <C>            <C>
At statutory rate:
         Income taxes on loss from continuing operations..........    $  (14,212)   $   (5,625)    $   (3,874)
Increases (decreases):
         Lower effective tax rate on non-U.S. operations..........           999         1,054            768
         Change in valuation allowance on net operating loss......         4,915         2,588          3,501
         Local taxes, non-U.S.....................................           714           435            171
         State taxes, net of federal benefit......................             -             -             16
         Amortization of warrant discount.........................         2,359           274              -
         Fair market value of warrants............................         5,635         1,673              -
         Other....................................................           298            35            (48)
                                                                      ----------    ----------     ----------
                                                                      $      708    $      434     $      534
                                                                      ==========    ==========     ==========
</TABLE>

                                     62

<PAGE>
<PAGE>

         The consolidated loss from continuing operations before income
taxes by domestic and foreign sources for the years ended September 30,
2005, 2004 and 2003 was as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                         2005          2004           2003
                                                                      ----------    ----------     ----------
<S>                                                                   <C>           <C>            <C>
Domestic..........................................................    $  (22,565)   $  (15,908)    $  (10,267)
Foreign...........................................................        (5,401)         (861)        (1,587)
                                                                      ----------    ----------     ----------
Loss from continuing operations before income taxes...............    $  (27,966)   $  (16,769)    $  (11,854)
                                                                      ==========    ==========     ==========
</TABLE>

         Zoltek Rt.'s accumulated deficit of $(8,003,000) at September 30,
2005 and accumulated earnings of $957,000 and $3,568,000 at September 30,
2004 and 2003, respectively, are considered to be permanently reinvested
and, accordingly, no provision for income taxes has been recorded.

         The Company currently has a net operating loss carry-forward of
approximately $71.0 million which expires between 2020 and 2025. The Company
has recorded a full valuation allowance against its deferred tax asset
because it is more likely than not that the value of the deferred tax asset
will not be realized.

7.       DEBT
------------------------------------------------------------------------------

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

         US Operations - The Company's current credit facility with its U.S.
bank is described in Note 2 under "--2005 Refinancing." No financial
covenants apply to the credit facility from the U.S. bank, which mature on
January 1, 2007. Total borrowings under the U.S. credit facility, including
the revolving line of credit and term loan, were $4.1 million at September
30, 2005 leaving an availability of $1.7 million.

         Hungarian Operations - The Company's Hungarian subsidiary has a
credit facility with a Hungarian bank. Total borrowings under this credit
facility were $2.8 million at September 30, 2005. Due to the fiscal 2004
refinancing (see "--2004 Refinancing" in Note 2), the credit facility is a
term loan with interest payments over the next three years and repayment of
principal at the maturity date on December 31, 2007.

         The Company's convertible debt issuances in fiscal 2004 and 2005
have restrictive covenants related to minimum cash balances, dividends and
use of proceeds. The Company was in compliance with all restrictive
covenants at September 30, 2005 (see "--2004 Refinancing" and "--2005
Refinancing" in Note 2).

                                     63

<PAGE>
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                 September 30,
                                                                                              2005           2004
                                                                                            --------       -------

<S>                                                                                         <C>            <C>
     Note payable with interest at 9%, payable in monthly installments of
         principal and interest of $15,392 to maturity in January 2007...................   $  1,442       $ 1,419

     Non-interest bearing note payable (discounted at 8%) to the City of Abilene, Texas
         to be repaid from real estate and personal property tax abatements .............      1,865         1,781

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

     Revolving credit agreement, maturing in January 2007, bearing interest at prime
         plus 2.0% (prime rate at September 30, 2005 was 6.75%) .........................      3,788         5,000

     Term loan, $0.3 million payable quarterly installments of $0.1 million
         in 2006, bearing interest at prime plus 2.0% (prime rate at
         September 30, 2005 was 6.75%)...................................................        300           700

     Convertible debentures due June 2006 bearing interest at 6%, converted in 2005......          -         7,000

     Convertible debentures due September 2006 bearing interest at 6%, converted in 2005.          -         5,750

     Mortgage payable with interest of 13.5% interest only payments
         Repaid in 2005..................................................................          -         6,000

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

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

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

     Facilities with Hungarian banks (interest rate of 5.5% to 10.6%)....................      2,766        13,568
                                                                                            --------       -------
         Total debt......................................................................     62,961        49,318
         Less: Conversion feature and debt discount associated
            with warrants................................................................    (22,166)       (6,746)
         Less: amounts payable within one year...........................................       (374)         (570)
                                                                                            --------       -------
     Total long-term debt ...............................................................   $ 40,421       $42,002
                                                                                            ========       =======
</TABLE>

         Following is a schedule of required principal payments of long-term
debt (amounts in thousands):

                 Year ending
                September 30,                                    Total
                -------------                                    -----
                   2006......................................   $   374
                   2007......................................     5,305
                   2008......................................    52,282
                   2009......................................     5,000
                   2010......................................         -
                   Thereafter................................         -
                                                                -------
                                                                $62,961
                                                                =======

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

<TABLE>
<CAPTION>
                                                                       YEAR ENDED SEPTEMBER 30, 2005
                                                                       -----------------------------
                                                                                 CONVERSION
                                                                   WARRANTS       FEATURES         TOTAL
                                                                   --------       --------         -----
<S>                                                                <C>            <C>            <C>
         January 2004 issuance...................................  $   1,818      $      -       $   1,818
         March 2004 issuance.....................................        867             -             867
         October 2004 issuance...................................      5,033        11,141          16,174
         February 2005 issuance..................................      3,637         6,526          10,163
                                                                   ---------      --------       ---------
                  Totals.........................................  $  11,353      $ 17,667       $  29,024
                                                                   =========      ========       =========

<CAPTION>
                                                                             SEPTEMBER 30, 2004
                                                                             ------------------
                                                                                 CONVERSION
                                                                   WARRANTS       FEATURES         TOTAL
                                                                   --------       --------         -----

<S>                                                                <C>            <C>            <C>
         January 2004 issuance  .................................. $   1,844      $  6,351       $   8,195
         March 2004 issuance  ....................................     1,198         4,328           5,526
                                                                   ---------      --------       ---------
                  Totals.......................................... $   3,042      $ 10,679       $  13,721
                                                                   =========      ========       =========
</TABLE>

                                     64

<PAGE>
<PAGE>

8.       COMMITMENTS AND CONTINGENCIES
------------------------------------------------------------------------------

LEASES

         Land at the carbon fibers manufacturing facility in Missouri is
leased under an operating lease that expires in December 2065, with a
renewal option for 24 years expiring in December 2089. The lease requires
annual rental payments of $57,991 through October 2010, no further rental
payments are required through initial term of lease. Rental expense related
to this lease was $57,991 for the years ended September 30, 2005, 2004 and
2003.

