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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, 2006     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 a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes   .  No X .
                                                   ---     ---
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         Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer or a non-accelerated filer. See
definition of "accelerated filer and large accelerated filer" in Rule 12b-2
of the Exchange Act. (check one):
Large Accelerated Filer    Accelerated Filer X    Non-Accelerated Filer   .
                       ---                  ---                        ---

         State the aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 31, 2006: approximately
$367,500,000.

         Indicate the number of shares outstanding of each of the
registrant's classes of common stock as of December 27, 2006: 26,970,642
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 2007
  Annual Meeting of Shareholders                         III


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                             ZOLTEK CORPORATION
                                    INDEX


                                   PART I.

Item 1.    Business
Item 1A.   Risk Factors
Item 1B.   Unresolved Staff Comments
Item 2.    Properties
Item 3.    Legal Proceedings
Item 4.    Submission of Matters to a Vote of Security Holders

                                   PART II.

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters
           and Issuer Purchases of Equity Securities
Item 6.    Selected Financial Data
Item 7.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
Item 8.    Financial Statements and Supplementary Data
Item 9.    Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosures
Item 9A.   Controls and Procedures
Item 9B.   Other Information

                                   PART III.

Item 10.   Directors and Executive Officers of the Registrant
Item 11.   Executive Compensation
Item 12.   Security Ownership of Certain Beneficial Owners and Management and
           Related Stockholder Matters
Item 13.   Certain Relationships and Related Transactions
Item 14.   Principal Accountant Fees and Services

                                   PART IV.

Item 15.   Exhibits, Financial Statement Schedules
Signatures
Exhibit Index
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                                   PART I

ITEM 1.  BUSINESS
------   --------

         This Annual Report on Form 10-K for the fiscal year ended September
30, 2006 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. In addition, the
Company manufactures and markets an intermediate product, stabilized and
oxidized acrylic fiber, which is used in flame and heat resistant
applications.

         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 and its
oxidized acrylic fiber under the PYRON(R) trade name.

         During 2006, the Company completed its transformation from
primarily a development business to an operational business and continued
its expansion plans that were first announced in fiscal 2005. Also during
2006, the demand for commercial carbon fibers continued to increase
significantly and the divergence of the aerospace and commercial markets
continued to evolve. The Company believes 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 and other applications.

         In view of the substantial increases in demand for carbon fibers,
supported by several long-term supply relationships, the Company continued
to execute the capacity expansion program originally announced in fiscal
2005 in a four-phase plan. The first phase 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. This
phase 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 $13.0
million, most of which was incurred in fiscal 2005. The third phase added
four continuous carbonization lines and expanded precursor production at the
Hungarian facility in the fourth quarter of 2006 at a cost of approximately
$26.0 million.

         In the fourth phase, the Company added a new building to house eight
more carbon fiber lines. The Company plans to add four continuous
carbonization lines and two oxidized acrylic fiber lines and expand precursor
production at its facility in Hungary to meet the demand for the additional
lines during the second and third quarters of fiscal 2007 at a cost of
approximately $45.0 million.

         Also subject to obtaining the necessary financing, during the fourth
quarter of fiscal 2007 Zoltek plans to add an additional four larger capacity
lines with an aggregate rated capacity of five million pounds per year, with
the remaining five million pound rated capacity expansion completed by December
31, 2007. In addition to the new carbon fiber lines the Company will need to
continue to increase its precursor capacity. The plans are to make a
significant increase in the base infrastructure of the precursor plant and add
spinning lines incrementally as additional carbon fiber lines are added.

         In November 2006, a judgment was rendered against the Company for
approximately $36.0 million. In order to appeal the verdict, the Company will
be required to post an appeal bond of approximately $40.0 million or a lesser
amount if its post-trial motion to reduce the amount of the judgment is
granted. While the Company has secured the funding for the bond, it has used
certain funding sources which were expected to be utilized to fund the
Company's carbon fiber expansion program. Accordingly, the Company may be
required to seek alternative sources of funding for its expansion program and
such funding may be at a cost or in an amount that may limit the Company's
ability to meet the capacity expansion program described above.

         The $60.0 million convertible debt financing package entered into in
September 2005 and amended in May 2006, which has been fully funded, provided
a substantial portion of the capital resources for the capacity increase in
fiscal 2006 and the planned capacity increase in the first half of fiscal
2007. The Company will seek to raise capital to finance the fiscal 2007
expansion of an additional 10 million pounds of annual production or possibly
more capacity if demand continues to grow.

         The Hungarian government has pledged a grant of 2.9 billion HUF
(approximately $14.1 million) to Zoltek's Hungarian subsidiary that will
partially provide the capital resources for use in modernizing its facility,
establishing a research and development center, and supporting buildup of
manufacturing capacity of carbon fibers. As of December 27, 2006, the
initial request for reimbursement of approximately $4 million was made, but
to date no proceeds have been received under this


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program. The Company will present bank guarantee statements amounting to
120% of the amount of the grant as it will be received, approximately a
total of 3.4 billion HUF when the grant is fully funded. To be entitled the
full subsidy, during the period between October 2008 and September 2013, the
Company must achieve excess export revenues amounting to an average annual
sum of HUF 21,698.6 million (approximately $105.5 million), must employ an
average annual number of staff of 1,200 employees and must utilize regional
suppliers for at least 45% of purchases.

         During 2006, the Company began to capitalize on the increasing demand
for carbon fiber with the expansion and activation of new carbon fiber lines
at is Hungarian facility and improved efficiency of the Abilene facility.
During fiscal 2006, the Company increased sales by 67%. The Company also
reported operating loss from continuing operations of $15.7 million for its
2006 fiscal year, which included $22.8 million of litigation charges arising
out of a lawsuit that the Company is contesting. This compared to an operating
loss of $7.6 million in the 2005 fiscal year.

         Historically, the most significant application for the Company had
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. However, the carbon fiber commercialization
strategy is built around carbon fiber reinforcement for composites used in
commercial applications. During 2006, the wind energy emerged as the
breakthrough application validating the Company's strategy. This application
surpassed the aircraft brakes as the Company's leading application. Other
applications, such as infrastructure, oil and gas and other commercial
composite reinforcement have emerged with far greater near-term potential 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.

         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 1996 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.

         During the fourth quarter of fiscal 2004, the Company discontinued
nylon fiber operations and its acrylic textile business. During the fourth
quarter of fiscal 2005, the Company discontinued the CMC operation. During
the fourth quarter of fiscal 2006, the Company formally adopted a plan to
sell certain of the assets of its continuously extruded netting division and
to discontinue and exit another division that manufactures thermoplastic
components. These operations were acquired with the acrylic fiber assets and
were never part of the long-term strategy of the Company. The results from
operations of these two divisions have been reclassified to discontinued
operations.

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 plant in Hungary is the Company's major carbon
fiber manufacturing facility with eight continuous carbonization lines and
produces intermediate oxidized fibers, carbon fiber textile products and
acrylic precursor. The Abilene, Texas facility has five installed continuous
carbonization lines and auxiliary processing capabilities. Zoltek's St.
Charles, Missouri facility is primarily dedicated to production of technical
fibers for aircraft brake and other friction applications, but also houses a
continuous carbonization line. As each carbon fiber production line has a
rated annual production capacity of approximately one million pounds and
each technical fiber production line has a rated annual production capacity
of approximately two million pounds, however, the operational capacity of
these lines is less due to production scheduling and maintenance factors.
Management expects that as the Company's production scale increases,
operational capacity will trend further toward rated capacity during 2007.

         Acrylic fiber precursor comprises more than 50% of the total cost
of producing carbon fibers. During 1999, the Company initiated the
conversion of the textile Mavilon (acrylic) production line at its Hungarian
facility to the production of precursor. During 2000, the Company began to
manufacture demonstration quantities of precursor and currently all of the
Company's carbon fibers are produced from this precursor. During 2004 and
2005, 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.

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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 $4.9 million, $3.3 million and $3.1 million in fiscal 2006,
fiscal 2005 and fiscal 2004, respectively.

         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. 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
commercial markets.

         During 2006, the Airbus A-380 and Boeing 787 airplane entered
production phase, utilizing carbon fibers for 50-60% of their structural
components, requiring 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 its ability to add
capacity quicker than its competitors with favorable quality and properties
of its PANEX(R)-35 fibers compared to other commercial carbon fibers and
aerospace fibers, and its established internal source of precursor and low
manufacturing costs.

         Extensive commercially viable applications are only possible at
carbon fiber prices 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.



                                     6

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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 that 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 production costs, their current production is now
         allocated to large aerospace 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. 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. The 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 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.

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 or
             higher 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's
             PANEX(R)-35 fibers have become the standard 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 over $250 million of sales in the next three
             fiscal 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


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             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 a Norwegian oil and gas company. As sub-sea
             developments have moved to ever deeper waters, the effect that
             this harsh environment on the umbilical systems that link the
             architecture on the seafloor back to the host platform has
             emerged as a critical issue. 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.

             The Norwegian customer developed a solution by replacing steel
             rods with carbon fiber rods, which effectively solves the
             problem. They, 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. The
             Norwegian customer has selected Zoltek's PANEX(R)-35 as the
             material of choice for the commercial umbilical cords 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 long-term increase 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.

         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, 2006, 2005 and 2004 the
Company reported sales of $19.0 million, $9.0 million and $0.4 million,
respectively, to a wind turbine manufacturer, which was the only customer that
represented greater than 10% of the Company's total consolidated revenues
during fiscal 2006.

2007 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 2006, 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 fiscal 2007.

         Early in fiscal 2007, Zoltek will focus the continued expansion of
its carbon fiber lines and enhancement of its current production operations.
The Company has taken steps to improve its management and staffing in its
Abilene facility and believe that during fiscal 2007 the plant will begin
operating at desired production levels. In addition, the Company has been
adding and will continue to add new production lines in Hungary during
fiscal 2007.

         Accordingly, subject to obtaining the necessary financing for
proposed capacity additions, the Company expects that by the end of the second
quarter of fiscal 2007, its installed carbon fiber capacity will have a rated
capacity of 20 million pounds annually. Additionally, the Company will
increase its selling prices for carbon fibers in the fiscal second quarter to
levels the Company believes will produce positive financial results and will
increase profit margins without inhibiting long-term market growth.

         In November 2006, a judgment was rendered against the Company for
approximately $36.0 million. In order to appeal the verdict, the Company will
be required to post an appeal bond of approximately $40.0 million or a lesser
amount if its post-trial motion to reduce the amount of the judgment is
granted. While the Company has secured the funding for the bond, it has used
certain funding sources which were expected to be utilized to fund the
Company's carbon fiber expansion program. Accordingly, the Company may be
required to seek alternative sources of funding for its expansion program and
such funding may be at a cost or in an amount that may limit the Company's
ability to meet the capacity expansion program described above.

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RECENT DEVELOPMENTS

         Structural Polymer Group Limited (SP Systems) and its subsidiary
Structural Polymer Systems, Limited filed an action against Zoltek Corporation
in the U. S. District Court for the Eastern District of Missouri, Eastern
Division alleging that the Company breached a Supply Agreement relating to
Zoltek's carbon fiber product known as Panex 33. The case was tried in
November 2006 and on November 29, 2006, the jury in the case rendered verdicts
against Zoltek Corporation in the amounts of $21.1 million and $14.9 million,
respectively, which verdicts were subsequently entered as judgments against
Zoltek Corporation. The Company believes that any damages should be limited to
$21.1 million because the verdicts are duplicative. Zoltek Corporation is
filing various post-trial motions. If such motions are unsuccessful, Zoltek
Corporation intends to file an appeal with the U. S. Court of Appeals for the
8th Circuit seeking reversal or a new trial. Although the litigation process
is inherently uncertain, the Company believes it has grounds for the judgment
to be substantially reduced or, possibly, overturned entirely. Management,
recognizing the judgment that has been rendered against the Company and the
uncertainty surrounding the Company's planned appeals process, accrued $21.8
million during the fourth quarter in respect of the potential liability in
this matter, which it believes is the best estimate of the liability
associated with this obligation. This amount includes $21.1 million related to
the aforementioned judgment and approximately $0.7 million related to legal
fees. The Company has already incurred legal expenses of approximately $1.0
million. Management believes that the ultimate resolution of this litigation
will not have further material adverse effect on the Company's results of
operations, financial condition or cash flow, however, if the Company's appeal
is unsuccessful, the resulting settlement could materially impact the
Company's results of operations, financial condition and cash flows. The
Company will be required to post a bond of approximately $40.0 million during
the appeals process, or a lesser amount if its post-trial motion to reduce the
amount of the judgment is granted. The Company has raised the funding
necessary for the bond with a $10.0 million loan collateralized by certain
real estate of the Company, a $10.0 million loan from the Company's Chief
Executive Officer, the proceeds from the exercise of 827,789 warrants for
$11.9 million by existing institutional shareholders and the remainder with
the Company's cash on hand.

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 certain aircraft brake
products. The primary source of raw material for the precursor is ACN
(acrylonitrile), which is a commodity product with multiple sources.

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. 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.

                                     9

<PAGE>
<PAGE>

         The carbon fibers business segment's direct carbon fiber
competitors include SGL Carbon in the United States and Europe, in as much 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.

EMPLOYEES

         As of September 30, 2006, the Company employed approximately 250
persons in its U.S. operations and approximately 775 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 and Viscosa 1990 (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.

         This Annual Report on Form 10-K for the fiscal year ended September
30, 2006 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."

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


                                     10

<PAGE>
<PAGE>

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.

         This Form 10-K also contains forward-looking statements which are
based upon the current expectations of the Company. 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 Company's ability to:
(1) successfully resolve pending litigation; (2) continue to improve
efficiency of its formerly idle manufacturing facilities on a timely and
cost-effective basis, to meet current order levels for carbon fibers; (3)
successfully add new capacity for the production of carbon fiber and precursor
raw material; (4) execute plans to exit its specialty products business and
reduce costs; (5) achieve profitable operations; (6) raise new capital and
increase our borrowing at acceptable costs; (7) manage changes in customers'
forecasted requirements for our products; (8) continue investing in
application and market development; (9) manufacture low-cost carbon fibers and
profitably market them; and (10) penetrate existing, identified and emerging
markets.

         Because forward-looking statements are inherently subject to risks
and uncertainties, some of which cannot be predicted or quantified,
investors should not rely upon forward-looking statements as predictions of
future events. The events and circumstances reflected in the forward-looking
statements may not be achieved or occur and actual results could differ
materially from those projected in the forward-looking statements. Except as
required by applicable law, including the securities laws of the United
States and the rules and regulations of the Commission, the Company does not
plan to publicly update or revise any forward-looking statements contained
herein after we distribute this prospectus, whether as a result of any new
information, future events or otherwise.

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 significant 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, results of operations or cash flows 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 REPORTED NET LOSSES FOR EACH OF THE PAST FIVE FISCAL YEARS AND
NEGATIVE CASH FLOWS FROM OPERATIONS FOR EACH OF THE PAST FIVE FISCAL YEARS
PRIOR TO FISCAL 2006.