LEGAL

         In October 2003, the Company was named as a defendant in a civil
action filed in the Court of Common Pleas for Cuyahoga County, Ohio by the
former owner of Hardcore Composites Operations, LLC ("Hardcore") alleging
breach by Hardcore and the Company of their respective obligations under a
sublease, the Company's guaranty of the sublease, and prior settlement
agreement among the parties. The former owner's action claimed damages in
the amount of $0.3 million for breaches by the Company of its obligations
under the guaranty and the settlement agreement and, in addition, demanded
$0.5 million in damages from Hardcore and the Company, jointly and
severally, under the terms of the settlement agreement. In October 2004, the
Court of Common Pleas for Cuyahoga County, Ohio ruled in favor of the former
owner of Hardcore Composites in the amount of $1.1 million. In prior
periods, the Company has accrued $1.1 million in respect of the possible
liability in this matter, which it believes is its maximum obligation under
this guaranty. The Company is vigorously defending this matter, has filed
counterclaims and filed an appeal that represents its only recourse
regarding this guaranty. Management believes that the ultimate resolution of
this litigation will not have a further material adverse effect on the
Company's results of operations, financial condition or cash flow. To date,
the Company has not made any payments of any portion of this obligation,
although it posted an appeal bond in the amount of $1.3 million. The Company
executed a guaranty of Hardcore Composite's lease obligations of
approximately $30,000 per month to the former owner. The lease of the
Hardcore Composites manufacturing facility expires March 31, 2008. Hardcore
no longer occupies the facility and, accordingly, in connection with the
ongoing litigation with the former owner, Zoltek is asserting that Zoltek
has no further ongoing guarantee obligation with respect to the lease. The
Company also is the obligee on aggregate original value of unsecured
promissory notes of $9.3 million in connection with the sale of Hardcore,
for which a full valuation allowance has been recorded. A full valuation
allowance is appropriate in light of Hardcore's current financial condition
which, among other relevant factors, make the collection of the promissory
notes doubtful.

         The Company is plaintiff in a patent infringement lawsuit pending
in the United States Court of Federal Claims. The lawsuit, which has been
pending since 1996, involves the alleged unauthorized use of the Company's
carbon fiber processing technology in the manufacture of stealthy aircraft.
A preliminary court decision has been favorable for the Company, but the
Company cannot predict the timing or the outcome of this litigation or the
impact on the Company's financial condition and results of operations.

         In September 2004, the Company was named a defendant in a civil
action filed by a former investment banker that was retained by the Company
to obtain equity investors, alleging breach by the Company of its
obligations under the agreement signed by the parties. The investment banker
alleges it is owed commission from equity investment obtained by the Company
from a different source. The Company has asserted various defenses,
including that the investment banker breached the agreement by not
performing reasonable efforts to obtain financing for the Company, and
therefore, the agreement was terminated by the Company prior to obtaining
new financing. The litigation is in early stages and the


                                     65

<PAGE>
<PAGE>

Company cannot predict the timing or the outcome of this litigation or the
impact on the Company's financial condition and results of operations.

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

ENVIRONMENTAL

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

SOURCES OF SUPPLY

         As part of its growth strategy, the Company has developed its own
precursor acrylic fibers and all of its carbon fibers and technical fibers.
The primary source of raw material for the precursor is ACN (acrylonitrile),
which is a commodity product with multiple sources.

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

9.       PROFIT SHARING PLAN
------------------------------------------------------------------------------

         The Company maintains a 401(k) Profit Sharing Plan for the benefit
of employees who have completed six months of service and attained 21 years
of age. No contributions were made by the Company for the years ended
September 30, 2005, 2004, and 2003.

10.      STOCK OPTIONS
------------------------------------------------------------------------------

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

                                     66

<PAGE>
<PAGE>

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

         Presented below is a summary of stock option plans activity for the
years shown:

<TABLE>
<CAPTION>
                                                   Wtd. Avg.      Wtd. Avg.     Wtd. Avg.
                                                    Options    Exercise Price  Exercisable    Exercise Price
                                                   ---------   --------------  -----------    --------------
<S>                                                <C>            <C>            <C>             <C>
         Balance, September 30, 2002               1,087,000      $ 7.05         561,833         $ 10.35
             Granted.............................    112,500        2.70
             Exercised...........................    (10,000)       2.07
             Cancelled...........................   (187,500)       4.76
                                                   ---------
         Balance, September 30, 2003.............  1,002,000        7.04         744,083            8.67
             Granted.............................     77,500        6.36
             Exercised...........................    (63,000)       3.27
             Cancelled...........................    (29,000)       5.44
                                                   ---------
         Balance, September 30, 2004                 987,500        7.22         722,250            8.91
             Granted.............................    187,500       11.02
             Exercised...........................   (119,333)       3.54
             Cancelled...........................     (4,000)       8.38
                                                   ---------
         Balance, September 30, 2005               1,051,667      $ 8.37         812,028        $   8.85
</TABLE>

         The following table summarizes information for options currently
outstanding and exercisable at September 30, 2005:

<TABLE>
<CAPTION>
                                                Options Outstanding               Options Exercisable
                                           ------------------------------     ---------------------------
          Range of                            Wtd. Avg.       Wtd. Avg.                       Wtd. Avg.
           Prices            Number        Remaining Life  Exercise Price     Number       Exercise Price
        ------------       ---------       --------------  --------------     -------      --------------
<S>                        <C>                <C>             <C>             <C>             <C>
        $  1.33-2.80         355,667          7 years         $ 2.29          274,361         $ 2.19
           3.25-5.67          72,500          8 years           5.48           39,167           5.32
           6.25-6.88         181,000          1 years           6.36          181,000           6.36
           7.69-9.25         105,000          6 years           8.18          105,000           8.18
         10.00-39.00         337,500          7 years          16.54          212,500          20.55
                           ---------                                          -------
        $ 1.33-39.00       1,051,667          6 years         $ 8.37          812,028         $ 8.85
                           =========                                          =======
</TABLE>

         The pro forma information required by FAS 123 regarding net income
and earnings per share has been presented in Note 1 as if the Company had
accounted for its stock option plans under the fair value method.

11.      BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
------------------------------------------------------------------------------

         The Company's strategic business units are based on product lines
and have been grouped into three reportable segments: Carbon Fibers,
Technical Fibers and Specialty Products. In the fourth quarter of fiscal
2004, the Company formally adopted a plan to discontinue and exit two
divisions of its Zoltek Rt. operations which manufacture acrylic and nylon
fibers and yarns. In the fourth quarter of fiscal 2005, the Company formally
adopted a plan to discontinue the CMC division of its Zoltek Rt. operations.
These divisions were part of the Specialty Products segment. Segment
information for 2004 and 2003 has been reclassified to reflect such change
(see Note 3).

                                     67

<PAGE>
<PAGE>

         The Carbon Fibers segment manufactures low-cost carbon fibers used
as reinforcement material in composites, carbon fiber composite products and
filament winding equipment used in the composite industry. The Technical
Fibers segment manufactures aircraft brake pads and oxidized acrylic fibers
for heat/fire barrier applications. These two segments also facilitate
development of product and process applications to increase the demand for
carbon fibers and technical fibers and seek to aggressively market carbon
fibers and technical fibers. The Carbon Fibers and Technical Fibers segments
are located geographically in the United States and Hungary. The Specialty
Products segment manufactures and markets acrylic and nylon products and
fibers primarily to the textile industry and is located in Hungary. In the
fourth quarters of fiscal 2004 and fiscal 2005, the Company discontinued
divisions within this segment. With the exception of the Technical Fibers
segment, none of the segments are substantially dependent on sales from one
customer or a small group of customers.

         Management evaluates the performance of its operating segments on
the basis of operating income (loss) contribution to the Company. The
following table presents financial information on the Company's operating
segments as of and for the fiscal years ended September 30, 2005, 2004 and
2003 (amounts in thousands):

<TABLE>
<CAPTION>
                                                                              Year Ended September 30, 2005
                                                                              -----------------------------
                                                                                                      Corporate
                                                                 Carbon    Technical     Specialty   Headquarters
                                                                 Fibers      Fibers      Products  and Eliminations    Total
                                                                 ------      ------      --------  ----------------    -----
<S>                                                             <C>         <C>           <C>          <C>            <C>
Net sales....................................................   $34,487     $19,693       $6,024       $     -        $60,204
Cost of sales, excluding available unused capacity expenses..    36,677      15,361        4,798             -         56,836

Available unused capacity expenses...........................     2,347           -            -             -          2,347
Operating income (loss)......................................    (8,214)      2,658          937        (3,530)        (8,149)
Depreciation and amortization expense........................     3,922         877          345           131          5,232
Capital expenditures.........................................    11,850       2,611          124           205         14,790

<CAPTION>
                                                                              Year Ended September 30, 2004
                                                                              -----------------------------
                                                                                                      Corporate
                                                                 Carbon    Technical     Specialty   Headquarters
                                                                 Fibers      Fibers      Products  and Eliminations    Total
                                                                 ------      ------      --------  ----------------    -----
<S>                                                             <C>         <C>           <C>          <C>            <C>
Net sales....................................................   $18,431     $14,831       $6,565       $     -        $39,827
Cost of sales, excluding available unused capacity expenses..    15,607      12,477        5,317             -         33,401

Available unused capacity expenses...........................     4,466           -            -             -          4,466
Operating income (loss)......................................    (5,792)      1,164        1,300        (2,386)        (5,714)
Depreciation and amortization expense........................     3,969       1,091          463            91          5,567
Capital expenditures.........................................     5,391         389          231            (8)         6,001

<CAPTION>
                                                                              Year Ended September 30, 2003
                                                                              -----------------------------
                                                                                                      Corporate
                                                                 Carbon    Technical     Specialty   Headquarters
                                                                 Fibers      Fibers      Products  and Eliminations    Total
                                                                 ------      ------      --------  ----------------    -----
<S>                                                             <C>         <C>           <C>          <C>            <C>
Net sales....................................................   $13,179     $14,098       $6,406       $     -        $33,683
Cost of sales, excluding available unused capacity expenses..    11,351      12,689        4,457             -         28,497

Available unused capacity expenses...........................     5,716           -            -             -          5,716
Operating income (loss)......................................    (8,303)         93        1,155        (2,850)        (9,905)
Depreciation and amortization expense........................     4,013       1,004          600           225          5,842
Capital expenditures.........................................       515         512          403             -          1,430

<CAPTION>
                                                                                        Total Assets
                                                                                        ------------
                                                                                                      Corporate
                                                                 Carbon    Technical     Specialty   Headquarters
                                                                 Fibers      Fibers      Products  and Eliminations    Total
                                                                 ------      ------      --------  ----------------    -----
<S>                                                             <C>         <C>           <C>          <C>           <C>
September 30, 2005............................................  $93,386     $22,662       $10,654      $ 3,727       $130,429
September 30, 2004............................................   63,306      19,701        36,429        3,019        122,455
September 30, 2003............................................   66,226      22,611        32,569       (1,951)       119,455
</TABLE>

                                     68

<PAGE>
<PAGE>

         Sales and long-lived assets, by geographic area, consist of the
following as of and for each of the three fiscal years in the period ended
September 30, 2005, 2004 and 2003 (amounts in thousands):

<TABLE>
<CAPTION>
                                      2005                         2004                          2003
                           -------------------------   ----------------------------   --------------------------
                                             Net                            Net                          Net
                                          Long Lived                     Long Lived                   Long Lived
                           Net Sales (a)  Assets (b)   Net Sales (a)     Assets (b)   Net Sales (a)   Assets (b)
                           -------------  ----------   -------------     ----------   -------------   ----------
<S>                        <C>            <C>           <C>              <C>           <C>            <C>
United States............  $    23,946    $   45,978    $    22,731      $   46,582    $    20,892    $   45,936
Western Europe...........       25,178             -         10,583               -          2,861             -
Eastern Europe...........        6,058        42,040          3,934          33,832          7,863        31,436
Asia.....................        4,879             -          2,361               -              -             -
Other areas..............          143             -            198               -          2,067             -
                           -----------    ----------    -----------      ----------    -----------    ----------
   Total.................  $    60,204    $   88,018    $    39,827      $   80,414    $    33,683    $   77,373
                           ===========    ==========    ===========      ==========    ===========    ==========

<FN>
(a) Revenues are attributed to countries based on the location of the customer.
(b) Property and equipment net of accumulated depreciation based on country
location of assets.
</TABLE>

12.     SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
------------------------------------------------------------------------------

(Amounts in thousands, except per share data)

<TABLE>
<CAPTION>
Fiscal year 2005                                     1st Quarter       2nd Quarter    3rd Quarter      4th Quarter
------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>              <C>            <C>               <C>
Net sales..........................................   $   12,243       $    14,308    $   17,643        $   16,010
Income (loss) from continuing operations...........      (29,338)            2,412        (1,235)          (10,512)
Loss from discontinued operations..................         (591)             (266)         (233)             (629)
                                                      ----------       -----------    ----------        ----------
Net income (loss)..................................   $  (29,929)      $     2,146    $   (1,468)       $  (11,141)
                                                      ==========       ===========    ==========        ==========

Basic and diluted income (loss) per share:
  Continuing operations - basic....................   $    (1.63)      $      0.14    $    (0.07)       $    (0.58)
  Discontinued operations - basic..................        (0.04)            (0.02)        (0.01)            (0.03)
                                                      ----------       -----------    ----------        ----------
       Total basic.................................   $    (1.67)      $      0.12    $    (0.08)       $    (0.61)
                                                      ==========       ===========    ==========        ==========

  Continuing operations - diluted..................   $    (1.78)      $     (0.21)   $    (0.13)       $    (0.52)
  Discontinued operations - diluted................        (0.04)            (0.02)        (0.01)            (0.03)
                                                      ----------       -----------    ----------        ----------
       Total diluted...............................   $    (1.82)      $     (0.23)   $    (0.14)       $    (0.55)
                                                      ==========       ===========    ==========        ==========

<CAPTION>
Fiscal year 2004                                     1st Quarter       2nd Quarter    3rd Quarter      4th Quarter
------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>              <C>            <C>               <C>
Net sales..........................................   $    7,247       $    10,145    $   11,807        $   10,628
Income (loss) from continuing operations...........       (3,345)           (8,578)        1,975            (7,255)
Loss from discontinued operations..................         (347)           (1,119)       (1,222)           (2,916)
                                                      ----------       -----------    ----------        ----------
Net income (loss)..................................   $   (3,692)      $    (9,697)   $      753        $  (10,171)
                                                      ==========       ===========    ==========        ==========