         The Company reported net losses from continuing operations of $7.1,
$12.3 million, $17.1 million, $38.2 million and $65.8 million in the fiscal
years ended September 30, 2002, 2003, 2004, 2005 and 2006, respectively. The
Company reported negative cash flows from continuing operations of $7.6
million and $8.1 million in the fiscal years ended September 30, 2004 and
2005, but positive cash flows of $3.3 million for 2006. These net losses and
negative cash flows from operations were attributable to, among other things,
the adverse market conditions discussed above, $22.8 million of litigation
charges in 2006 arising out of a lawsuit that the Company is contesting,
combined with excess capacities and inventories the Company maintained in
prior years in anticipation of greater sales volumes, and the non-cash loss
related to the mark to market of derivatives of $4.9 million, $16.6 million
and $29.3 million in 2004, 2005 and 2006, respectively. The Company has relied
on equity financing and borrowings to finance its business over the past five
fiscal years. The Company intends to primarily fund its continuing operations
in the near-term from internally generated funds, borrowings, and sales of
equity. 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
DIFFICULTIES IN OPERATING THE COMPANY'S EXPANDED CARBON FIBERS CAPACITY AT
ITS ABILENE, TEXAS FACILITY.

         Demand for our carbon fibers from existing and potential new
customers exceeds our current capacity, and in fiscal 2005 we restarted
carbon fiber production at our major carbon fiber manufacturing facility in
Abilene, Texas which had been temporarily idled. We have experienced
difficulties in achieving targeted production levels at our Abilene
facility, which has resulted in the Company not being able to convert all of
its capacity into sales despite strong demand for our products. The
difficulties were due in large part to the inability to recruit and train
qualified workers and managers at the plant that had been dormant for
several years. While we expect to achieve planned levels of production
capacity during fiscal 2007, there can be no assurance that such production
levels will be achieved. We may not be able to supply anticipated demand
unless we are able to achieve targeted production levels at our Abilene
facility.

                                     11

<PAGE>
<PAGE>

         ZOLTEK'S OPERATING RESULTS HAVE BEEN ADVERSELY AFFECTED BY
PREVIOUSLY ADVERSE CONDITIONS IN THE MARKETS FOR CARBON FIBER AND ACRYLIC
FIBER.

         Until fiscal 2004, our 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 we
had excess carbon fiber manufacturing capacity which resulted in substantial
depreciation and other charges and constrained the operating results of our
carbon fiber manufacturing activities. Since the beginning of fiscal 2004,
the market has strengthened for current and emerging applications for carbon
fiber. However, we 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.

         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, financial condition and cash flows.

         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.

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

         We are party to various legal actions as either plaintiff or
defendant. Structural Polymer Group Limited (SP Systems) and its subsidiary
Structural Polymer Systems, Limited filed an action against Zoltek
Corporation in the U. S. District Court for the Eastern District of
Missouri, Eastern Division alleging that the Company breached a Supply
Agreement relating to Zoltek's carbon fiber product known as Panex 33. The
case was tried in November 2006 and on November 29, 2006, the jury in the
case rendered verdicts against Zoltek Corporation in the amounts of $21.1
million and $14.9 million, respectively, which verdicts were subsequently
entered as judgments against Zoltek Corporation. The Company believes that
any damages should be limited to $21.1 million because the verdicts are
duplicative. Zoltek Corporation is filing various post-trial motions. If
such motions are unsuccessful, Zoltek Corporation intends to file an appeal
with the U. S. Court of Appeals for the 8th Circuit seeking reversal or a
new trial. Although the litigation process is inherently uncertain, the
Company believes it has grounds for the judgment to be substantially reduced
or, possibly, overturned entirely.

         We are 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 us alleging breach by Hardcore
and us of our 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. We have recorded an
accrual of $1.3 million in respect of the possible liability in this matter.
We are vigorously defending this motion and have filed counterclaims and an
appeal. Additionally, as previously disclosed, we were named a defendant in
a civil action filed by a former investment banker that was retained by us
to obtain equity investors, alleging that we breached our obligations under


                                     12

<PAGE>
<PAGE>

the agreement signed by the parties. The investment banker alleges that it
is owed commission from the equity investment we obtained from a different
source. We have asserted various defenses, including that the investment
banker breached the agreement by not performing reasonable efforts to obtain
financing for us, and therefore, we terminated the agreement prior to
obtaining new financing. A decision granting summary judgment against us was
entered in April 2005 and a trial on damages took place in December 2005,
for which a judgment has not been filed. We are vigorously defending this
matter, have filed counterclaims and will file an appeal once the damage
judgment is rendered.

         The ultimate outcome of these actions and other pending litigation
and the estimates of the potential future impact on our operating results,
financial condition and cash flows for these proceedings could have a
material adverse effect on our business. In addition, we may incur
additional legal costs in connection with pursuing and defending such
actions.

         ZOLTEK'S ABILITY TO RAISE CAPITAL TO FUND ITS EXPANSION PROGRAM MAY
BE LIMITED.

         In November 2006, a judgment was rendered against the Company for
approximately $36.0 million. In order to appeal the verdict, the Company will
be required to post an appeal bond of approximately $40.0 million or a lesser
amount if its post-trial motion to reduce the amount of judgment is granted.
While the Company has secured the funding for the bond, it has used certain
funding sources which were expected to be utilized to fund the Company's
carbon fiber expansion program. Accordingly, the Company may be required to
seek alternative sources of funding for its expansion program and such funding
may be at a cost or in an amount that may limit the Company's ability to meet
the expansion program's capacity.

         ZOLTEK'S STOCK PRICE HAS BEEN VOLATILE AND MAY CONTINUE TO 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-sector declines, may materially and adversely
affect 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.

         ZOLTEK'S OPERATING RESULTS MAY FLUCTUATE.

         Our quarterly results of operations may fluctuate as a result of a
number of factors, including the timing of purchase orders for and shipments
of our products, our ability to successfully operate our expanding production
capacity and changes in production levels. 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, our 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, interruptions in plant operations and
derivative accounting rules applicable to certain of financings.

         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 limits 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.

                                     13

<PAGE>
<PAGE>

         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 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 THE COMPANY'S INTERIM AND ANNUAL CONSOLIDATED
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 control over financial
reporting as of September 30, 2006. 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, 2006, the Company identified material
weaknesses in its controls over accounting for inventory. The control
deficiencies inherent in accounting for inventory could result in a
misstatement of the Company's inventory and cost of goods sold accounts that
could result in a material misstatement to the Company's interim or annual
consolidated financial statements that would not be prevented or detected.
Management is actively engaged in the implementation of remediation efforts to
address the material weaknesses in the Company's internal control over
financial reporting as of September 30, 2006.

         The Company has expended significant resources to comply with its
obligations under Section 404 of the Sarbanes-Oxley Act of 2002 with respect
to fiscal 2005 and 2006 to address previously identified material
weaknesses. However, if the remedial policies and procedures the Company
implements are insufficient to address the material weaknesses that exist as
of September 30, 2006, 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 adversely impacted. Any such
failure could also adversely affect the results of periodic management
assessment and annual auditor attestation reports regarding the
effectiveness of the Company's internal control over financial reporting, as
required by the SEC's rules under Section 404. The existence of a material
weakness could result in errors in the Company's consolidated financial
statements that could result in a restatement of financial statements or
failure to meet reporting obligations, which in turn could cause investors
to lose confidence in 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 control over financial reporting. Furthermore, there are inherent
limitations to the effectiveness of controls and procedures, including the
possibility of human error and circumvention or overriding of controls and
procedures.

         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.

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

         Zsolt Rumy, Zoltek's founder and principal shareholder, owns
approximately 24.4% 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,


                                     14

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<PAGE>

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.

         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
-------   -------------------------

         As of the filing of this annual report on Form 10-K, there were no
unresolved comments from the staff of the SEC.

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)
                  --------                                    ---                        ----------------

<C>                                               <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

<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
------   ------------------

         Structural Polymer Group Limited (SP Systems) and its subsidiary
Structural Polymer Systems, Limited filed an action against Zoltek
Corporation in the U. S. District Court for the Eastern District of
Missouri, Eastern Division alleging that the Company breached a Supply
Agreement relating to Zoltek's carbon fiber product known as Panex 33. The
case was


                                     15

<PAGE>
<PAGE>

tried in November 2006 and on November 29, 2006, the jury in the case rendered
verdicts against Zoltek Corporation in the amounts of $21.1 million and $14.9
million, respectively, which verdicts were subsequently entered as judgments
against Zoltek Corporation. The Company believes that any damages should be
limited to $21.1 million because the verdicts are duplicative. Zoltek
Corporation is filing various post-trial motions. If such motions are
unsuccessful, Zoltek Corporation intends to file an appeal with the U. S.
Court of Appeals for the 8th Circuit seeking reversal or a new trial. Although
the litigation process is inherently uncertain, the Company believes it has
grounds for the judgment to be substantially reduced or, possibly, overturned
entirely. Management, recognizing the judgment that has been rendered against
the Company and the uncertainty surrounding the Company's planned appeals
process, accrued $21.8 million during the fourth quarter in respect of the
potential liability in this matter, which it believes is the best estimate of
the liability associated with this obligation. This amount includes $21.1
million related to the aforementioned judgment and approximately $0.7 million
related to legal fees. The Company has already incurred legal expenses of
approximately $1.0 million. 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, however, if
the Company's appeal is unsuccessful, the resulting settlement could
materially impact the Company's results of operations, financial condition and
cash flows. The Company will be required to post a bond of approximately $40
million during the appeals process, or a lesser amount if its post-trial
motion to reduce the amount of the judgment is granted. The Company has raised
the funding necessary for the bond with a $10 million loan collateralized by
certain real estate of the Company, a $10.0 million loan from the Company's
Chief Executive Officer, the proceeds from the exercise of 827,789 warrants
for $11.9 million by existing institutional shareholders and the remainder
with the Company's cash on hand. Accordingly, the Company may be required to
seek alternative sources of funding for its expansion program. Such funding
may be at a cost or in an amount that may limit the Company's ability to meet
the expansion program's capacity.

         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 $1.3 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. In July
2006, the Company was successful in its appeal of the lower court's ruling
and the case was remanded to the Court of Common Pleas for retrial.
Management believes that the ultimate resolution of this litigation will not
have a further material adverse effect on the Company's results of
operations, financial condition or cash flow. To date, the Company has not
made any payments of any portion of this obligation, although it posted an
appeal bond in the amount of $1.3 million. The Company executed a guaranty
of Hardcore Composite's lease obligations of approximately $30,000 per month
to the former owner. The lease of the Hardcore Composites manufacturing
facility expires March 31, 2008. Hardcore no longer occupies the facility
and, accordingly, in connection with the ongoing litigation with the former
owner, Zoltek is asserting that Zoltek has no further ongoing guarantee
obligation with respect to the lease. The Company also is the obligee on
aggregate original value of unsecured promissory notes of $9.3 million in
connection with the sale of Hardcore, for which a full valuation allowance
has been recorded. A full valuation allowance is appropriate in light of
Hardcore's current financial condition which, among other relevant factors,
make the collection of the promissory notes doubtful.

         In September 2004, the Company was named a defendant in a civil
action filed by a former investment banker that was retained by the Company
to obtain equity investors, alleging breach by the Company of its
obligations under the agreement signed by the parties. The investment banker
alleges it is owed commission from the equity investment obtained by the
Company from a different source. The Company has asserted various defenses,
including that the investment banker breached the agreement by not
performing reasonable efforts to obtain financing for the Company, and
therefore, the agreement was terminated by the Company prior to obtaining
new financing. A decision granting summary judgment against the Company was
entered in April 2005 and a trial on damages took place in December 2005,
after which a judgment was filed in May 2006 against the Company in the
amount of $4.1 million in cash and an order to issue warrants to purchase
122,888 shares of the Company's common stock at various prices. To date the
Company has not made payments of any portion of this obligation, although it
posted an appeal bond in the amount of $6.6 million. During the second
quarter of 2006, the Company accrued $0.5 million in respect of the possible
liability in this matter, which it believes is its maximum obligation under
this matter. Management currently believes that the ultimate resolution of
this litigation will not have a material adverse effect on the Company's
results of operations, financial condition or cash flow, however, if the
Company's appeal is unsuccessful, the resulting settlement could materially
impact the Company's results of operations. The Company is vigorously
defending this matter and has filed counterclaims and an appeal.

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

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

                                     16

<PAGE>
<PAGE>

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, 2006.

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 64, 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 40, 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 prior
years, 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.

                                   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 19,000, 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, markdown or commission:

<TABLE>
<CAPTION>
                                                   Fiscal year ended                   Fiscal year ended
                                                  September 30, 2006                  September 30, 2005
                                                  ------------------                  ------------------
                                                High               Low              High                Low
                                                ----               ---              ----                ---
<C>                                           <C>                <C>              <C>                 <C>
         First Quarter......................  $ 13.24            $  8.03          $ 15.10             $  8.49
         Second Quarter.....................    24.34               8.38            18.26               10.78
         Third Quarter......................    39.74              19.87            14.70                8.87
         Fourth Quarter.....................    30.47              17.38            13.70                9.28
</TABLE>

         During the fiscal year ended September 30, 2006, the investors
converted $47.3 million principal and interest amount of the convertible
debt privately placed in the February 2003, October 2004, February 2005 and
September 2005 issuances into 4,738,486 shares of common stock, which was
recorded into equity. The Company also recorded into equity the fair market
value of the conversion feature at the time of conversion of the debt issued
in the October 2004 and February 2005 issuances, which was valued at $57.5
million and offset by a reduction to equity of $10.2 million for the
unamortized portion of the debt discount. Also, at the time of conversion,
the Company reclassified the unamortized deferred financing cost of $1.4
million related to these issuances into additional paid-in capital. The
February 2005 issuance also had a beneficial conversion feature, of which
$6.8 million was unamortized at the time of conversion and was recorded as
an expense into amortization of financing fees and debt discount. Subsequent
to these conversions, the October 2004 and February 2005 issuances have been
fully converted into the Company's common stock.

         In September 2005, Zoltek entered into an agreement for a new
financing; a convertible debenture package of up to $50 million in a private
placement with a group of institutional investors. In April 2006, the
Company amended the September 2005 financing package to provide for an
additional $10.0 million funding. In order to match the cash needs to
support the Company's planned expansion, the financing arrangements provided
for the funding to occur in six separate


                                     17

<PAGE>
<PAGE>

closings discussed in the following paragraphs. These financings are
collateralized by the carbon fiber assets of the Company's Hungarian
subsidiary.

         The closing on September 30, 2005 included a draw down of $5.0
million. The borrowing matures 42 months from the closing date and bears
interest at a fixed rate of 7.5% annum. The debentures are convertible into
Zoltek common stock of 400,000 shares at a conversion price of $12.50 per
share. The debentures were issued with five-year warrants that give holders
the right to purchase up to 140,000 shares of Zoltek common stock at an
exercise price of $14.50 per share. The fair value of the debt discount
associated with the warrants and conversion features at the time of
issuances was $1.0 million and will be accreted to the debt's face value
over the life of the convertible debentures.

         In December 2005, the Company issued convertible debentures in the
aggregate principal amount of $15.0 million to institutional private equity
investors. The convertible debentures had a stated maturity of 42 months and
bore interest at a fixed rate of 7.5% annum. The convertible debentures are
convertible into Zoltek 1,200,000 shares of common stock at a conversion
price of $12.50 per share The Company also issued to the investors five-year
warrants that give holders the right to purchase up to 420,000 shares of
Zoltek common stock at an exercise price of $14.50 per share. The fair value
of the debt discount associated with the warrants and conversion features at
the time of issuances was $1.9 million and will be accreted to the debt's
face value over the life of the convertible debentures.