Basic and diluted income (loss) per share:

  Continuing operations - basic....................   $    (0.21)      $     (0.53)   $     0.12        $    (0.44)
  Discontinued operations - basic..................        (0.02)            (0.06)        (0.08)            (0.18)
                                                      ----------       -----------    ----------        ----------
       Total basic.................................   $    (0.23)      $     (0.59)   $     0.04        $    (0.62)
                                                      ==========       ===========    ==========        ==========

  Continuing operations - diluted..................   $    (0.21)      $     (0.53)   $    (0.05)       $    (0.44)
  Discontinued operations - diluted................        (0.02)            (0.06)        (0.07)            (0.18)
                                                      ----------       -----------    ----------        ----------
       Total diluted...............................   $    (0.23)      $     (0.59)   $    (0.12)       $    (0.62)
                                                      ==========       ===========    ==========        ==========
</TABLE>


                                     69

<PAGE>
<PAGE>

Item 9.  Changes in and Disagreements With Accountants on Accounting and
------   ---------------------------------------------------------------
Financial Disclosures
---------------------

None.

Item 9A.  Controls and Procedures
--------  -----------------------

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation was
carried out by our management, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, of
the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934,
as amended (the "Exchange Act")). Our disclosure controls and procedures are
designed to ensure that information required to be disclosed in reports we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time period specified in SEC rules and forms and that
such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosures.

Based on our evaluation and the identification of the material weaknesses in
internal control over financial reporting described below, our Chief
Executive Officer and Chief Financial Officer concluded that, as of
September 30, 2005, our disclosure controls and procedures were ineffective.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act). Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles ("GAAP"). Internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that
receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and (iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company's assets that
could have a material effect on the interim or annual consolidated financial
statements.

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

                                     70

<PAGE>
<PAGE>

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

A material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be
prevented or detected. In connection with our assessment of the Company's
internal control over financial reporting described above, we have
identified the following control deficiencies, which represent material
weaknesses in the Company's internal control over financial reporting as of
September 30, 2005.

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

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

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

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

                                     71

<PAGE>
<PAGE>

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

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

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

     b)   The Company did not maintain effective controls over the
          preparation and review of the interim and annual consolidated
          financial statements and disclosures. Specifically, effective
          controls were not designed and in place over the process related
          to (i) identifying and accumulating all required supporting
          information to ensure the completeness and accuracy of the
          consolidated financial statements and disclosures, and (ii) the
          performance of period-end financial analyses including analytical
          reviews. This control deficiency resulted in audit adjustments to
          the Company's 2005 annual consolidated financial statements and
          the interim consolidated financial statements for each of the 2005
          quarters.

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

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

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

                                     72

<PAGE>
<PAGE>

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

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

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

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

     a)   The Company did not maintain effective controls over the
          completeness and accuracy of physical inventory quantities.
          Specifically, effective controls were not designed and in place to
          ensure that (i) the Company's perpetual inventory records were
          appropriately updated for the results of cycle counts performed
          and

                                     73

<PAGE>
<PAGE>

          (ii) an accurate and complete physical inventory was achieved and
          that the Company's perpetual inventory records were appropriately
          updated for the results of the annual physical inventory. These
          control deficiencies resulted in audit adjustments to the
          Company's 2005 annual consolidated financial statements and the
          interim consolidated financial statements for each of the 2005
          quarters.

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

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

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

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

8)   The Company did not maintain effective controls over the completeness
     and accuracy of its accounting for derivatives associated with
     convertible debt and the related amortization of financing fees and
     debt discount and gain (loss) on value of warrants and conversion
     feature. Specifically, effective controls were not designed and in
     place over the accounting for derivatives in connection with the
     Company's convertible debt issued in January, March and October 2004,
     and February and September 2005 to ensure the completeness and accuracy
     of the accounting for (i) the beneficial conversion feature embedded in
     the Company's convertible debt, or (ii) the common stock purchase
     warrants issued in connection with the Company's convertible debt. This
     control deficiency resulted in misstatements to long-term

                                     74

<PAGE>
<PAGE>

     liabilities, shareholders' equity, interest expense, amortization
     expense, and fair value gains and losses which resulted in the
     restatement of the Company's 2004 annual consolidated financial
     statements, as well as the Company's interim consolidated financial
     statements for the quarters ended March 31, 2004, June 30, 2004, and
     the 2005 interim consolidated financial statements for the quarters
     ending December 31, 2004 and March 31, 2005, as well as audit
     adjustments to the Company's quarter ended September 30, 2005
     consolidated financial statements. In addition, this control deficiency
     could result in a misstatement of the aforementioned accounts and
     disclosures that would result in a material misstatement to the annual
     or interim consolidated financial statements that would not be
     prevented or detected. Accordingly, management determined that this
     control deficiency constitutes a material weakness.

9)   The Company did not maintain effective controls over the completeness
     and accuracy of its earnings per share calculation and the related
     disclosures. Specifically, the Company did not maintain effective
     controls over the appropriate sequencing of warrants and convertible
     debt instruments for determining diluted earnings per share. This
     control deficiency resulted in the restatement of the Company's interim
     consolidated financial statements for the quarter ended March 31, 2005.
     In addition, this control deficiency could result in a material
     misstatement to earnings per share that would result in a material
     misstatement to the Company's annual or interim consolidated financial
     statements that would not be prevented or detected. Accordingly,
     management determined that this control deficiency constitutes a
     material weakness.

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

Because of the material weaknesses described above, we have concluded that
the Company did not maintain effective internal control over financial
reporting as of September 30, 2005, based on the criteria in Internal
Control - Integrated Framework issued by the COSO.

                                     75

<PAGE>
<PAGE>

Management's assessment of the effectiveness of our internal control over
financial reporting as of September 30, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as stated in their report which appears herein.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

We made no changes in our internal control over financial reporting that
occurred in the fourth quarter of fiscal 2005 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.

MANAGEMENT'S REMEDIATION INITIATIVES AND INTERIM MEASURES

As discussed above, management has identified certain material weaknesses
that exist in our internal control over financial reporting and management
is taking steps to strengthen our internal control over financial reporting.
Zoltek is actively engaged in the implementation of remediation efforts to
address the material weaknesses in Zoltek's internal control over financial
reporting as of September 30, 2005. These remediation efforts, as outlined
below, are designed to address the material weaknesses identified by Zoltek
management and to enhance the overall control environment.

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

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

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

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

                                     76

<PAGE>
<PAGE>

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

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

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

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

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

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

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

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

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

                                     77

<PAGE>
<PAGE>

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

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

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

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

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

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


Item 9B.  Other Information
--------  -----------------

         Not Applicable.

                                  PART III

Item 10.  Directors and Executive Officers of the Registrant
--------  --------------------------------------------------

         The information set forth under the captions "Election of
Directors" and "Other Matters" in the registrant's Proxy Statement for its
2006 Annual Meeting of Shareholders is incorporated herein by this
reference. See also Item 4A of Part I of this report.

                                     78

<PAGE>
<PAGE>


Item 11.  Executive Compensation
--------  ----------------------

         The information set forth under the captions "Directors' Fees" and
"Compensation of Executive Officers" in the registrant's Proxy Statement for
its 2006 Annual Meeting of Shareholders is incorporated herein by this
reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and
-------   ------------------------------------------------------------------
Related Stockholder Matters
---------------------------

         The information set forth under the captions "Voting Securities and
Principal Holders Thereof" and "Security Ownership By Management" in the
registrant's Proxy Statement for its 2006 Annual Meeting of Shareholders is
incorporated herein by this reference.

         The following table shows the total number of outstanding options
and shares available for future issuances of options under the Company's
existing stock option plans as of September 30, 2005.

<TABLE>
                                       Equity Compensation Plan Information
                                       ------------------------------------
<CAPTION>
                                                                                             NUMBER OF SECURITIES
                                                                                              REMAINING AVAILABLE
                                                                                              FOR FUTURE ISSUANCE
                                                                     WEIGHTED AVERAGE            UNDER EQUITY
                                       NUMBER OF SECURITIES TO       EXERCISE PRICE OF        COMPENSATION PLANS
                                       BE ISSUED UPON EXERCISE      OUTSTANDING OPTIONS      (EXCLUDING SECURITIES
                                       OF OUTSTANDING OPTIONS          UNDER EQUITY           REFLECTED IN COLUMN
                                         WARRANTS AND RIGHTS        WARRANTS AND RIGHTS              (a))
          PLAN CATEGORY                        (#)(a)                     ($)(b)                    (#)(c)
          -------------             -------------------------     ---------------------      ----------------------

<S>                                          <C>                           <C>                     <C>
Equity Compensation Plans
Approved by Security Holders                 1,051,667(1)                  $8.37                   735,000(1)

Equity Compensation Plans Not
Approved by Security Holders                         0(2)                      0                         0(2)

Total                                        1,051,667                     $8.37                   735,000

<FN>
(1) Under the Company's Directors Stock Option Plan, there is at all times
    reserved for issuance a number of shares of Common Stock equal to the
    total number of shares then issuable pursuant to all option grants which
    are then outstanding under such plan.

(2) The Company currently has no equity compensation plans that are not
    approved by securityholders.
</TABLE>

                                     79

<PAGE>
<PAGE>

Item 13.  Certain Relationships and Related Transactions
--------  ----------------------------------------------

         The information set forth under the caption "Certain Transactions"
in the registrant's Proxy Statement for its 2006 Annual Meeting of
Shareholders is incorporated herein by this reference.

Item 14.  Principal Accountant Fees and Services
--------  --------------------------------------

         The information set forth under the caption "Principal Accountant
Fees and Services" in the registrant's Proxy Statement for its 2006 Annual
Meeting of Shareholders is incorporated herein by this reference.


                                     80

<PAGE>
<PAGE>


                                   PART IV

Item 15.  Exhibits and Financial Statement Schedule
--------  -----------------------------------------

         (a)      (1) Financial statements: The following financial statements
are included in Item 8 of this report:

                  Report of Independent Registered Public Accounting Firm

                  Consolidated Balance Sheet as of September 30, 2005
                  and 2004

                  Consolidated Statement of Operations for the years ended
                  September 30, 2005, 2004 and 2003

                  Consolidated Statement of Changes in Shareholders' Equity
                  for the years ended September 30, 2005, 2004 and 2003

                  Consolidated Statement of Cash Flows for the years ended
                  September 30, 2005, 2004 and 2003

                  Notes to Consolidated Financial Statements

                  (2) The following financial statement schedule and
Independent Registered Public Accounting Firm's report thereon are included
in Part IV of this report:

         Report of Independent Registered Public Accounting Firm on
         Financial Statement Schedule

         12-09 Valuation and Qualifying Accounts and Reserves

                           Schedules other than those listed above have been
omitted because they are either not required or not applicable, or because
the information is presented in the consolidated financial statements or the
notes thereto.

                  (3) The following exhibits are filed herewith or
incorporated by reference herein, as indicated:

         3.1      Restated Articles of Incorporation of the Registrant,
                  filed as Exhibit 3.1 to Registrant's Registration
                  Statement on Form S-1 (Reg. No. 33-51142) is incorporated
                  herein by this reference

         3.2      Restated By-Laws of the Registrant, as currently in
                  effect, filed as Exhibit 3.2 to Registrant's Registration
                  Statement on Form S-1 (Reg. No. 33-51142) is incorporated
                  herein by this reference

         4.1      Form of certificate for Common Stock, filed as Exhibit 4.1
                  to Registrant's Registration Statement on Form S-1 (Reg.
                  No. 33-51142) is incorporated herein by this reference

                                     81

<PAGE>
<PAGE>

         4.2      Form of Warrant, dated May 11, 2001, issued to Southwest
                  Bank of St. Louis with respect to 12,500 shares of
                  Registrant's Common Stock is filed herewith

         4.3      Subordinated Convertible Debenture Purchase Agreement,
                  dated as of February 13, 2003, by and among Zoltek
                  Companies, Inc. and the investors named therein, filed as
                  Exhibit 4.1 to Registrant's Current Report on Form 8-K
                  dated February 18, 2003 is incorporated herein by
                  reference

         4.4      Form of Subordinated Debenture, filed as Exhibit 4.2 to
                  Registrant's Current Report on Form 8-K dated February 18,
                  2003 is incorporated herein by reference

         4.5      Form of Warrant, filed as Exhibit 4.3 to Registrant's
                  Current Report on Form 8-K dated February 18, 2003 is
                  incorporated herein by reference

         4.6      Securities Purchase Agreement, dated as of December 19,
                  2003, by and among Zoltek Companies, Inc. and the
                  investors named therein, filed as Exhibit 4.6 to
                  Registrant's Annual Report on Form 10-K for the year ended
                  September 30, 2003 is incorporated herein by reference

         4.7      Form of 6% Convertible Debenture, filed as Exhibit 4.7 to
                  Registrant's Annual Report on Form 10-K for the year ended
                  September 30, 2003 is incorporated herein by reference

         4.8      Form of Warrant, filed as Exhibit 4.8 to Registrant's
                  Annual Report on Form 10-K for the year ended September
                  30, 2003 is incorporated herein by reference

         4.9      Securities Purchase Agreement, dated as of March 11, 2004,
                  by and among Zoltek Companies, Inc. and the investors
                  named therein, filed as Exhibit 4.2 to Registrant's
                  Registration Statement on Form S-3 (Reg. No. 333-115043)
                  is incorporated herein by reference

         4.10     Form of 6% Convertible Debenture, filed as Exhibit 4.3 to
                  Registrant's Registration Statement on Form S-3 (Reg. No.
                  333-115043) is incorporated herein by reference

         4.11     Form of Warrant, filed as Exhibit 4.4 to Registrant's
                  Registration Statement on Form S-3 (Reg. No. 333-115043)
                  is incorporated herein by reference

         4.12     Loan and Warrant Agreement, dated as of October 14, 2004,
                  filed as Exhibit 4.1 to Registrant's Current Report on
                  Form 8-K dated October 19, 2004 is incorporated herein by
                  reference