         In February 2006, the Company issued convertible debentures in the
aggregate principal amount of $10.0 million to institutional private equity
investors. The convertible debentures had a stated maturity of 42 months and
bore interest at a fixed rate of 7.5% annum. The convertible debentures are
convertible into 765,110 shares of Zoltek common stock at a conversion price
of $15.16 per share The Company also issued to the investors five-year
warrants that give holders the right to purchase up to 267,789 shares of
Zoltek common stock at an exercise price of $15.16 per share. The fair value
of the debt discount associated with the warrants and conversion features at
the time of issuances was $4.6 million and will be accreted to the debt's
face value over the life of the convertible debentures.

         In May 2006, the Company issued convertible debentures in the
aggregate principal amount of $20 million to institutional private equity
investors. The convertible debentures had a stated maturity of 42 months and
bore interest at a fixed rate of 7.5% annum. However, after 18 months, the
interest rate will be LIBOR plus 4% per annum. The convertible debentures
are convertible into 784,006 shares of Zoltek common stock at a conversion
price of $25.51 per share The Company also issued to the investors five-year
warrants that give holders the right to purchase up to 274,406 shares of
Zoltek common stock at an exercise price of $28.06 per share. The fair value
of the debt discount associated with the warrants and conversion features at
the time of issuances was $17.1 million and will be accreted to the debt's
face value over the life of the convertible debentures.

         In July 2006, the Company issued convertible debentures in the
aggregate principal amount of $2.5 million to institutional private equity
investors. The convertible debentures had a stated maturity of 42 months and
bore interest at a fixed rate of 7.5% annum. However, after 18 months, the
interest rate will be LIBOR plus 4% per annum. The convertible debentures
are convertible into 98,000 shares of Zoltek common stock at a conversion
price of $25.51 per share The Company also issued to the investors five-year
warrants that give holders the right to purchase up to 34,370 shares of
Zoltek common stock at an exercise price of $28.06 per share. The fair value
of the debt discount associated with the warrants and conversion features at
the time of issuances was $1.7 million and will be accreted to the debt's
face value over the life of the convertible debentures.

         In October 2006, the Company issued convertible debentures in the
aggregate principal amount of $7.5 million to institutional private equity
investors. The convertible debentures had a stated maturity of 42 months and
bore interest at a fixed rate of 7.5% annum. However, after 18 months, the
interest rate will be LIBOR plus 4% per annum. The convertible debentures
are convertible into 294,002 shares of Zoltek common stock at a conversion
price of $25.51 per share The Company also issued to the investors five-year
warrants that give holders the right to purchase up to 102,835 shares of
Zoltek common stock at an exercise price of $28.06 per share.

         As part of the amended financing agreement, Zoltek reduced the
conversion price on its outstanding convertible debt in the aggregate
principal amount of $20.0 million issued in October 2004 from $12.00 to
$9.50 per share, with the requirement that conversion take place within 30
days of the December closing. In connection with the April 2006 amendment,
the investors converted the $20.0 million convertible notes previously
issued in February 2005 into approximately 1,000,000 shares of common stock
and exercised associated warrants for 1,052,000 shares related to October
2004 and February 2005 issuances. The Company also issued the investors up
to 111,113 shares of common stock at an exercise price of $.01 per share.
The fair value of the $0.01 per share warrants at the time of issuance was
$3.3 million and was expensed in amortization of financing fees and debt
discount during the third quarter of 2006.

                                     18

<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>
                         CONVERTIBLE DEBT ISSUANCES FISCAL 2003 THROUGH FISCAL 2005
                         ----------------------------------------------------------
<CAPTION>
                                          FEBRUARY    JANUARY    MARCH      OCTOBER     FEBRUARY   SEPTEMBER
                                            2003(1)     2004      2004        2004        2005       2005(1)
                                            ----        ----      ----        ----        ----       ----

<C>                                       <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.......................      7.0%       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 warrants....................      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%
Converted...........................      Partial    Yes        Yes        Yes         Yes         Partial
Warrants exercised..................      Partial    Yes        Yes        Yes         Yes         Yes

<CAPTION>
                         CONVERTIBLE DEBT ISSUANCES FISCAL 2006 THROUGH FISCAL 2007
                         ----------------------------------------------------------

                                          DECEMBER   FEBRUARY     MAY        JULY       OCTOBER
                                            2005(1)    2006(1)    2006(1)    2006(1)     2006(1)
                                            ----       ----       ----       ----        ----
<C>                                       <C>        <C>        <C>        <C>         <C>
Amount of debenture (millions)            $15.0      $10.0      $20.0      $2.5        $7.5
Per share conversion price on
  debenture.........................      $12.5      $13.07     $25.51     $25.51      $25.51
Interest rate.......................      7.5%       7.5%       7.5%       7.5%        7.5%
Term of debenture...................      42 months  42 months  42 months  42 months   42 months
Warrants issued.....................      420,000    267,789    274,406    34,370      102,835
Term of warrants....................      60 months  60 months  60 months  60 months   60 months
Per share exercise price of
  warrants..........................      $14.50     $15.16     $28.06     $28.06      $28.06
Fair value per warrant at
  issuance..........................      $5.92      $10.56     $26.03     $23.89      $22.13
Value per share conversion
  feature at issuance...............      $10.72     $10.20     $18.80     $19.21      $19.57
Stock price on date of agreement          $8.80      $13.99     $32.25     $29.28      $26.81
Stock volatility at issuance........      96%        99%        106%       111%        117%
Dividend yield......................      0.0%       0.0%       0.0%       0.0%        0.0%
Risk-free interest rate at issuance.      4.28%      4.28%      4.88%      4.88%       4.65%
Converted...........................      No         No         No         No          No
Warrants exercised..................      Yes        Yes        No         No          No

<FN>
--------

(1) The warrants issued in connection with the February 2003, September
    2005, December 2005, February 2006, May 2006, July 2006 and October 2006
    convertible issuances meet the criteria of EITF 00-19 for equity
    classification, as they do not contain similar registration rights
    obligations with respect to the underlying shares. Accordingly, the
    conversion features do not require derivative accounting. The September
    2005, February 2006, May 2006, July 2006 and October 2006 issuances do
    have a beneficial conversion feature; however, the February 2003 and
    December 2005 issuances have no beneficial conversion feature.
</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.


                                     19

<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)                                     Fiscal Year Ended September 30,
-------------------------------------------------------------------------------------------------------------------

                                                               2006       2005       2004       2003       2002
                                                             --------   --------   --------   --------   --------

<C>                                                          <C>        <C>        <C>        <C>        <C>
Net sales.................................................   $ 92,357   $ 55,377   $ 34,525   $ 28,258   $ 31,090
Cost of sales, excluding available unused capacity costs..     69,994     52,809     29,137     24,122     25,049
Available unused capacity costs...........................          -      2,347      4,466      5,716      6,039
Litigation charge (2).....................................     22,795          -          -          -          -
Selling, general and administrative expenses (3)..........     15,243      7,847      6,463      8,300      8,788
Operating loss from continuing operations.................    (15,675)    (7,626)    (5,541)    (9,880)    (8,786)
Other income (expense) and income tax expense.............    (50,090)   (30,585)   (11,552)    (2,434)     1,706
Net loss from continuing operations.......................    (65,765)   (38,211)   (17,093)   (12,314)    (7,080)

Discontinued Operations:
    Operating loss, net of taxes..........................       (187)    (2,182)    (5,055)    (3,288)    (2,645)
    Gain (loss) on disposal of discontinued operation,
     net of taxes.........................................        150          -       (659)         -      1,894
                                                             --------   --------   --------   --------   --------
        Net loss on discontinued operations, net of taxes.        (37)    (2,182)    (5,714)    (3,288)      (751)
                                                             --------   --------   --------   --------   --------

Net loss..................................................   $(65,802)  $(40,393)  $(22,807)  $(15,602)  $ (7,831)
                                                             ========   ========   ========   ========   ========
Net loss per share:
  Basic and diluted loss per share:

     Continuing operations................................   $  (2.91)  $  (2.12)  $  (1.04)  $  (0.76)  $  (0.43)
     Discontinued operations..............................       (.00)     (0.12)     (0.35)     (0.20)     (0.05)
                                                             --------   --------   --------   --------   --------
     Total................................................   $  (2.91)  $  (2.24)  $  (1.39)  $  (0.96)  $  (0.48)
                                                             ========   ========   ========   ========   ========

Basic and diluted weighted average common shares
 outstanding..............................................     22,575     18,050     16,372     16,307     16,289

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

                                                               2006       2005       2004       2003       2002
                                                             --------   --------   --------   --------   --------


<S>                                                          <C>        <C>        <C>        <C>        <C>
Working capital...........................................   $ 20,042   $ 19,072   $ 16,802   $ 18,790   $  9,872
Total assets..............................................    187,684    130,429    122,455    119,455    121,422
Short-term debt...........................................      1,365        374        570        933     14,014
Long-term debt, less current maturities...................     32,002     40,421     42,002     33,541     13,699
Shareholders' equity......................................    111,661     40,645     44,230     64,516     75,904

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

(2) Litigation expenses related to the SP System case, as discussed in Note 8
to Consolidated Financial Statements.

(3) Includes application and development costs of $4,887, $3,324, $3,070,
$3,453 and $3,750 for fiscal years 2006, 2005, 2004, 2003 and 2002,
respectively.

</TABLE>


                                     20

<PAGE>
<PAGE>


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

OVERVIEW
--------

         The following Management's Discussion and Analysis of Financial
Condition and Results of Operations, commonly referred to as MD&A, is
intended to help the reader understand Zoltek, our operations and our
business environment. MD&A is provided as a supplement to, and should be
read in conjunction with, our consolidated financial statements and the
accompanying notes. This overview summarizes the MD&A, which includes the
following sections:

               Our Business -- a general description of the key drivers that
         affect our business, the industry in which we operate and the
         strategic initiatives on which we focus.

               Results of Operations -- an analysis of our overall results
         of operations and segment results for the three years presented in
         our financial statements. We operate in two segments: Carbon Fiber
         and Technical Fiber. Other miscellaneous and corporate are combined
         into a third business segment called Headquarters/Other.

               Liquidity and Capital Resources -- an analysis of cash flows,
         sources and uses of cash, off-balance sheet arrangements,
         contractual obligations, the potential impact of currency exchange
         and an overview of our financial position.

               Critical Accounting Estimates -- a description of accounting
         estimates that require critical judgments and estimates.

               Recent Developments -- an update on recent court decisions
         which will affect our fiscal 2007 cash position.

OUR BUSINESS
------------

         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.

          During 2006, the Company completed its transformation from
primarily a development business to an operational business and continued
its expansion plans that were first announced in fiscal 2005. Also during
2006, the demand for commercial carbon fibers continued to increase
tremendously and the divergence of the aerospace and commercial markets
continued to evolve. The Company believes 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 and other applications.

         In view of the substantial increases in demand for carbon fibers,
supported by several long-term supply relationships, the Company continued to
execute the capacity expansion program originally announced in fiscal 2005 in
a four phase plan. The first phase 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 $13.0 million, most of which was
incurred in fiscal 2005. Beginning in the fourth quarter of 2006, the third
phase added four continuous carbonization lines and expanded precursor
production to meet the demand for the additional carbon lines in Hungary at a
cost of approximately $26.0 million. In the fourth phase, the Company plans to
add four continuous carbonization lines and two oxidized acrylic fiber lines
and expand precursor production at its Hungary facility to meet the demand for
the additional lines during the second quarter of fiscal 2007 at a cost of
approximately $30.0 million. The $60.0 million convertible debt financing
package entered into in September 2005 and


                                     21

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<PAGE>

amended in May 2006, which has been fully funded, provided a substantial
portion of the capital resources for the capacity increase in fiscal 2006
and planned capacity increase in the first half of fiscal 2007.

         In November 2006, a judgment was rendered against the Company for
approximately $36.0 million. In order to appeal the verdict, the Company will
be required to post an appeal bond of approximately $40.0 million or a lesser
amount if its post-trial motion to reduce the amount of the judgment is
granted. While the Company has secured the funding for the bond, it has used
certain funding sources which were expected to be utilized to fund the
Company's carbon fiber expansion program. Accordingly, the Company may be
required to seek alternative sources of funding for its expansion program and
such funding may be at a cost or in an amount that may limit the Company's
ability to meet the expansion program's capacity.

         Subject to the availability of financing, during the third quarter of
fiscal 2007 Zoltek plans to complete the installation of approximately five
million pounds of rated capacity per year, with the first five million pound
rated capacity expansion completed by December 31, 2007. 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.

         The Hungarian government has pledged a grant of 2.9 billion HUF
(approximately $14.1 million) to Zoltek's Hungarian subsidiary that will
partially provide the capital resources for use in modernizing its facility,
establishing a research and development center there, and supporting a rapid
buildup of manufacturing capacity for both acrylic fiber precursor raw
material and carbon fiber increase. No amount has been funded under this
program as of September 30, 2006. The Company will present bank guarantee
statements amounting to 120% of the total amount of the subsidy (3.4 billion
HUF) in order to be granted the full amount of the subsidy. To be entitled
to apply for the subsidy, during the period between October 2008 and
September 2013, the Company must achieve excess export revenues amounting to
an average annual sum of HUF 21,698.6 million (approximately $105.5
million), must employ an average annual number of staff of 1,200 employees
and must utilize regional suppliers for at least 45% of purchases.

         During 2006, the Company began to capitalize on the increasing demand
for carbon fiber with the expansion and activation of new carbon fiber lines
at is Hungarian facility and improved efficiency of the Abilene facility.
During fiscal 2006, the Company increased sales by 67%. The Company reported
an operating loss from continuing operations of $15.7 million for its 2006
fiscal year, which included $22.8 million of litigation charges arising out of
a lawsuit that the Company is contesting. This compared to an operating loss
of $7.6 million in the 2005 fiscal year. In recent years, many factors had a
material adverse effect on the Company's financial performance, including the
Company's substantial investments in manufacturing assets and market and
application development expenses to position the Company to capitalize on the
upturn in demand, the delay in the anticipated growth in commercialization of
carbon fibers prior to 2004, and the Company's lack of ability to activate
production capacity at its Abilene plant as fast as expected due in large part
to the inability to recruit and train qualified workers and managers at the
plant that had been dormant for several years during 2005.

         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 2007 as its internally produced carbon fiber becomes
available to run the production lines.

         During the fourth quarter of fiscal 2004, the Company discontinued
nylon fiber operations and its 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 were 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. During the fourth quarter of fiscal 2006, the Company formally
adopted a plan to sell certain of the assets of its continuously extruded
netting division and to discontinue and exit another division that
manufactures thermoplastic components. The company incurred no significant
exit costs for the selling or discontinuation of these businesses. These
divisions are not part of the long-term strategy of the Company and are not
expected to be profitable in the foreseeable future due to the continued
pricing pressure from competitive manufacturers. The results from operations
of these two divisions have been reclassified to discontinued operations.