         4.13     Security Agreement, dated as of October 14, 2004, filed as
                  Exhibit 4.3 to Registrant's Current Report on Form 8-K
                  dated October 19, 2004 is incorporated herein by reference

         4.14     Mortgage Agreement, dated as of October 14, 2004, filed as
                  Exhibit 4.4 to Registrant's Current Report on Form 8-K
                  dated October 19, 2004 is incorporated herein by reference

         4.15     Form of Warrant, filed as Exhibit 4.5 to Registrant's
                  Current Report on Form 8-K dated October 19, 2004 is
                  incorporated herein by reference

         4.16     Loan and Warrant Agreement, dated as of February 9, 2005,
                  by and among the Registrant, the Lenders and the Agent,
                  filed as Exhibit 4.1 to the Registrant's Quarterly


                                     82

<PAGE>
<PAGE>

                  Report on Form 10-Q for the quarter ended December 31, 2004
                  and incorporated herein by reference

         4.17     Form of Senior Convertible Note, dated as of February 9,
                  2005, filed as Exhibit 4.2 to the Registrant's Quarterly
                  Report on Form 10-Q for the quarter ended December 31,
                  2004 and incorporated herein by reference

         4.18     Form of Warrant, dated as of February 9, 2005, filed as
                  Exhibit 4.3 to the Registrant's Quarterly Report on Form
                  10-Q for the quarter ended December 31, 2004 and
                  incorporated herein by reference

         4.19     Form of Registration Rights Agreement, dated as of
                  February 9, 2005, filed as Exhibit 4.4 to the Registrant's
                  Quarterly Report on Form 10-Q for the quarter ended
                  December 31, 2004 and incorporated herein by reference

         4.20     Loan and Warrant Agreement, as of September 29, 2005,
                  among the Registrant, the Lenders and the Agent, filed as
                  Exhibit 4.1 to the Registrant's Current Report on Form 8-K
                  dated September 29, 2005 and incorporated herein by
                  reference

         4.21     Form of Note, filed as Exhibit 4.2 to the Registrant's
                  Current Report on Form 8-K dated September 29, 2005 and
                  incorporated herein by reference

         4.22     Form of Warrant, filed as Exhibit 4.3 to the Registrant's
                  Current Report on Form 8-K dated September 29, 2005 and
                  incorporated herein by reference

         4.23     Registration Rights Agreement, dated as of September 30,
                  2005, by and among the Registrant and the Lenders parties
                  thereto, filed as Exhibit 4.4 to the Registrant's Current
                  Report on Form 8-K dated September 29, 2005 and
                  incorporated herein by reference

         10.1     Loan Agreement, dated December 29, 1989, by and between
                  Zoltek Corporation and Southwest Bank of St. Louis, as
                  amended by letter, dated August 13, 1992, filed as Exhibit
                  10.7 to Registrant's Registration Statement on Form S-1
                  (Reg. No. 33-51142) is incorporated herein by this
                  reference

         10.2     Zoltek Companies, Inc. Long Term Incentive Plan, filed as
                  Appendix B to Registrant's definitive proxy statement for
                  the 1997 Annual Meeting of Shareholders is incorporated
                  herein by this reference*

         10.3     Zoltek Companies, Inc. Amended and Restated Directors
                  Stock Option Plan, filed as Exhibit 10.1 to Registrant's
                  Quarterly Report on Form 10-Q dated August 13, 1999, is
                  incorporated herein by this reference*

         10.5     Precursor Agreement, dated as of July 1, 1994, by and
                  between Zoltek Corporation and Courtaulds Fibres Limited,
                  filed as Exhibit 10.9 to Registrant's Annual Report on
                  Form 10-K for the fiscal year ended September 30, 1994, is
                  incorporated herein by this reference (An application for
                  confidential treatment has been made for a portion of
                  Exhibit 10.5.)

         10.6     Materials Supply Agreement, dated as of June 15, 1994, by
                  and between Zoltek Companies, Inc. and The B.F. Goodrich
                  Company, filed as Exhibit 10.10 to Registrant's Annual
                  Report on Form 10-K for the fiscal year ended September
                  30, 1994, is


                                     83

<PAGE>
<PAGE>

                  incorporated herein by this reference (An application for
                  confidential treatment has been made for a portion of
                  Exhibit 10.6.)

         10.8     Promissory Note, dated November 14, 1994, by and between
                  Zoltek Corporation and Southwest Bank of St. Louis, filed
                  as Exhibit 10.2 to the Registrant's Quarterly Report on
                  Form 10-Q for the quarter ended March 31, 1995, is
                  incorporated herein by this reference

         10.10    Credit Agreement, dated May 11, 2001, between Southwest
                  Bank of St. Louis and Zoltek Companies, Inc., Zoltek
                  Corporation, Cape Composites, Inc., Engineering Technology
                  Corporation, Zoltek Properties, Inc., and Hardcore
                  Composites Operations, LLC, filed as Exhibit 10.1 to
                  Registrant's Quarterly Report on Form 10-Q for the quarter
                  ended June 30, 2001 is incorporated herein by reference

         10.11    First Amendment to Credit Agreement, dated as of February
                  13, 2003, by and among Zoltek Companies, Inc., Zoltek
                  Corporation, Cape Composites, Inc., Engineering Technology
                  Corporation, Zoltek Properties, Inc. and Southwest Bank of
                  St. Louis, filed as Exhibit 10.1 to Registrant's Current
                  Report on Form 8-K dated February 18, 2003 is incorporated
                  herein by reference

         10.12    Zoltek Companies, Inc. 2003 Long-Term Equity Incentive
                  Plan, filed as Appendix A to Registrant's definitive proxy
                  statement for the 2002 Annual Meeting of Shareholders is
                  corporated herein by reference*

         10.13    Promissory Note, dated January 13, 2004, by and between
                  Zoltek Properties, Inc. and Beal Bank, S.S.B. filed as
                  Exhibit 10.13 to Registrant's Annual Report on Form 10-K
                  for the fiscal year ended September 30, 2003, is
                  incorporated herein by this reference

         10.14    Second Amendment to Credit Agreement, dated as of January 13,
                  2003, by and among Zoltek Companies, Inc., Zoltek
                  Corporation, Cape Composites, Inc., Engineering Technology
                  Corporation, Zoltek Properties, Inc. and Southwest Bank of
                  St. Louis filed as Exhibit 10.14 to Registrant's Annual
                  Report on Form 10-K for the fiscal year ended September
                  30, 2003, is incorporated herein by this reference

         21       Subsidiaries of the Registrant filed as Exhibit 21 to
                  Registrant's Annual Report on Form 10-K for the fiscal
                  year ended September 30, 2000 is incorporated herein by
                  this reference

         23       Consent of PricewaterhouseCoopers LLP is filed herewith

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

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

         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 is filed herewith

         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 is filed herewith

<FN>
--------
* Management compensatory plan or arrangement


                                     84

<PAGE>
<PAGE>


                                 SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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)


                                               By /s/ Zsolt Rumy
                                                  ----------------------------
                                                  Zsolt Rumy, Chairman of the
                                                  Board, President and Chief
                                                  Executive Officer

Date: December 30, 2005

         Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature                                 Title                                         Date
---------                                 -----                                         ----

<S>                                       <C>                                           <C>
/s/ Zsolt Rumy                            Chairman, President,                          December 30, 2005
------------------------------------      Chief Executive Officer and Director
Zsolt Rumy



/s/ Kevin Schott                          Chief Financial Officer                       December 30, 2005
------------------------------------
Kevin Schott



/s/ Linn H. Bealke                        Director                                      December 30, 2005
------------------------------------
Linn H. Bealke



/s/ James W. Betts                        Director                                      December 30, 2005
------------------------------------
James W. Betts



/s/ Charles A. Dill                       Director                                      December 30, 2005
------------------------------------
Charles A. Dill



/s/ John L. Kardos                        Director                                      December 30, 2005
------------------------------------
John L. Kardos



/s/ John F. McDonnell                     Director                                      December 30, 2005
------------------------------------
John F. McDonnell
</TABLE>


                                     85

<PAGE>
<PAGE>

         REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
                        FINANCIAL STATEMENT SCHEDULE





To the Board of Directors
of Zoltek Companies, Inc.