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

FISCAL YEAR ENDED SEPTEMBER 30, 2006 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 2005

         The Company's sales increased 66.8%, or $37.0 million, to $92.4
million in fiscal 2006 from $55.4 million in fiscal 2005. Carbon fiber sales
increased 90.4%, or $31.2 million, to $65.7 million in fiscal 2006 from
$34.5 million in fiscal 2005 as production and sales of wind energy orders
continued to grow and the demand for the Company's milled and chopped
products significantly increased from prior years. The Company's sales
benefited from the newly added capacity in Hungary of six carbon fiber
lines, continued improvement of the Abilene facility production and price
increases which took effect during the fiscal 2006 third quarter. Technical
fiber sales increased 27.9%, or $5.5 million, to $25.2 million in fiscal
2006 from $19.7 million in fiscal 2005. Technical fiber sales increased as
aircraft brake and automotive customers increased orders for heat resistance
applications. Miscellaneous sales, primarily consisting of water treatment
and electrical services in Hungary, increased 25.0%, or $0.3 million, to
$1.5 million in fiscal 2006 from $1.2 million in fiscal 2005.

         The Company's cost of sales (including available unused capacity
costs of $2.3 million in 2005) increased by 26.8%, or $14.8 million, to
$70.0 million in fiscal 2006 from $55.2 million in fiscal 2005. Carbon fiber
cost of sales


                                     22

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<PAGE>

increased by 34.6%, or $12.7 million, to $49.4 million for fiscal 2006 from
$36.7 million for fiscal 2005. The increase in carbon fiber cost of sales
reflected increased sales, offset by the improvement in margins resulting
from reduced costs related to the start-up operating inefficiencies of the
installed carbon fiber lines at the Abilene, Texas facility. Technical fiber
cost of sales increased $3.8 million, or 25.1%, to $19.2 million for fiscal
2006 from $15.4 million for fiscal 2005. The increase in technical fiber
cost of sales was a reflection of the increase in sales. The cost of sales
of the other products increased $0.6 million to $1.4 million from $0.8
million for fiscal 2005.

         During fiscal 2005, the Company incurred costs related to the
unused productive capacity for carbon fibers at the Abilene, Texas facility
and prepreg operation. These costs included depreciation and other overhead
associated with the unused capacity. These costs, which were separately
identified on the statement of operations, were approximately $2.3 million
in fiscal 2005. During the first quarter of fiscal 2006, the increased
orders and increased efficiency rates resulted in the unused capacity costs
being fully absorbed into cost of sales.

         Application and market development costs were $4.9 million in
fiscal 2006 and $3.3 million in fiscal 2005. These costs included product
and market development efforts, product trials and sales and product
development personnel and related travel. Targeted emerging applications
include automobile components, fire/heat barrier and alternate energy
technologies. The increase included application development of the towpreg
product at the Company's prepreg facility in Utah.

         A special non-recurring charge of $22.8 million was recorded in the
fourth quarter of 2006 related to the SP Systems case. The expenses included
$1.0 million legal fees incurred in fiscal 2006, $0.7 million for estimated
legal fees for the appeal process and $21.1 estimated damages. The Company
is vigorously defending against this case. Although the litigation process
is inherently uncertain, the Company believes it has grounds for the
judgment to be substantially reduced or, possibly, overturned entirely.

         Selling, general and administrative expenses for continuing
operations were $10.4 million in fiscal 2006 compared to $4.5 million in
fiscal 2005. The increase related to staffing of management positions that
have been filled to meet the new demands of the growing sales and production
volume and costs related to compliance with the Sarbanes-Oxley Act's
requirements. In 2005, $2.5 million of corporate headquarters costs were
allocated to businesses later classified as discontinued operations. In
2006, these expenses were wholly absorbed by continuing operations. The
Company also recorded $1.0 million for the cost of employee services
received in exchange for equity instruments under SFAS 123-R during fiscal
2006. In the second quarter of fiscal 2006, the Company accrued a charge of
$0.5 million representing management's estimate of the liability associated
with an ongoing lawsuit unrelated to the SP case.

         Operating loss increased $8.1 million, from $7.6 million in fiscal
2005 to $15.7 million in fiscal 2006, primarily related to a non-recurring
litigation charge of $22.8 million related to the SP Systems case. Carbon
fiber operating income improved from a loss of $8.2 million in fiscal 2005 to
income of $10.4 million in fiscal 2006. The improvement related to the
increase in production and sales as the Company added new capacity at its
Hungarian facility, increased prices and improved production efficiency at its
Abilene facility. The operating income in technical fibers improved from
income of $2.7 million in fiscal 2005 to $4.6 million in fiscal 2006 due to
increased orders from the European aircraft brake customers and new sales
within the automotive heat resistance applications. Other products/
headquarters operating loss increased from a loss of $2.1 million in fiscal
2005 to a loss of $30.7 million in fiscal 2006 due to a special non-recurring
charge of $22.8 million related to the SP Systems case, corporate headquarters
costs previously allocated to businesses later classified as discontinued
operations, staffing of management positions that have been filled to meet the
new demands of the growing sales and production volume and costs related to
compliance with the Sarbanes-Oxley Act's requirements. In the second quarter
of fiscal 2006, the Company accrued a charge of $0.5 million in respect of a
contingent liability related to a lawsuit. The Company recorded $1.0 million
for the cost of employee services received in exchange for equity instruments
under SFAS 123-R in fiscal 2006. The Company's consolidated operating income
was benefited by the newly added capacity in Hungary of six carbon fiber
lines, the improvement in Abilene's operations and price increases which took
effect during the 2006 second quarter.

         Interest expense was approximately $2.6 million in fiscal 2006
compared to $3.0 million in the corresponding period of fiscal 2005. The
decrease in interest resulted from higher debt levels after the Company's
refinancing transactions offset by an increase of $3.1 million in
capitalized interest cost 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 market interest rates was
immaterial.

         Amortization of financing fees and debt discounts, which are
non-cash expenses, were approximately $16.5 million for fiscal 2006 compared
to $8.5 million for fiscal 2005. The increase in amortization resulted from
the expensing of $6.8 million of a beneficial conversion feature related to
a partial conversion in June 2006 of the September 2005 issuance


                                     23

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<PAGE>

and full conversion in May 2006 of the February 2005 issuance and the $3.3
million discount related to the issuance of 111,113 warrants to purchase the
Company's shares at $0.01 per share (see "--Liquidity and Capital
Resources").

         Loss on value of warrants and conversion feature, which is a
non-cash item, increased $12.7 million from a loss of $16.6 million in
fiscal 2005 to a loss of $29.3 million in fiscal 2006 (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 2006 compared to
fiscal 2005 over the exercise prices of applicable underlying securities.

         Other expense, net, was of $1.0 million in fiscal 2006 compared to
$1.9 million for fiscal 2005. The decrease in the foreign currency
transactional loss during fiscal 2006 was due to the Hungarian Forint
becoming stronger during 2006 compared to the Euro and Pound Sterling in
which the Company buys most raw materials.

         Income tax expense was $0.9 million for fiscal 2006 compared to
$0.7 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 2006 and 2005 due to uncertainties in the
Company's ability to utilize net operating loss carryforward in the future.
The expense for both fiscal 2005 and 2006 related to local taxes for the
Hungarian facility.

         The foregoing resulted in a loss from continuing operations of
$65.8 million for fiscal 2006 compared to a loss of $38.2 million for fiscal
2005. Similarly, the Company reported a loss from continuing operations per
share of $2.91 and $2.12 on a basic and diluted basis for fiscal 2006 and
2005, respectively. The weighted average common shares outstanding was 22.6
million and 18.1 million for fiscal 2006 and 2005, respectively.

         The loss from discontinued operations of $0.04 million for fiscal
2006 compares to a loss of $2.2 million for fiscal 2005. The decrease in
sales was offset by a significant decrease in cost during fiscal 2006 as the
Company liquidated existing inventory balances. The Company reported a loss
from discontinued operations per share of $0.00 and $0.12 on a basic and
diluted basis for fiscal 2006 and 2005, respectively.

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

         The Company's sales increased 60.6%, or $20.9 million, to $55.4
million in fiscal 2005 from $34.5 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 from the
Other business segment, primarily consisting of water treatment and
electrical services, decreased 7.7%, or $0.1 million, to $1.20 million in
fiscal 2005 from $1.30 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 64%, or $21.6 million, to $55.2 million in fiscal 2005
from $33.6 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
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 to the inability to recruit and train
qualified workers and managers at the plant which had been dormant for
several years. 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 Other segment decreased $0.30 million to
$0.8 million compared to fiscal 2004.

         During fiscal 2004 and 2005, 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 was 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.

         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 alternative energy
technologies.

                                     24

<PAGE>
<PAGE>

         Selling, general and administrative expenses were $4.5 million in
fiscal 2005 compared to $3.4 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
compliance with the Sarbanes-Oxley Act's requirements.

         Operating loss was $7.6 million in fiscal 2005 compared to a loss
of $5.5 million in fiscal 2004, an increase of $2.1 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 the 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. Corporate headquarters'
operating loss increased from $0.9 million in fiscal 2004 to $2.1 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 compliance 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 market 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 beneficial 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 $1.9 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 Sterling in which the Company buys most raw materials.

         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.

         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.

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

Convertible Debt

         During the fiscal year ended September 30, 2006, the investors
converted $47.3 million principal and interest amount of the convertible
debt privately placed in the February 2003, October 2004, February 2005 and
September 2005 issuances into 4,738,486 shares of common stock, which was
recorded into equity. The Company also recorded into equity the fair market
value of the conversion feature at the time of conversion of the debt issued
in the October 2004 and February 2005 issuances, which was valued at $57.5
million and offset by a reduction to equity of $10.2 million for the
unamortized portion of the debt discount. Also, at the time of conversion,
the Company reclassified the unamortized deferred financing


                                     25

<PAGE>
<PAGE>

cost of $1.4 million related to these issuances into additional paid-in
capital. The February 2005 issuance also had a beneficial conversion
feature, of which $6.8 million was unamortized at the time of conversion and
was recorded as an expense into amortization of financing fees and debt
discount. Subsequent to these conversions, the October 2004 and February
2005 issuances have been fully converted into the Company's common stock.

         In September 2005, Zoltek entered into an agreement for a new
financing; a convertible debenture package of up to $50 million in a private
placement with a group of institutional investors. In April 2006, the
Company amended the September 2005 financing package to provide for an
additional $10.0 million funding. In order to match the cash needs to
support the Company's planned expansion, the financing arrangements provided
for the funding to occur in six separate closings discussed in the following
paragraphs. These financings are collateralized by the carbon fiber assets
of the Company's Hungarian subsidiary.

         The closing on September 30, 2005 included a draw down of $5.0
million. The borrowing matures 42 months from the closing date and bears
interest at a fixed rate of 7.5% annum. The debentures are convertible into
Zoltek common stock of 400,000 shares at a conversion price of $12.50 per
share. The debentures were issued with five-year warrants that give holders
the right to purchase up to 140,000 shares of Zoltek common stock at an
exercise price of $14.50 per share. The fair value of the debt discount
associated with the warrants and conversion features at the time of
issuances was $1.0 million and will be accreted to the debt's face value
over the life of the convertible debentures.

         In December 2005, the Company issued convertible debentures in the
aggregate principal amount of $15.0 million to institutional private equity
investors. The convertible debentures had a stated maturity of 42 months and
bore interest at a fixed rate of 7.5% annum. The convertible debentures are
convertible into Zoltek 1,200,000 shares of common stock at a conversion
price of $12.50 per share The Company also issued to the investors five-year
warrants that give holders the right to purchase up to 420,000 shares of
Zoltek common stock at an exercise price of $14.50 per share. The fair value
of the debt discount associated with the warrants and conversion features at
the time of issuances was $1.9 million and will be accreted to the debt's
face value over the life of the convertible debentures.

         In February 2006, the Company issued convertible debentures in the
aggregate principal amount of $10.0 million to institutional private equity
investors. The convertible debentures had a stated maturity of 42 months and
bore interest at a fixed rate of 7.5% annum. The convertible debentures are
convertible into 765,110 shares of Zoltek common stock at a conversion price
of $15.16 per share The Company also issued to the investors five-year
warrants that give holders the right to purchase up to 267,789 shares of
Zoltek common stock at an exercise price of $15.16 per share. The fair value
of the debt discount associated with the warrants and conversion features at
the time of issuances was $4.6 million and will be accreted to the debt's
face value over the life of the convertible debentures.

         In May 2006, the Company issued convertible debentures in the
aggregate principal amount of $20 million to institutional private equity
investors. The convertible debentures had a stated maturity of 42 months and
bore interest at a fixed rate of 7.5% annum. However, after 18 months, the
interest rate will be LIBOR plus 4% per annum. The convertible debentures
are convertible into 784,006 shares of Zoltek common stock at a conversion
price of $25.51 per share The Company also issued to the investors five-year
warrants that give holders the right to purchase up to 274,406 shares of
Zoltek common stock at an exercise price of $28.06 per share. The fair value
of the debt discount associated with the warrants and conversion features at
the time of issuances was $17.1 million and will be accreted to the debt's
face value over the life of the convertible debentures.

         In July 2006, the Company issued convertible debentures in the
aggregate principal amount of $2.5 million to institutional private equity
investors. The convertible debentures had a stated maturity of 42 months and
bore interest at a fixed rate of 7.5% annum. However, after 18 months, the
interest rate will be LIBOR plus 4% per annum. The convertible debentures
are convertible into 98,000 shares of Zoltek common stock at a conversion
price of $25.51 per share The Company also issued to the investors five-year
warrants that give holders the right to purchase up to 34,370 shares of
Zoltek common stock at an exercise price of $28.06 per share. The fair value
of the debt discount associated with the warrants and conversion features at
the time of issuances was $1.7 million and will be accreted to the debt's
face value over the life of the convertible debentures.

         In October 2006, the Company issued convertible debentures in the
aggregate principal amount of $7.5 million to institutional private equity
investors. The convertible debentures had a stated maturity of 42 months and
bore interest at a fixed rate of 7.5% annum. However, after 18 months, the
interest rate will be LIBOR plus 4% per annum. The convertible debentures
are convertible into 294,002 shares of Zoltek common stock at a conversion
price of $25.51 per share The Company also issued to the investors five-year
warrants that give holders the right to purchase up to 102,835 shares of
Zoltek common stock at an exercise price of $28.06 per share.

         As part of the amended financing agreement, Zoltek reduced the
conversion price on its outstanding convertible debt in the aggregate
principal amount of $20.0 million issued in October 2004 from $12.00 to
$9.50 per share, with the


                                     26

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<PAGE>

requirement that conversion take place within 30 days of the December
closing. In connection with the April 2006 amendment, the investors
converted the $20.0 million convertible notes previously issued in February
2005 into approximately 1,000,000 shares of common stock and exercised
associated warrants for 1,052,000 shares related to October 2004 and
February 2005 issuances. The Company also issued the investors up to 111,113
shares of common stock at an exercise price of $.01 per share. The fair
value of the $0.01 per share warrants at the time of issuance was $3.3
million and was expensed in amortization of financing fees and debt discount
during the third quarter of 2006.