Our audits of the consolidated financial statements referred to in our
report dated January 3, 2006, appearing in the 2005 Annual Report to
Shareholders of Zoltek Companies, Inc. (which report and consolidated
financial statements are included in this Annual Report on Form 10-K) also
included an audit of the Financial Statement Schedule listed in Item
15(a)(2) of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated
financial statements.



/s/PricewaterhouseCoopers LLP
-----------------------------
PricewaterhouseCoopers LLP
St. Louis, Missouri
January 3, 2006



                                     86

<PAGE>
<PAGE>

<TABLE>
<CAPTION>
                                              FOR THE YEAR ENDED SEPTEMBER 30, 2005

                                   Rule 12-09 Valuation and Qualifying Accounts and Reserves

                                                     (Amounts in thousands)

          Column A                  Column B                       Column C                          Column D         Column E
          --------                  --------          ------------------------------------           --------         --------
                                                                   Additions
                                                      ------------------------------------
                                   Balance at         Charged to              Charged to                             Balance at
                                   beginning          costs and             other accounts          Deductions           end
                                   of period           expenses                describe              describe         of period
                                   ---------           --------                --------              --------         ---------

<S>                                 <C>                <C>                    <C>                    <C>              <C>
RESERVE FOR DOUBTFUL ACCOUNTS       $   981            $     425              $        -             $    688 (1)     $     718
                                    =======            =========              ==========             ========         =========

RESERVE FOR INVENTORY VALUATION     $ 5,187            $       -              $        -             $  2,087 (2)     $   3,100
                                    =======            =========              ==========             ========         =========

DEFERRED TAX VALUATION              $14,497            $   4,915              $        -             $      -         $  19,412
                                    =======            =========              ==========             ========         =========


<CAPTION>
                                                  -----------------------------

                                              FOR THE YEAR ENDED SEPTEMBER 30, 2004

                                   Rule 12-09 Valuation and Qualifying Accounts and Reserves

                                                     (Amounts in thousands)

          Column A                  Column B                       Column C                          Column D         Column E
          --------                  --------          ------------------------------------           --------         --------
                                                                   Additions
                                                      ------------------------------------
                                   Balance at         Charged to              Charged to                             Balance at
                                   beginning          costs and             other accounts          Deductions           end
                                   of period           expenses                describe              describe         of period
                                   ---------           --------                --------              --------         ---------

<S>                                 <C>                <C>                    <C>                    <C>              <C>
RESERVE FOR DOUBTFUL ACCOUNTS       $   931            $   1,041              $        -             $     991(1)     $     981
                                    =======            =========              ==========             =========        =========

RESERVE FOR INVENTORY VALUATION     $ 6,300            $       -              $        -             $   1,113(2)     $   5,187
                                    =======            =========              ==========             =========        =========

DEFERRED TAX VALUATION              $11,909            $   2,588              $        -             $       -        $  14,497
                                    =======            =========              ==========             =========        =========


<CAPTION>
                                                  -----------------------------

                                              FOR THE YEAR ENDED SEPTEMBER 30, 2003

                                   Rule 12-09 Valuation and Qualifying Accounts and Reserves

                                                     (Amounts in thousands)

          Column A                  Column B                       Column C                          Column D         Column E
          --------                  --------          ------------------------------------           --------         --------
                                                                   Additions
                                                      ------------------------------------
                                   Balance at         Charged to              Charged to                             Balance at
                                   beginning          costs and             other accounts          Deductions           end
                                   of period           expenses                describe              describe         of period
                                   ---------           --------                --------              --------         ---------

<S>                                 <C>                <C>                    <C>                    <C>              <C>
RESERVE FOR DOUBTFUL ACCOUNTS       $   742            $     215              $        -             $      30(1)     $     931
                                    =======            =========              ==========             =========        =========

RESERVE FOR INVENTORY VALUATION     $ 6,100            $   1,106              $        -             $     906(2)     $   6,300
                                    =======            =========              ==========             =========        =========

DEFERRED TAX VALUATION              $ 8,408            $   3,501              $        -             $       -        $  11,909
                                    =======            =========              ==========             =========        =========

<FN>
--------
(1) Write-off of uncollectible receivable, net of recovery.
(2) Reduction in inventory reserve for inventory items sold during fiscal 2005.
</TABLE>


                                     87

<PAGE>
<PAGE>


                                EXHIBIT INDEX
                                -------------

Exhibit No.       Description
-----------       -----------

         3.1      Restated Articles of Incorporation of the Registrant*

         3.2      Restated By-Laws of the Registrant, as currently in effect*

         4.1      Form of certificate for Common Stock*

         4.2      Form of Warrant, dated May 11, 2001, issued to Southwest
                  Bank of St. Louis with respect to 12,500 shares of
                  Registrant's Common Stock*

         4.3      Subordinated Convertible Debenture Purchase Agreement,
                  dated as of February 13, 2003, by and among Zoltek
                  Companies, Inc. and the investors named therein, filed as
                  Exhibit 4.1 to Registrant's Current Report on Form 8-K
                  dated February 18, 2003*

         4.4      Form of Subordinated Debenture, filed as Exhibit 4.2 to
                  Registrant's Current Report on Form 8-K dated February 18,
                  2003*

         4.5      Form of Warrant, filed as Exhibit 4.3 to Registrant's
                  Current Report on Form 8-K dated February 18, 2003*

         4.6      Securities Purchase Agreement, dated as of December 19,
                  2003, by and among Zoltek Companies, Inc. and the
                  investors named therein, filed as Exhibit 4.6 to
                  Registrant's Annual Report on Form 10-K for the year ended
                  September 30, 2003 is incorporated herein by reference

         4.7      Form of 6% Convertible Debenture, filed as Exhibit 4.7 to
                  Registrant's Annual Report on Form 10-K for the year ended
                  September 30, 2003 is incorporated herein by reference

         4.8      Form of Warrant, filed as Exhibit 4.8 to Registrant's
                  Annual Report on Form 10-K for the year ended September
                  30, 2003 is incorporated herein by reference