Bond Related to SP Systems Case

         The Company will have to post a bond of approximately $40.0 million
during the appeals process, or a lesser amount if its post-trial motion to
reduce the amount of the judgment is granted. The Company has raised the
funding necessary for the bond with a $10.0 million loan collateralized by
certain real estate of the Company at an interest rate of 7.5% with a due date
of January 1, 2008, a $10.0 million loan from the Company's Chief Executive
Officer at the Chief Executive Officer's cost of funds rate due January 2,
2008, the proceeds from the exercise of 827,789 warrants for $11.9 million by
existing institutional shareholders and the remainder with the Company's cash
on hand. There are no financial covenants associated with the $10 million loan
with the bank or the $10 million loan from the Company's Chief Executive
Officer. Additionally, the $10 million term loan with the bank is guaranteed
by the Company's Chief Executive Officer. This guarantee will remain in place
until certain conditions of the credit agreement are fulfilled, primarily the
delivery of appraisals related to the real-estate properties collateralized
with the term loan.

Revolving Credit Facility

         The credit facility consists of a revolving credit and term loan with
maximum available borrowings of $5.5 million of which $1.7 million and $5.5
million were available as of September 30, 2005 and June 30, 2006,
respectively. In December 2006, the Company extended this line of credit until
January 1, 2008. The renewal of the credit facility included an amendment
which increased the amount available under the original revolving credit
facility from $5.5 million to $6.7 million and established a new $10.0 million
term loan, collateralized by certain properties of the Company. The amendment
also provided that the $6.6 million letter of credit previously collateralized
by the Company's cash and cash equivalents and presented as restricted cash in
the Company's consolidated balance sheet will be collateralized by the
availability under the $6.7 million revolving credit facility thereby
eliminating the cash restriction. The Company believes the financing currently
available is sufficient to fund near-term liquidity needs but its capacity
expansion plans for fiscal 2007 and beyond will require additional debt and
equity financing. The Company will be required to post a $40.0 million bond in
order to appeal the verdict of a judgment rendered in November or a lesser
amount if its post-trial motion to reduce the amount of the judgment is
granted. While the Company has secured the funding for the bond, it has used
certain funding sources which were expected to be utilized to fund the
Company's expansion program. Accordingly, the Company may be required to seek
alternative sources of funding for its expansion and such funding may be at a
cost or in an amount that may limit the Company's ability to meet the
expansion program's capacity.

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

         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 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.

         As part of the amended financing agreement, Zoltek reduced the
conversion price on its outstanding convertible debt in the aggregate
principal amount of $20.0 million issued in October 2004 from $12.00 to
$9.50 per share, with the


                                     27

<PAGE>
<PAGE>

requirement that conversion take place within 30 days of the second closing.
In connection with the April 2006 amendment, the institutional investors
converted the $20.0 million convertible notes previously issued in February
2005 into approximately 1,000,000 shares of common stock and exercised
associated warrants for 1,052,000 shares related to October 2004 and
February 2005 issuances. The Company also issued the investors up to 111,113
shares of common stock at an exercise price of $.01 per share. The fair
value of the $0.01 per share warrants at the time of issuance was $3.3
million and was expensed in amortization of financing fees and debt discount
during the third quarter of 2006.

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

         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 were 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. 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 Activity
--------------------------------

         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


                                     28

<PAGE>
<PAGE>

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 7.0% 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.

         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>
                         CONVERTIBLE DEBT ISSUANCES FISCAL 2003 THROUGH FISCAL 2005
                         ----------------------------------------------------------
<CAPTION>
                                          FEBRUARY    JANUARY    MARCH      OCTOBER     FEBRUARY   SEPTEMBER
                                            2003(1)     2004      2004        2004        2005       2005(1)
                                            ----        ----      ----        ----        ----       ----

<C>                                       <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.......................      7.0%       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 warrants....................      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%
Converted...........................      Partial    Yes        Yes         Yes         Yes        Partial
Warrants exercised..................      Partial    Yes        Yes         Yes         Yes        Yes

<CAPTION>
                         CONVERTIBLE DEBT ISSUANCES FISCAL 2006 THROUGH FISCAL 2007
                         ----------------------------------------------------------
                                          DECEMBER   FEBRUARY     MAY        JULY       OCTOBER
                                            2005(1)    2006(1)    2006(1)    2006(1)     2006(1)
                                            ----       ----       ----       ----        ----
<C>                                       <C>        <C>        <C>        <C>         <C>
Amount of debenture (millions)......      $15.0      $10.0      $20.0      $2.5        $7.5
Per share conversion price on
  debenture.........................      $12.5      $13.07     $25.51     $25.51      $25.51
Interest rate.......................      7.5%       7.5%       7.5%       7.5%        7.5%
Term of debenture...................      42 months  42 months  42 months  42 months   42 months
Warrants issued.....................      420,000    267,789    274,406    34,370      102,835
Term of warrants....................      60 months  60 months  60 months  60 months   60 months
Per share exercise price of
  warrants..........................      $14.50     $15.16     $28.06     $28.06      $28.06
Fair value per warrant at
  issuance..........................      $5.92      $10.56     $26.03     $23.89      $22.13
Value per share conversion
  feature at issuance...............      $10.72     $10.20     $18.80     $19.21      $19.57
Stock price on date of agreement          $8.80      $13.99     $32.25     $29.28      $26.81
Stock volatility at issuance........      96%        99%        106%       111%        117%
Dividend yield......................      0.0%       0.0%       0.0%       0.0%        0.0%
Risk-free interest rate at issuance.      4.28%      4.28%      4.88%      4.88%      4.65%
Converted...........................      No         No         No         No          No
Warrants exercised..................      Yes        Yes        No         No          No

<FN>
(1) The warrants issued in connection with the February 2003, September
    2005, December 2005, February 2006, May 2006, July 2006 and October
    2006 convertible issuances meet the criteria of EITF 00-19 for equity
    classification, as they do not contain similar registration rights
    obligations with respect to the underlying shares. Accordingly, the
    conversion features do not require derivative accounting. The
    September 2005, February 2006, May 2006, July 2006 and October 2006
    issuances do have a beneficial conversion feature; however, the
    February 2003 and December 2005 issuances have no beneficial
    conversion feature.
</TABLE>

                                     29

<PAGE>
<PAGE>

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. Since the effective registration of the
securities underlying the conversion feature and warrants is an event
outside of the control of the Company, 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 were reflected in the consolidated statement of
operations as "Gain (loss) on value of warrants and conversion feature." The
Company accounted 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." The gain or loss related to these securities is based on changes in
the Company's stock price during the period. As the Company's stock price
increased the value of the derivative security increased, therefore the
Company recorded a loss. As the Company's stock price decreased the value of
the derivative security decreased, therefore the Company recorded a gain.
When the convertible security was converted, the underlying liability of
derivative was removed from long-term debt and recorded as an increase to
the Company's equity. As a result of the above-described amendment of the
convertible debt financing package in April 2006 and the transactions
contemplated thereby, the derivative accounting treatment described above
was terminated in the quarter ended June 30, 2006. See table below for
impact on the financial results for the year-end financial results ended
September 30, 2006, 2005 and 2004 (amounts in thousands).

<TABLE>
<CAPTION>
                                                                  FISCAL YEAR ENDED SEPTEMBER 30, 2006
                                                                  ------------------------------------
                                                                                CONVERSION
                                                                 WARRANTS        FEATURES        TOTAL
                                                                 --------        --------        -----

<C>                                                              <C>             <C>            <C>
         January 2004 issuance - mark to market ................ $ (1,413)       $      -       $ (1,413)
         March 2004 issuance - mark to market ..................     (730)              -           (730)
         October 2004 issuance - mark to market.................   (2,902)         (5,671)        (8,573)
         February 2005 issuance - mark to market................   (1,788)        (16,799)       (18,587)
                                                                 --------        --------       --------
                  Loss on value of warrants and
                    conversion feature.......................... $ (6,833)       $(22,470)      $(29,303)
                                                                 ========        ========       ========

<CAPTION>
                                                                 FISCAL YEAR ENDED SEPTEMBER 30, 2005
                                                                 ------------------------------------
                                                                                CONVERSION
                                                                 WARRANTS        FEATURES        TOTAL
                                                                 --------        --------        -----
<C>                                                              <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
                                                                 --------        --------       --------
                  Loss on value of warrants and
                    conversion feature.......................... $ (2,711)       $(13,863)      $(16,574)
                                                                 ========        ========       ========

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

Amortization of Financing Fees and Debt Discount
------------------------------------------------

         At the time of issuance of convertible debt securities with
warrants, the Company records the fair value associated with the warrants
using the Black-Scholes option-pricing model. This fair value discount is
recorded as a reduction in the carrying value of the convertible debt
security that is accreted to its face value over the life of the convertible
security and expensed into the Company's income statement. If the
convertible security is converted prior to the redemption date, the
unamortized debt discount associated with the valuation of the warrants is
recorded as a reduction to additional paid-in capital at the time of
conversion.

                                     30

<PAGE>
<PAGE>

         As part of the April 2006 amendment to the September 2005
convertible debt issuance, the Company issued the investors five-year
warrants to purchase 111,113 shares of common stock at an exercise price of
$.01 per share as an inducement to the holders to convert the February 2005
issuance. The fair value of the warrants issued of $3.3 million was expensed
during the quarter ended June 30, 2006 and is included in amortization of
financing fees and debt discount in the statement of operations.

         The February 2005, February 2006, May 2006 and July 2006 issuances
were considered to have a beneficial conversion feature because the adjusted
conversion price after allocating a portion of the proceeds to the warrants,
as discussed above, was less than the Company's market price of common stock
at date of issue. The beneficial conversion is recorded as a reduction in
the carrying value of the convertible debt security and is accreted to its
face value over the life of the convertible security and expensed into the
Company's income statement. If the convertible security is converted prior
to the redemption date, the unamortized balance is recorded in expense at
the time of conversion. During the third quarter of fiscal 2006, the
February 2005 issuance, which had a beneficial conversion feature, was
converted and the Company recorded an expense $5.0 million for the
unamortized portion on the beneficial conversion feature which is included
in amortization of financing fees and debt discount in the statement of
operations.

         See the table below for impact of amortization of financing fees
and debt discount on the financial results for the fiscal year 2006, 2005
and 2004 (amounts in thousands).

<TABLE>
<CAPTION>
                                                                  FISCAL YEAR ENDED SEPTEMBER 30, 2006
                                                                  ------------------------------------
                                                                                CONVERSION
                                                                 WARRANTS        FEATURES        TOTAL
                                                                 --------        --------        -----
<C>                                                              <C>             <C>            <C>
October 2004 issuance..........................................  $    204        $    400       $    604
February 2005 issuance.........................................       834           7,830          8,664
September 2005 issuance........................................       906               -            906
December 2005 issuance.........................................       548               -            548
February 2006 issuance.........................................       312             694          1,006
May 2006 issuance..............................................     3,524             332          3,856
July 2006 issuance.............................................        28              34             62
                                                                 --------        --------       --------
                                                                 $  6,356        $  9,290       $ 15,646
                                                                 ========        ========       ========
         Deferred financing costs..............................                                      886
                                                                                                --------
         Total.................................................                                 $ 16,532
                                                                                                ========

<CAPTION>
                                                                   FISCAL YEAR ENDED SEPTEMBER 30, 2005
                                                                   ------------------------------------
                                                                                CONVERSION
                                                                 WARRANTS        FEATURES        TOTAL
                                                                 --------        --------        -----
<C>                                                              <C>             <C>            <C>
January 2004 issuance..........................................  $    458       $       -       $    458
March 2004 issuance............................................       863               -            863
October 2004 issuance..........................................       973           1,902          2,875
February 2005 issuance.........................................       850           1,892          2,742
                                                                 --------        --------       --------
                                                                 $  3,144       $   3,794       $  6,938
                                                                 ========        ========       ========
         Deferred financing costs..............................                                    1,531
                                                                                                --------
         Total.................................................                                 $  8,469
                                                                                                ========


<CAPTION>
                                                                   FISCAL YEAR ENDED SEPTEMBER 30, 2004
                                                                   ------------------------------------
                                                                                CONVERSION
                                                                 WARRANTS        FEATURES        TOTAL
                                                                 --------        --------        -----
<C>                                                              <C>             <C>            <C>
January 2004 issuance..........................................  $    903       $       -       $    903
March 2004 issuance............................................     1,150               -          1,150
                                                                 --------       ---------       --------

                                                                 $  2,053       $       -       $  2,053
                                                                 ========       =========       ========
         Deferred financing costs.............................                                       524
                                                                                                --------
         Total................................................                                  $  2,577
                                                                                                ========
</TABLE>

                                     31

<PAGE>
<PAGE>

The carrying values of unamortized conversion features, debt discount and
financing fees are as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                           SEPTEMBER 30, 2006
                                                                           ------------------
                                                                                CONVERSION
                                                                 WARRANTS        FEATURES        TOTAL
                                                                 --------        --------        -----
<C>                                                              <C>             <C>            <C>
September 2005 issuance........................................  $  1,003        $      -       $  1,003
December 2005 issuance.........................................     1,894               -          1,894
February 2006 issuance.........................................     2,278           2,343          4,621
May 2006 issuance..............................................     6,899          10,187         17,086
July 2006 issuance.............................................       791             952          1,743
                                                                 --------        --------       --------
                                                                 $ 12,865        $ 13,482         26,347
                                                                 ========        ========       ========
     Debt acquisition cost and financing fees..................                                    1,582
                                                                                                --------
         Total.................................................                                 $ 27,929
                                                                                                ========


<CAPTION>
                                                                           SEPTEMBER 30, 2005
                                                                           ------------------
                                                                                CONVERSION
                                                                 WARRANTS        FEATURES        TOTAL
                                                                 --------        --------        -----
<C>                                                              <C>             <C>            <C>
March 2004 issuance............................................  $  2,476        $  4,841       $  7,317
October 2005 issuance..........................................       724           1,612          2,336
September 2005 issuance........................................    12,513               -         12,513
                                                                 --------        --------       --------
                                                                 $ 15,713        $  6,453         22,166
                                                                 ========        ========       ========
     Debt acquisition cost and financing fees..................                                    2,315
                                                                                                --------
         Total.................................................                                 $ 24,481
                                                                                                ========
</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, 2006 and 2005
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 4.3 million shares for
fiscal 2006 and 6.6 million shares for fiscal 2005 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 consists of a revolving line of credit and term loan of $5.5 million,
which matures January 1, 2007. The financial covenants applied to the credit
facility from the U.S. bank have been waived through January 1, 2008. The
availability of the revolving line of credit and term loan was $5.5 million at
September 30, 2006. The Company has issued $6.6 million in letters of credit
that are collateralized by the cash and cash equivalents in an equal amount
and are therefore restricted. In December 2006, the Company extended this line
of credit until January 1, 2008. The renewal of the credit facility included
an amendment which increased the amount available under the original revolving
credit facility from $5.5 million to $6.7 million and established a new $10.0
million term loan, collateralized by certain properties of the Company. The
amendment also provided that the $6.6 million letter of credit previously
collateralized by the Company's cash and cash equivalents and presented as
restricted cash in the Company's consolidated balance sheet will be
collateralized by the availability under the $6.7 million revolving credit
facility thereby eliminating the cash restriction.

         Hungarian Operations - The Company's Hungarian subsidiary has a
credit facility with a Hungarian bank. Total borrowings under this credit
facility were $3.2 million at September 30, 2006. The credit facility is a
term loan with quarterly interest payments and repayment of principal at the
maturity date on December 31, 2007.

         The Company's convertible debt issuances (see Note 2) 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, 2006.

         The Hungarian government has pledged a grant of 2.9 billion HUF
(approximately $14.1 million) to Zoltek's Hungarian subsidiary that will
partially provide the capital resources for use in modernizing its facility,
establishing a research and development center there, and supporting a rapid
buildup of manufacturing capacity for both acrylic fiber precursor raw
material and carbon fiber increase. As of December 27, 2006, no amount has
been funded under this program. The Company will present bank guarantee
statements amounting to 120% of the total amount of the subsidy (3.4 billion
HUF) in order to be granted the full amount of the subsidy. To be entitled
to apply for the subsidy, during the period between October 2008 and
September 2013, the Company must achieve excess export revenues amounting to
an average annual sum of HUF 21,698.6 million (approximately $105.5
million), must employ an average annual number of staff of 1,200 employees
and must utilize regional suppliers for at least 45% of purchases.

                                     32

<PAGE>
<PAGE>

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

         Operating activities provided $3.3 million of cash in fiscal year
2006 compared to cash used of $7.6 million in fiscal year 2005. The
improvement was the result of increased operating income, excluding the effect
non-recurring litigation charge related to the SP case, as sales and margins
continue to increase offset by increases in receivables as the Company's sales
grew significantly during fiscal 2006 and an increase in prepaid and other
assets as the Company's VAT receivable increased related to expansion
activities at its Hungarian facility. Other factors contributing to the
improvement were a decrease in inventory due to sales of chopped and milled
fiber and an increase in accounts payable due to timing of payments to vendors
working on the expansion project in Hungary. The Company anticipates improving
future cash flows from operations as it gains operating efficiency at the
Abilene and Hungarian manufacturing facilities.

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

         Net cash used in discontinued operating activities was $0.5 million
for fiscal 2006 as compared to a usage of $1.5 million in 2005.

Cash Used In Investing Activities
---------------------------------

         Net cash used in investing activities for fiscal year 2006 was
$47.4 million which consisted of capital expenditures and an increase in
restricted cash of $6.6 million for letters of credit. These capital
expenditures primarily related to the expansion of the Company's precursor
facility and carbon fiber operations to meet the additional demand for
carbon fiber products.

         Net cash used in investing activities for fiscal 2005 was $14.8
million which included capital expenditures primarily at the Hungarian
subsidiary related to expansion of its precursor facility and its carbon
fiber lines.

         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.

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

         Net cash provided by financing activities was $55.5 million and
$23.9 million for the fiscal years ended 2006 and 2005, respectively. The
various cash provided by financing activities is due to the various
financing transactions described above.

Future Contractual Obligations
------------------------------
         In the table below, we set forth our enforceable and legally binding
obligations as of September 30, 2006. Some of the figures we include in this
table are based on our estimates and assumptions about these obligations,
including their durations, anticipated actions by third parties and other
factors. The enforceable and legally binding obligations we will actually pay
in future periods may vary from those reflected in the table because the
estimates and assumptions are subjective. See Note 2 to the consolidated
financial statements for discussion of the Company's debt agreements.



                                     33

<PAGE>
<PAGE>


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

<C>                                                              <C>         <C>         <C>          <C>
Notes payable................................................... $ 3,293     $ 1,365     $ 1,928      $     -
Convertible debentures..........................................  53,205          -       20,700       32,505
Long-term debt, including current maturities....................   3,217                   3,217            -
                                                                 -------     -------     -------      -------
     Total debt.................................................  59,715       1,365      25,845       32,505
Operating leases................................................     231          58         173            -
                                                                 -------     -------     -------      -------
     Total debt and operating leases............................  59,946       1,423      26,018       32,505
Contractual interest payments (a)...............................  12,614       4,339       7,587          688
Accrued litigation cost (b).....................................  24,278      23,963           -            -
Purchase obligations (c)........................................   2,688       2,688           -            -
                                                                 -------     -------     -------      -------
     Total contractual obligations.............................. $99,526     $32,413     $33,605      $33,193
                                                                 =======     =======     =======      =======
<FN>
        (a)   Amounts represent the expected cash payment for interest on
              our debt.

        (b)   Amount includes $21.8 million accrued for potential damages and
              litigation cost related to SP Systems case and $2.5 million
              related to other litigation costs as discussed in Note 8 to the
              consolidated financial statements.

        (c)   Purchase obligations include agreements to purchase goods or
              services that are enforceable and legally binding and that
              specify all significant terms, including fixed or minimum
              quantities to be purchased, fixed, minimum or variable price
              provisions, and the approximate timing of the transactions.
              Purchase obligations exclude agreements that are cancelable at
              any time without penalty.
</TABLE>

The future contractual obligations and debt could be reduced by up to $65.8
million in exchange for up to 4.0 million shares of common stock if all the
convertible debt was converted.

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

<C>                                                  <C>        <C>         <C>         <C>          <C>
Total contractual obligation.......................             $ 99,526    $32,413     $ 33,605     $ 33,193

February 2003 issuance.............................  $ 3.25       (2,700)         -       (2,700)           -
September 2005 issuance............................   12.50       (3,000)         -       (3,000)           -
December 2005 issuance.............................   12.50      (15,000)         -      (15,000)           -
February 2006 issuance.............................   13.07      (10,000)         -            -      (10,000)
May 2006 issuance..................................   25.51      (20,000)         -            -      (20,000)
July 2006 issuance.................................   25.51       (2,505)         -            -       (2,505)
Interest payments..................................              (12,614)    (4,339)      (7,587)        (688)
                                                                --------    -------     --------     --------
     Total contractual obligations assuming
       conversion..................................             $ 33,707    $28,074     $  5,318     $      -
                                                                ========    =======     ========     ========
</TABLE>

         As of December 26, 2006, the last reported sale price of the
Company's common stock was $19.20 per share.

         Structural Polymer Group Limited (SP Systems) and its subsidiary
Structural Polymer Systems, Limited filed an action against Zoltek
Corporation in the U. S. District Court for the Eastern District of
Missouri, Eastern Division alleging that the Company breached a Supply
Agreement relating to Zoltek's carbon fiber product known as Panex 33. The
case was tried in November 2006 and on November 29, 2006, the jury in the
case rendered verdicts against Zoltek Corporation in the amounts of $21.1
million and $14.9 million, respectively, which verdicts were subsequently
entered as judgments against Zoltek Corporation. The Company believes that
any damages should be limited to $21.1 million because the verdicts are
duplicative. Zoltek Corporation is filing various post-trial motions. If
such motions are unsuccessful, Zoltek Corporation intends to file an appeal
with the U. S. Court of Appeals for the 8th Circuit seeking reversal or a
new trial. Although the litigation process is inherently uncertain, the
Company believes it has grounds for the judgment to be substantially reduced
or, possibly, overturned entirely. Management, recognizing the judgment that
has been rendered against the Company and the uncertainty surrounding the
Company's planned appeals process, accrued $21.8 million during the fourth
quarter in respect of the potential liability in this matter, which it
believes is the best estimate of the liability associated with this
obligation. This amount includes $21.1 million related to the aforementioned
judgment and approximately $0.7 million related to legal fees. The Company
has already incurred legal expenses of approximately $1.0 million.
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, however, if the Company's
appeal is unsuccessful, the resulting settlement could materially impact the
Company's results of operations, financial condition and cash flows. The
Company will be required to post a bond of approximately $40.0 million
during the appeals process, or a lesser amount if its post-trial motion to
reduce the amount of the judgment is granted. The Company has raised the
funding necessary for the bond with a $10.0 million loan collateralized by
certain real estate of the Company, a $10.0 million loan from the Company's
Chief Executive Officer, the proceeds from the exercise of 827,789 warrants
for $11.9 million by existing institutional shareholders and the remainder
with the Company's cash on hand.

         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


                                     34

<PAGE>
<PAGE>

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 $1.3 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. In July 2006, the Company was successful in its appeal of the lower
court's ruling and the case was remanded to the Court of Common Pleas for
retrial. Management believes that the ultimate resolution of this litigation
will not have a further material adverse effect on the Company's results of
operations, financial condition or cash flow. To date, the Company has not
made any payments of any portion of this obligation, although it posted an
appeal bond in the amount of $1.3 million. The Company executed a guaranty
of Hardcore Composite's lease obligations of approximately $30,000 per month
to the former owner. The lease of the Hardcore Composites manufacturing
facility expires March 31, 2008. Hardcore no longer occupies the facility
and, accordingly, in connection with the ongoing litigation with the former
owner, Zoltek is asserting that Zoltek has no further ongoing guarantee
obligation with respect to the lease. The Company also is the obligee on
aggregate original value of unsecured promissory notes of $9.3 million in
connection with the sale of Hardcore, for which a full valuation allowance
has been recorded. A full valuation allowance is appropriate in light of
Hardcore's current financial condition which, among other relevant factors,
make the collection of the promissory notes doubtful.

         In September 2004, the Company was named a defendant in a civil
action filed by a former investment banker that was retained by the Company
to obtain equity investors, alleging breach by the Company of its
obligations under the agreement signed by the parties. The investment banker
alleges it is owed commission from the equity investment obtained by the
Company from a different source. The Company has asserted various defenses,
including that the investment banker breached the agreement by not
performing reasonable efforts to obtain financing for the Company, and
therefore, the agreement was terminated by the Company prior to obtaining
new financing. A decision granting summary judgment against the Company was
entered in April 2005 and a trial on damages took place in December 2005,
after which a judgment was filed in May 2006 against the Company in the
amount of $4.1 million in cash and an order to issue warrants to purchase
122,888 shares of the Company's common stock at various prices. To date the
Company has not made payments of any portion of this obligation, although it
posted an appeal bond in the amount of $6.6 million. During the second
quarter of 2006, the Company accrued $0.5 million in respect of the possible
liability in this matter, which it believes is its maximum obligation under
this claim. Management currently believes that the ultimate resolution of
this litigation will not have a material adverse effect on the Company's
results of operations, financial condition or cash flow, however, if the
Company's appeal is unsuccessful, the resulting settlement could materially
impact the Company's results of operations. The Company is vigorously
defending this matter and has filed counterclaims and an appeal.

CRITICAL ACCOUNTING ESTIMATES
-----------------------------

         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").

ACCOUNTS RECEIVABLE COLLECTIBILITY

         The Company evaluates the collectibility of our accounts receivable
for each of our segments based on a combination of factors. In circumstances
where we are aware of a specific customer's inability to meet its financial
obligations to us (e.g., bankruptcy filing or substantial downgrading of
credit), we record a specific reserve for bad debts against the amounts due
reducing the net recognized receivable to the amount we estimate will be
collected. For all other customers, we estimate reserves for bad debts based
on the length of time receivables have been past due and our experience with
collection. Our bad debt expense on accounts receivables was $0.3 million
for 2006 and $0.7 million for 2005.

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.

                                     35

<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 Abilene so presentation of these costs separately from cost
of goods sold was not included for fiscal 2006.

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.

         We are subject to the jurisdiction of numerous tax authorities. Our
operations in these different jurisdictions are generally taxed on income
before taxes adjusted for various differences between tax law and GAAP
accounting. Determination of taxable income in any jurisdiction requires the
interpretation of the related tax laws and regulations and the use of
estimates and assumptions regarding significant future events such as the
amount, timing and character of deductions, permissible revenue recognition
methods under the tax law and the sources and character of income and tax
credits. Changes in tax laws, regulations, agreements and treaties, foreign
currency exchange restrictions or our level of operations or profitability
in each taxing jurisdiction could have an impact on the amount of income
taxes that we provide during any given year. Our tax filings for various
periods are subject to audit by the tax authorities in the jurisdictions in
which we conduct business.

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. At
September 30, 2006, the Company did not have any interest rate swap
agreements outstanding.

         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, Zoltek
Rt. is exposed to foreign currency risks related to this investment. The
Company does not currently employ a foreign currency hedging strategy
related to the sales of Zoltek Rt. In terms of foreign currency translation
risk, the Company is exposed to Zoltek Rt.'s functional currency, which is
the Hungarian Forint. Hungary is not considered to be a highly inflationary
or deflationary economy. As of September 30, 2006, the Company has a
long-term loan with its Zoltek Rt. subsidiary of $60.1 million. The Company
does not expect the loan to be repaid in the near future. In fact the
Company 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 until repayment occurs.
In addition, Zoltek Rt. routinely sells


                                     36

<PAGE>
<PAGE>

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.

         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 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 separates 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 $0.9 million and $13.7 million at September 30,
2006 and 2005 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.

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, 2006.

         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
Chief Executive Officer
December 27, 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 integrated audits of Zoltek Companies, Inc.'s 2006 and 2005
consolidated financial statements and of its internal control over financial
reporting as of September 30, 2006, and an audit of its 2004 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, 2006 and 2005, and the
results of their operations and their cash flows for each of the three years
in the period ended September 30, 2006 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.

As discussed in Note 10 to the consolidated financial statements, the Company
changed the manner in which it accounts for share-based compensation in fiscal
2006.

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, 2006 because the Company did not
maintain effective controls over the accounting for inventory, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway

                                      38

<PAGE>
<PAGE>

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
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 have been identified
and included in management's assessment as of September 30, 2006.

                                      39

<PAGE>
<PAGE>

The Company did not maintain effective controls over the accounting for
inventory, which resulted in the following material weaknesses.

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

     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 and (ii)
         perform the proper analysis and review of inventory manufacturing
         variances for capitalization at period-end.

     The control deficiencies described 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.

These material weaknesses were considered in determining the nature, timing,
and extent of audit tests applied in our audit of the 2006 consolidated
financial statements, and our opinion 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, 2006 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, 2006, based on criteria established in
Internal Control - Integrated Framework issued by the COSO.