         4.9      Securities Purchase Agreement, dated as of March 11, 2004,
                  by and among Zoltek Companies, Inc. and the investors
                  named therein, filed as Exhibit 4.2 to Registrant's
                  Registration Statement on Form S-3 (Reg. No. 333-115043)
                  is incorporated herein by reference

         4.10     Form of 6% Convertible Debenture, filed as Exhibit 4.3 to
                  Registrant's Registration Statement on Form S-3 (Reg. No.
                  333-115043) is incorporated herein by reference

         4.11     Form of Warrant, filed as Exhibit 4.4 to Registrant's
                  Registration Statement on Form S-3 (Reg. No. 333-115043)
                  is incorporated herein by reference

         4.12     Loan and Warrant Agreement, dated as of October 14, 2004,
                  filed as Exhibit 4.1 to Registrant's Current Report on
                  Form 8-K dated October 19, 2004 is incorporated herein by
                  reference

                                     88

<PAGE>
<PAGE>

                                EXHIBIT INDEX
                                -------------

Exhibit No.       Description
-----------       -----------

         4.13     Security Agreement, dated as of October 14, 2004, filed as
                  Exhibit 4.3 to Registrant's Current Report on Form 8-K
                  dated October 19, 2004 is incorporated herein by reference

         4.14     Mortgage Agreement, dated as of October 14, 2004, filed as
                  Exhibit 4.4 to Registrant's Current Report on Form 8-K
                  dated October 19, 2004 is incorporated herein by reference

         4.15     Form of Warrant, filed as Exhibit 4.5 to Registrant's
                  Current Report on Form 8-K dated October 19, 2004 is
                  incorporated herein by reference

         4.16     Loan and Warrant Agreement, dated as of February 9, 2005,
                  by and among the Registrant, the Lenders and the Agent,
                  filed as Exhibit 4.1 to the Registrant's Quarterly
                  Report on Form 10-Q for the quarter ended December 31, 2004
                  and incorporated herein by reference

         4.17     Form of Senior Convertible Note, dated as of February 9,
                  2005, filed as Exhibit 4.2 to the Registrant's Quarterly
                  Report on Form 10-Q for the quarter ended December 31,
                  2004 and incorporated herein by reference

         4.18     Form of Warrant, dated as of February 9, 2005, filed as
                  Exhibit 4.3 to the Registrant's Quarterly Report on Form
                  10-Q for the quarter ended December 31, 2004 and
                  incorporated herein by reference

         4.19     Form of Registration Rights Agreement, dated as of
                  February 9, 2005, filed as Exhibit 4.4 to the Registrant's
                  Quarterly Report on Form 10-Q for the quarter ended
                  December 31, 2004 and incorporated herein by reference

         4.20     Loan and Warrant Agreement, as of September 29, 2005,
                  among the Registrant, the Lenders and the Agent, filed as
                  Exhibit 4.1 to the Registrant's Current Report on Form 8-K
                  dated September 29, 2005 and incorporated herein by
                  reference

         4.21     Form of Note, filed as Exhibit 4.2 to the Registrant's
                  Current Report on Form 8-K dated September 29, 2005 and
                  incorporated herein by reference

         4.22     Form of Warrant, filed as Exhibit 4.3 to the Registrant's
                  Current Report on Form 8-K dated September 29, 2005 and
                  incorporated herein by reference

         4.23     Registration Rights Agreement, dated as of September 30,
                  2005, by and among the Registrant and the Lenders parties
                  thereto, filed as Exhibit 4.4 to the Registrant's Current
                  Report on Form 8-K dated September 29, 2005 and
                  incorporated herein by reference

         10.1     Loan Agreement, dated December 29, 1989, by and between
                  Zoltek Corporation and Southwest Bank of St. Louis, as
                  amended by letter, dated August 13, 1992*

         10.2     Zoltek Companies, Inc. Long Term Incentive Plan*

         10.3     Zoltek Companies, Inc. Amended and Restated Directors
                  Stock Option Plan filed as Exhibit 10.1 to Registrant's
                  Quarterly Report on Form 10-Q dated August 13, 1999*

                                     89

<PAGE>
<PAGE>

                                EXHIBIT INDEX
                                -------------

Exhibit No.       Description
-----------       -----------

         10.4     Promissory Note, dated September 29, 1994, by and between
                  Zoltek Properties, Inc. and Metlife Capital Corporation*

         10.5     Precursor Agreement, dated as of July 1, 1994, by and
                  between Zoltek Corporation and Courtaulds Fibres Limited*
                  (An application for confidential treatment has been made
                  for a portion of Exhibit 10.5.)

         10.6     Materials Supply Agreement, dated as of June 15, 1994, by
                  and between Zoltek Companies, Inc. and The B.F. Goodrich
                  Company* (An application for confidential treatment has
                  been made for a portion of Exhibit 10.6.)

         10.7     Loan Agreement, dated November 14, 1994, by and between
                  Zoltek Properties, Inc. and The Reliable Life Insurance
                  Company*

         10.8     Promissory Note, dated November 14, 1994, by and between
                  Zoltek Corporation and Southwest Bank of St. Louis*

         10.9     Stock Purchase Agreement, dated as of November 6, 2000, by
                  and among Structural Polymer Group Limited, Zoltek
                  Companies, Inc. and certain Shareholders of Zoltek
                  Companies, Inc.*

         10.10    Credit Agreement, dated as of May 11, 2001, between
                  Southwest Bank of St. Louis and Zoltek Companies, Inc.,
                  Zoltek Corporation, Cape Composites, Inc., Engineering
                  Technology Corporation, Zoltek Properties, Inc., and
                  Hardcore Composites Operations, LLC*

         10.11    First Amendment to Credit Agreement, dated as of February
                  13, 2003, by and among Zoltek Companies, Inc., Zoltek
                  Corporation, Cape Composites, Inc., Engineering Technology
                  Corporation, Zoltek Properties, Inc. and Southwest Bank of
                  St. Louis*

         10.12    Zoltek Companies, Inc. 2003 Long-Term Equity Incentive
                  Plan, filed as Appendix A to Registrant's definitive proxy
                  statement for the 2002 Annual Meeting of Shareholders*

         10.13    Promissory Note, dated January 13, 2004, by and between
                  Zoltek Properties, Inc. and Beal Bank, S.S.B. filed as
                  Exhibit 10.13 to Registrant's Annual Report on Form 10-K
                  for the fiscal year ended September 30, 2003, is
                  incorporated herein by this reference

         10.14    Second Amendment to Credit Agreement, dated as of January
                  13, 2003, by and among Zoltek Companies, Inc., Zoltek
                  Corporation, Cape Composites, Inc., Engineering Technology
                  Corporation, Zoltek Properties, Inc. and Southwest Bank of
                  St. Louis filed as Exhibit 10.14 to Registrant's Annual
                  Report on Form 10-K for the fiscal year ended September
                  30, 2003, is incorporated herein by this reference

         21       Subsidiaries of the Registrant*

         23       Consent of PricewaterhouseCoopers LLP

                                     90

<PAGE>
<PAGE>

                                EXHIBIT INDEX
                                -------------

Exhibit No.       Description
-----------       -----------

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

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

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

         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

<FN>
--------
* Incorporated herein by reference

                                     91