/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
St. Louis, Missouri
December 27, 2006

                                      40

<PAGE>
<PAGE>

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

<CAPTION>
ASSETS                                                                                                   September 30,
----------------------------------------------------------------------------------------------------------------------------
                                                                                                    2006             2005
                                                                                                  ---------        --------
Current assets:
<C>                                                                                               <C>              <C>
     Cash and cash equivalents.................................................................   $  10,802        $    255
     Restricted cash...........................................................................       6,634               -
     Accounts receivable, less allowance for doubtful accounts of $729 and $718, respectively..      17,009          11,101
     Inventories...............................................................................      21,721          24,753
     Other current assets......................................................................       6,915           3,195
                                                                                                  ---------        --------
          Total current assets.................................................................      63,081          39,304

Property and equipment, net....................................................................     122,284          88,018

Other assets...................................................................................       2,319           3,107
                                                                                                  ---------        --------
          Total assets.........................................................................   $ 187,684        $130,429
                                                                                                  =========        ========

LIABILITIES AND SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------------------------------------------------------
Current liabilities:
     Current maturities of long-term debt......................................................   $   1,365        $    374
     Trade accounts payable....................................................................      11,935          13,267
     Notes payable.............................................................................           -             442
     Legal liability (see Note 8)..............................................................      21,835               -
     Accrued expenses and other liabilities....................................................       7,904           6,149
                                                                                                  ---------        --------
          Total current liabilities............................................................      43,039          20,232
Other long-term liabilities....................................................................          79             107
Value of warrants and beneficial conversion feature associated with convertible debt
  obligations..................................................................................         903          29,024
Long-term debt, less current maturities........................................................      32,002          40,421
                                                                                                  ---------        --------
          Total liabilities....................................................................      76,023          89,784
                                                                                                  ---------        --------
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,
        25,652,982 and 19,213,384 shares issued and outstanding in 2006 and 2005, respectively.         258             189
     Additional paid-in capital................................................................     287,299         148,982
     Accumulated other comprehensive loss......................................................     (14,389)        (12,821)
     Accumulated deficit ......................................................................    (161,507)        (95,705)
                                                                                                  ---------        --------

          Total shareholders' equity...........................................................     111,661          40,645
                                                                                                  ---------        --------
          Total liabilities and shareholders' equity...........................................   $ 187,684        $130,429
                                                                                                  =========        ========

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

                                     41

<PAGE>
<PAGE>

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

<CAPTION>
                                                                                     Fiscal Year Ended September 30,
-------------------------------------------------------------------------------------------------------------------------
                                                                                  2006            2005            2004
                                                                                --------        --------        --------

<S>                                                                             <C>             <C>             <C>
Net sales...................................................................    $ 92,357        $ 55,377        $ 34,525
Cost of sales, excluding available unused capacity costs....................      69,994          52,809          29,137
Available unused capacity costs.............................................           -           2,347           4,466
Application and development costs...........................................       4,887           3,324           3,070
Litigation charge (see Note 8)..............................................      22,795               -               -
Selling, general and administrative expenses................................      10,356           4,523           3,393
                                                                                --------        --------        --------
     Operating loss from continuing operations..............................     (15,675)         (7,626)         (5,541)

Other income (expense):
     Interest expense, excluding amortization of financing fees, debt
       discount and beneficial conversion feature...........................      (2,645)         (2,960)         (3,429)
     Amortization of financing fees and debt discount.......................     (16,532)         (8,469)         (2,577)
     Loss on value of warrants and beneficial conversion feature............     (29,303)        (16,574)         (4,920)
     Interest income........................................................         281               2              21
     Other, net.............................................................      (1,003)         (1,876)           (213)
                                                                                --------        --------        --------
         Loss from continuing operations before income taxes................     (64,877)        (37,503)        (16,659)
Income tax expense..........................................................         888             708             434
                                                                                --------        --------        --------
Net loss from continuing operations.........................................     (65,765)        (38,211)        (17,093)
                                                                                --------        --------        --------

Discontinued operations:
     Operating loss, net of taxes...........................................        (187)         (2,182)         (5,055)
     Gain (loss) on disposal of discontinued operation, net of taxes........         150               -            (659)
                                                                                --------        --------        --------
         Net loss on discontinued operations, net of taxes..................         (37)         (2,182)         (5,714)
                                                                                --------        --------        --------
Net loss....................................................................    $(65,802)       $(40,393)       $(22,807)
                                                                                ========        ========        ========

Net loss per share:

     Basic and diluted loss per share:
            Continuing operations...........................................    $  (2.91)       $  (2.12)       $  (1.04)
            Discontinued operations.........................................       (0.00)          (0.12)          (0.35)
                                                                                --------        --------        --------
                Total.......................................................    $  (2.91)       $  (2.24)       $  (1.39)
                                                                                ========        ========        ========

Weighted average common shares outstanding - basic and diluted...............     22,575          18,050          16,372

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

                                     42

<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)
------------------------------------------------------------------------------------------------------------------------------------

<C>                                       <C>          <C>       <C>             <C>            <C>       <C>            <C>
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)

Net loss..............................     (65,802)                                                         (65,802)     $(65,802)

Foreign currency translation
  adjustment..........................      (1,568)                                (1,568)                                 (1,568)
                                                                                                                         --------
Comprehensive loss....................                                                                                   $(67,370)
                                                                                                                         ========
Value of warrants and conversion
  feature at time of conversion.......      57,451                 57,451
Unamortized value of convertible debt
  discount at time of conversion......     (10,165)               (10,165)
Warrants exercised....................      10,456       17        10,439
Value of warrants and beneficial
  conversion feature issued
  with convertible debt...............      30,992                 30,992
Convertible debt converted............      47,308       47        47,261
Issuance cost related to convertible
  debt conversions....................      (1,403)                (1,403)
Stock option awards...................         969                    969
Exercise of stock options.............       2,778        5         2,773
                                          --------     ----      --------        --------       -------   ---------
Balance, September 30, 2006...........    $111,661     $258      $287,299        $(14,389)      $     -   $(161,507)
                                          ========     ====      ========        ========       =======   =========

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

                                     43

<PAGE>
<PAGE>

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

<CAPTION>
                                                                                    Fiscal Year Ended September 30,
-----------------------------------------------------------------------------------------------------------------------
                                                                                    2006          2005          2004

<C>                                                                               <C>           <C>           <C>
Cash flows from operating activities:
     Net loss..............................................................       $(65,802)     $(40,393)     $(22,807)
     Net loss from discontinued operations.................................             37         2,182         5,714
                                                                                  --------      --------      --------
     Net loss from continuing operations...................................        (65,765)      (38,211)      (17,093)
     Adjustments to reconcile net loss to net cash provided by (used in)
       operating activities:
         Depreciation and amortization.....................................          5,853         5,142         5,462
         Amortization of financing fees, debt discount and beneficial
           conversion feature..............................................         16,532         8,469         2,577
         Loss on value of warrants and beneficial conversion feature.......         29,303        16,574         4,920
         Litigation charge.................................................         21,835             -             -
         Foreign currency transaction losses...............................              -             -           128
         Share based compensation expense..................................            969             -             -
         Other, net........................................................              -           117           (38)
         Changes in assets and liabilities:
              Increase in accounts receivable..............................         (6,772)       (1,276)       (4,537)
              (Increase) decrease in inventories...........................          2,318           (10)         (505)
              (Increase) decrease in prepaid expenses and other assets.....         (3,686)         (793)          169
              Increase in trade accounts payable...........................            658         2,828         2,644
              Increase (decrease) in accrued expenses and other liabilities          2,035           (69)       (1,777)
              Decrease in other long-term liabilities......................            (25)         (366)           (1)
                                                                                  --------      --------      --------
     Net cash provided by (used in) continuing operations..................          3,255        (7,595)       (8,051)
     Net cash provided by (used in) discontinued operations................           (450)       (1,505)          833
                                                                                  --------      --------      --------
Net cash provided by (used in) operating activities........................          2,805        (9,100)       (7,218)
                                                                                  --------      --------      --------

Cash flows from investing activities:
     Purchases of property and equipment...................................        (40,795)      (14,765)       (5,919)
     Proceeds from sale of property and equipment..........................              -             1           137
     Change in cash restricted for letters of credit.......................         (6,634)            -             -
                                                                                  --------      --------      --------
  Net cash used in continuing operations...................................        (47,429)      (14,764)       (5,782)
  Net cash used in discontinued operations.................................            (11)          (26)          (90)
                                                                                  --------      --------      --------
Net cash used in investing activities......................................        (47,440)      (14,790)       (5,872)
                                                                                  --------      --------      --------

Cash flows from financing activities:
     Proceeds from exercise of stock options and warrants..................         13,234         2,947           255
     Proceeds from issuance of convertible debt............................         47,505        45,000        12,750
     Proceeds from issuance of notes payable...............................              -             -        12,581
     Proceeds from issuance of note payable to related party...............              -             -         1,400
     Payment of financing fees.............................................         (1,541)       (1,693)       (1,249)
     Repayment of notes payable and long-term debt.........................         (3,744)      (22,349)      (11,811)
     Repayment of note payable to related party............................              -             -        (1,400)
                                                                                  --------      --------      --------
Net cash provided by financing activities..................................         55,454        23,905        12,526
                                                                                  --------      --------      --------
Effect of exchange rate changes on cash....................................           (272)          (26)           (7)
                                                                                  --------      --------      --------
Net increase (decrease) in cash and cash equivalents.......................         10,547           (12)         (571)
Cash and cash equivalents at beginning of year.............................            255           267           838
                                                                                  --------      --------      --------
Cash and cash equivalents at end of year...................................       $ 10,802      $    255      $    267
                                                                                  ========      ========      ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the year for:
     Interest..............................................................       $  3,793      $  3,679      $  3,436
     Income taxes..........................................................            888           708           434
Non-cash conversion of convertible securities..............................         47,308        13,161             -


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

                                     44

<PAGE>
<PAGE>



                           ZOLTEK COMPANIES, INC.
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------
ORGANIZATION AND 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"). Unless the context otherwise indicates, the words
"we", "our", "us", and similar terms, as well as "Company" and "Zoltek",
refer to Zoltek and all of its subsidiaries. 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 carbon fibers and manufactures precursor raw material used in
production of carbon fibers. During the fourth quarter of fiscal 2005, the
Company formally adopted a plan to discontinue and exit the CMC division of
Zoltek Rt. During the fourth quarter of fiscal 2006, the Company formally
adopted a plan to discontinue and sell its Netlon division and exit its
Danamid Granules division of Zoltek Rt. 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 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.

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 Entec
Composite Machines 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. Entec Composite Machines earned revenue of $4.1 million for
fiscal 2006. 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 quarterly 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 industries. Entec Composite Machines' products
are primarily sold in the composite industry. 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, 2006 and 2005, the Company
reported sales of $19.0 million and $9.0 million, respectively, to a wind
blade manufacturer which was the only customer that represented greater than
10% of the Company's total consolidated revenues.

CASH AND CASH EQUIVALENTS

         Cash equivalents, include certificates of deposit and overnight
repurchase agreements, all of which have initial maturities of three months
or less. Cash equivalents are stated at cost plus accrued interest, which
approximates market value. The


                                     45

<PAGE>
<PAGE>

Company places its temporary cash investments with high credit quality
financial institutions, however, at times such investments may be in excess of
the Federal Deposit Insurance Corporation ("FDIC") insurance limit of $100,000
for U.S. Banks. As of September 30, 2006 and 2005, the Company had
approximately $16.7 million and $21,000 in excess of FDIC insured limits,
respectively.

INVENTORIES

         Inventories are valued at the lower of cost or market and are
removed from inventory under the first-in-first-out method ("FIFO"). Cost of
inventory includes material, labor and overhead. The Company recorded
inventory valuation reserves of $1.3 million and $3.1 million as of
September 30, 2006 and 2005, respectively, to reduce the carrying value of
inventories to a net realizable value. No material increases to the reserve
were required in the current year. The reserves were established primarily
due to industry overcapacity conditions for certain carbon fiber products in
prior years.

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 to 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 of
$3.1 million during fiscal 2006 and $1.2 million during fiscal 2005 related to
its carbon fiber capacity expansion in Hungary. The Company did not capitalize
interest in fiscal 2004. 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 30 years
             Machinery and equipment.........................3 to 20 years
             Furniture and fixtures..........................7 to 10 years
             Computer hardware and software..................2 to 5 years

         Depreciation expense was $5.9 million, $5.1 million, and $5.5
million for fiscal years ended 2006, 2005 and 2004, 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. No
impairment of long-lived assets existed as of fiscal year end.

FOREIGN CURRENCY TRANSLATION

         The consolidated balance sheet of the Company's 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, 2006 and 2005.

         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, 2006 and 2005.

         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 accounted for the fair value of
these outstanding warrants to purchase common stock and


                                     46

<PAGE>
<PAGE>

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 require the Company
to 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 separates 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 $0.9 million and $29.0 million at September 30,
2006 and 2005, respectively.

APPLICATION AND DEVELOPMENT EXPENSES

         The Company is actively pursuing the development of a number of
applications for the use of its carbon fibers 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 $4.9 million, $3.3 million
and $3.1 million for the years ended September 30, 2006, 2005 and 2004.
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 will 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. Certain tax disclosures as of and for the year ended September 30, 2005,
as reflected in Note 6 - Income Taxes, have been revised in relation to
previously reported amounts to correct typographical and clerical errors.

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 at September 30, 2006 and 2005 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 4.3 million shares for fiscal 2006 and 6.6
million shares for fiscal 2005 would have been included in the Company's
diluted earnings per share calculation. Certain tax disclosures as of and for
the year ended September 30, 2005, as reflected in Note 6 - Income Taxes, have
been revised in relation to previously reported amounts to correct
typographical and clerical errors.

RECENT ACCOUNTING PRONOUNCEMENT

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

         EITF Issue No. 05-8, "Income Tax Consequences of Issuing
Convertible Debt with a Beneficial Conversion Feature," will be effective
for fiscal year ending September 2007. The Company does have convertible
debt with beneficial conversion features. However, the Company currently has
a large net operating loss carryforward which would offset any deferred tax
liability arising from the book to tax difference in treatment of the
beneficial conversion feature.

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


                                     47

<PAGE>
<PAGE>

fiscal year ending September 30, 2007. The Company believes this new
pronouncement will have an immaterial impact on the Company's financial
statements in future periods.

         On July 13, 2006, FASB released its final interpretation on
uncertain tax positions, FIN 48, "Accounting for Uncertainty in Income
Taxes." FIN 48 addresses the recognition and measurement of uncertain income
tax positions using a "more-likely-than-not" threshold and introduces a
number of new disclosure requirements. The guidance will become effective as
of the beginning of a company's fiscal year beginning after December 15,
2006, for both public and non-public companies. The Company is currently
evaluating this guidance for its potential effects on current tax
provisions.

         FASB statement No. 157 "Fair Value Measurements", issued in
September of 2006, defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. This statement is effective for
financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The Company believes
that this new pronouncement will have an immaterial impact on the Company's
financial statements in future periods.

         FASB statement No. 158 "Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans", was issued in September of 2006. It
requires an employer to recognize the overfunded or underfunded status of a
defined benefit postretirement plan as an asset or liability in its balance
sheet and to recognize changes in that funded status in the year in which
the changes occur through its income statement. An employer with publicly
traded equity securities is required to initially recognize the funded
status of a defined benefit postretirement plan and to provide the required
disclosures as of the end of the fiscal year ending after December 15, 2006.
The Company does not currently participate in defined benefit pension plans
or other postretirement plans.

         In September 2006, the U.S. Securities and Exchange commission (SEC)
issued Staff Accounting Bulletin No. 108, "Quantifying Financial Statement
Misstatements" (SAB 108), which provides interpretive guidance on how
registrants should quantify misstatements when evaluating the materiality of
financial statement errors. SAB 108 also provides transition accounting and
disclosure guidance for situations in which a material error existed in prior
period financial statements by allowing companies to restate prior period
financial statements or recognize the cumulative effect of initially applying
SAB 108 through an adjustment to beginning retained earnings in the year of
adoption. SAB 108 is effective for the Company in fiscal 2007. The Company
does not expect the adoption of SAB 108 will have a material impact on the
consolidated financial statements.

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

Fiscal 2007 Financing Activity
------------------------------

         The Company will be required to post a bond related to the SP
Systems case of approximately $40.0 million during the appeals process, or a
lesser amount if its post-trial motion to reduce the amount of the judgment
is granted. The Company has raised the funding necessary for the bond with a
$10.0 million loan collateralized by certain real estate of the Company at
an interest rate of 7.5% with a due date of January 1, 2008, a $10.0 million
loan from the Company's Chief Executive Officer, the proceeds from the
exercise of 827,789 warrants for $11.9 million by existing institutional
shareholders and the remainder with the Company's cash on hand. The Company
issued the existing institutional shareholders an additional 827,789
warrants at an exercise price of $28.06 with a six-year life in exchange for
the institutional shareholders agreement to exercise the aforementioned
warrants. As of the date of this filing, the Company has executed an
agreement with their bank for the $10.0 million term loan, the warrants have
been exercised and the Company's Chief Executive Officer has loaned the
Company $10.0 million with a financial interest rate of the Cost of Funds
due January 2, 2008. No covenants are associated with the $10.0 million
term loan from the bank or the $10.0 million term loan from the Company's Chief
Executive Officer. Additionally, the $10.0 million term loan to the bank is
guaranteed by the Company's Chief Executive Officer. This guarantee will
remain in place until certain conditions of the credit agreement are
fulfilled, primarily, the delivery of appraisals related to the real estate
properties collateralized by the term loan.

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

          During the fiscal year ended September 30, 2006, the investors
converted $47.3 million principal and interest amount of the convertible
debt privately placed in the February 2003, October 2004, February 2005 and
September 2005 issuances into 4,738,486 shares of common stock, which was
recorded into equity. The Company also recorded into equity the fair market
value of the conversion feature at the time of conversion of the debt issued
in the October 2004 and February 2005 issuances, which was valued at $57.5
million and offset by a reduction to equity of $10.2 million for the
unamortized portion of the debt discount. Also, at the time of conversion,
the Company reclassified the unamortized deferred financing cost of $1.4
million related to these issuances into additional paid-in capital. The
February 2005 issuance also had a beneficial conversion feature, of which
$6.8 million was unamortized at the time of conversion and was recorded as an


                                     48

<PAGE>
<PAGE>

expense into amortization of financing fees and debt discount. Subsequent to
these conversions, the October 2004 and February 2005 issuances have been
fully converted into the Company's common stock.

         In September 2005, Zoltek entered into an agreement for a new
financing; a convertible debenture package of up to $50 million in a private
placement with a group of institutional investors. In April 2006, the
Company amended the September 2005 financing package to provide for an
additional $10.0 million funding. In order to match the cash needs to
support the Company's planned expansion, the financing arrangements provided
for the funding to occur in six separate closings discussed in the following
paragraphs. These financings are collateralized by the carbon fiber assets
of the Company's Hungarian subsidiary.

         The closing on September 30, 2005 included a draw down of $5.0
million. The borrowing matures 42 months from the closing date and bears
interest at a fixed rate of 7.5% annum. The debentures are convertible into
Zoltek common stock of 400,000 shares at a conversion price of $12.50 per
share. The debentures were issued with five-year warrants that give holders
the right to purchase up to 140,000 shares of Zoltek common stock at an
exercise price of $14.50 per share. The fair value of the debt discount
associated with the warrants and conversion features at the time of
issuances was $1.0 million and will be accreted to the debt's face value
over the life of the convertible debentures.

         In December 2005, the Company issued convertible debentures in the
aggregate principal amount of $15.0 million to institutional private equity
investors. The convertible debentures had a stated maturity of 42 months and
bore interest at a fixed rate of 7.5% annum. The convertible debentures are
convertible into 1,200,000 shares of Zoltek common stock at a conversion
price of $12.50 per share The Company also issued to the investors five-year
warrants that give holders the right to purchase up to 420,000 shares of
Zoltek common stock at an exercise price of $14.50 per share. The fair value
of the debt discount associated with the warrants and conversion features at
the time of issuances was $1.9 million and will be accreted to the debt's
face value over the life of the convertible debentures.

         In February 2006, the Company issued convertible debentures in the
aggregate principal amount of $10.0 million to institutional private equity
investors. The convertible debentures had a stated maturity of 42 months and
bore interest at a fixed rate of 7.5% annum. The convertible debentures are
convertible into 765,110 shares of Zoltek common stock at a conversion price
of $15.16 per share The Company also issued to the investors five-year
warrants that give holders the right to purchase up to 267,789 shares of
Zoltek common stock at an exercise price of $15.16 per share. The fair value
of the debt discount associated with the warrants and conversion features at
the time of issuances was $4.6 million and will be accreted to the debt's
face value over the life of the convertible debentures.

         In May 2006, the Company issued convertible debentures in the
aggregate principal amount of $20 million to institutional private equity
investors. The convertible debentures had a stated maturity of 42 months and
bore interest at a fixed rate of 7.5% annum. However, after 18 months, the
interest rate will be LIBOR plus 4% per annum. The convertible debentures
are convertible into 784,006 shares of Zoltek common stock at a conversion
price of $25.51 per share. The Company also issued to the investors five-year
warrants that give holders the right to purchase up to 274,406 shares of
Zoltek common stock at an exercise price of $28.06 per share. The fair value
of the debt discount associated with the warrants and conversion features at
the time of issuances was $17.1 million and will be accreted to the debt's
face value over the life of the convertible debentures.

         In July 2006, the Company issued convertible debentures in the
aggregate principal amount of $2.5 million to institutional private equity
investors. The convertible debentures had a stated maturity of 42 months and
bore interest at a fixed rate of 7.5% annum. However, after 18 months, the
interest rate will be LIBOR plus 4% per annum. The convertible debentures
are convertible into 98,000 shares of Zoltek common stock at a conversion
price of $25.51 per share. The Company also issued to the investors five-year
warrants that give holders the right to purchase up to 34,370 shares of
Zoltek common stock at an exercise price of $28.06 per share. The fair value
of the debt discount associated with the warrants and conversion features at
the time of issuances was $1.7 million and will be accreted to the debt's
face value over the life of the convertible debentures.

         In October 2006, the Company issued convertible debentures in the
aggregate principal amount of $7.5 million to institutional private equity
investors. The convertible debentures had a stated maturity of 42 months and
bore interest at a fixed rate of 7.5% annum. However, after 18 months, the
interest rate will be LIBOR plus 4% per annum. The convertible debentures
are convertible into 294,002 shares of Zoltek common stock at a conversion
price of $25.51 per share. The


                                     49

<PAGE>
<PAGE>

Company also issued to the investors five-year warrants that give holders
the right to purchase up to 102,835 shares of Zoltek common stock at an
exercise price of $28.06 per share.

         As part of the amended financing agreement, Zoltek reduced the
conversion price on its outstanding convertible debt in the aggregate
principal amount of $20.0 million issued in October 2004 from $12.00 to
$9.50 per share, with the requirement that conversion take place within 30
days of the December closing. In connection with the April 2006 amendment,
the investors converted the $20.0 million convertible notes previously
issued in February 2005 into approximately 1,000,000 shares of common stock
and exercised associated warrants for 1,052,000 shares related to October
2004 and February 2005 issuances. The Company also issued the investors up
to 111,113 shares of common stock at an exercise price of $.01 per share.
The fair value of the $0.01 per share warrants at the time of issuance was
$3.3 million and was expensed in amortization of financing fees and debt
discount during the third quarter of 2006.

         In December 2006, the Company extended this line of credit until
January 1, 2008. The credit facility consists of a revolving credit and term
loan with maximum available borrowings of $5.5 million of which $1.7 million
and $5.5 million were available as of September 30, 2005 and June 30, 2006,
respectively. The Company is utilizing the proceeds of the $60.0 million
financing package to support its previously announced capacity expansion
program. The Company believes this is sufficient to fund near-term liquidity
needs but its capacity expansion plans for fiscal 2007 and beyond will require
additional debt and equity financing.

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

         During the quarter ended March 31, 2005, the investors converted
$13.0 million of convertible debt issued in January and March 2004 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, offset by a
reduction to equity of $5.5 million for the unamortized portion of the debt
discount.

         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 had a stated maturity of 42 months and
bore interest at a variable rate of six-month LIBOR plus 4%, which was 7.5%
at March 2005, and converted into 1,000,000 shares of common stock at a
conversion price of $20.00 per share. These notes were converted into common
stock in May 2006. The Company also issued to the investors four-year
warrants to purchase an aggregate of 457,142 shares of common stock of the
Company at an exercise price of $17.50 per share. These warrants were
exercised in May 2006. The fair value of the debt discount associated with
the warrants and conversion feature of the debt at the time of issuance was
$15.3 million and was being amortized over the life of the convertible debt.
Proceeds from issuance of these convertible debentures were used to repay
mortgage debt of $6.0 million and the balance to expand the capacity of
carbon fiber operations to meet demand. The repayment of the $6.0 million
mortgage note had a stated maturity of three years and bore interest at a
rate of LIBOR plus 11% with a LIBOR floor of 2%. The Company paid a
prepayment fee of $0.3 million, which was expensed to the Company's
statement of operations at the repayment date. The Company also wrote off
the unamortized amount of the deferred financing cost related to the
original issuances of the note of $0.4 million.

         In October 2004, the Company issued convertible debentures in the
aggregate principal amount of $20.0 million to institutional private equity
investors. The convertible debentures had a stated maturity of 42 months and
bore interest at 7.5% per annum and were initially convertible into
1,666,666 shares of common stock at a conversion price of $12.00 per share.
In connection with the September 2005 issuance the conversion price was
adjusted to $9.50 per share, resulting in the potential issuance of
2,105,263 shares upon conversion. The Company also issued to the investors
six-year warrants to purchase an aggregate of 500,000 shares of common stock
of the Company at an exercise price of $13.00 per share. The fair value of
the debt discount associated with the warrants and conversion feature of the
debt at the time of issuance was $10.2 million and was being amortized over
the life of the convertible debt. Proceeds from issuance of these
convertible debentures were used to reduce existing Hungarian bank debt by
$12.0 million and the balance for working capital purposes which allowed the
Company to refinance the remaining Hungarian bank debt to a three-year term
loan for $3.0 million with no financial covenants going forward. These
convertible debentures and warrants have been converted into and exercised
for the Company's common stock during 2006.



                                     50

<PAGE>
<PAGE>

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

         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 were then 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. 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.

                                     51

<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 as of December 20,
2006:

<TABLE>
                         CONVERTIBLE DEBT ISSUANCES FISCAL 2003 THROUGH FISCAL 2005
                         ----------------------------------------------------------

<CAPTION>
                                          FEBRUARY    JANUARY    MARCH    OCTOBER    FEBRUARY    SEPTEMBER
                                           2003(1)     2004      2004       2004       2005        2005(1)
                                           ----        ----      ----       ----       ----        ----
<C>                                       <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.......................      7.0%       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 warrants....................      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%
Converted...........................      Partial    Yes        Yes        Yes         Yes         Partial
Warrants exercised..................      Partial    Yes        Yes        Yes         Yes         Yes

<CAPTION>
                         CONVERTIBLE DEBT ISSUANCES FISCAL 2006 THROUGH FISCAL 2007
                         ----------------------------------------------------------

                                          DECEMBER    FEBRUARY     MAY        JULY     OCTOBER
                                           2005(1)     2006(1)    2006(1)    2006(1)    2006(1)
                                           ----        ----       ----       ----       ----
<C>                                       <C>        <C>        <C>        <C>         <C>
Amount of debenture (millions)......      $15.0      $10.0      $20.0      $2.5        $7.5
Per share conversion price on
  debenture.........................      $12.5      $13.07     $25.51     $25.51      $25.51
Interest rate.......................      7.5%       7.5%       7.5%       7.5%        7.5%
Term of debenture...................      42 months  42 months  42 months  42 months   42 months
Warrants issued.....................      420,000    267,789    274,406    34,370      102,835
Term of warrants....................      60 months  60 months  60 months  60 months   60 months
Per share exercise price of
  warrants..........................      $14.50     $15.16     $28.06     $28.06      $28.06
Fair value per warrant at
  issuance..........................      $5.92      $10.56     $26.03     $23.89      $22.13
Value per share conversion
  feature at issuance...............      $10.72     $10.20     $18.80     $19.21      $19.57
Stock price on date of agreement....      $8.80      $13.99     $32.25     $29.28      $26.81
Stock volatility at issuance........      96%        99%        106%       111%        117%
Dividend yield......................      0.0%       0.0%       0.0%       0.0%        0.0%
Risk-free interest rate at issuance.      4.28%      4.28%      4.88%      4.88%       4.65%
Converted...........................      No         No         No         No          No
Warrants exercised..................      Yes        Yes        No         No          No

<FN>
-------------------
(1) The warrants issued in connection with the February 2003, September
    2005, December 2005, February 2006, May 2006, July 2006 and October
    2006 convertible issuances meet the criteria of EITF 00-19 for equity
    classification, as they do not contain similar registration rights
    obligations with respect to the underlying shares. Accordingly, the
    conversion features do not require derivative accounting. The
    September 2005, February 2006, May 2006, July 2006 and October 2006
    issuances do have a beneficial conversion feature; however, the
    February 2003 and December 2005 issuances have no beneficial
    conversion feature.
</TABLE>

                                     52

<PAGE>
<PAGE>

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. Since the effective registration of the
securities underlying the conversion feature and warrants is an event
outside of the control of the Company, 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 were reflected in the consolidated statement of
operations as "Gain (loss) on value of warrants and conversion feature." The
Company accounted 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." The gain or loss related to these securities is based on changes in
the Company's stock price during the period. As the Company's stock price
increased the value of the derivative security increased, therefore the
Company recorded a loss. As the Company's stock price decreased the value of
the derivative security decreased, therefore the Company recorded a gain.
When the convertible security was converted, the underlying liability of
derivative was removed from long-term debt and recorded as an increase to
the Company's equity. As a result of the above-described amendment of the
convertible debt financing package in April 2006 and the transactions
contemplated thereby, the derivative accounting treatment described above
was terminated in the quarter ended June 30, 2006. See table below for
impact on the financial results for the year-end financial results ended
September 30, 2006, 2005 and 2004 (amounts in thousands).

<TABLE>
<CAPTION>
                                                                  FISCAL YEAR ENDED SEPTEMBER 30, 2006
                                                                  ------------------------------------
                                                                               CONVERSION
                                                                  WARRANTS      FEATURES         TOTAL
                                                                  --------      --------         -----
<C>                                                             <C>             <C>           <C>
         January 2004 issuance - mark to market ................ $  (1,413)     $       -      $  (1,413)
         March 2004 issuance - mark to market ..................      (730)             -           (730)
         October 2004 issuance - mark to market.................    (2,902)        (5,671)        (8,573)
         February 2005 issuance - mark to market................    (1,788)       (16,799)       (18,587)
                                                                 ---------      ---------      ---------
                  Loss on value of warrants and
                    conversion feature.......................... $  (6,833)     $ (22,470)     $ (29,303)
                                                                 =========      =========      =========

<CAPTION>
                                                                   FISCAL YEAR ENDED SEPTEMBER 30, 2005
                                                                   ------------------------------------
                                                                                CONVERSION
                                                                  WARRANTS       FEATURES        TOTAL
                                                                  --------       --------        -----
<C>                                                             <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
                                                                 ---------      ---------      ---------
                  Loss on value of warrants and
                    conversion feature.......................... $  (2,711)     $ (13,863)     $ (16,574)
                                                                 =========      =========      =========

<CAPTION>
                                                                   FISCAL YEAR ENDED SEPTEMBER 30, 2004
                                                                   ------------------------------------
                                                                               CONVERSION
                                                                  WARRANTS      FEATURES         TOTAL
                                                                  --------      ---------        -----
<C>                                                             <C>             <C>           <C>
         January 2004 issuance - mark to market ................ $  (1,109)     $  (4,039)     $  (5,148)
         February 2004 issuance - mark to market................        18            210            228
                                                                 ---------      ---------      ---------

                  Loss on value of warrants and
                    conversion feature.......................... $  (1,091)     $  (3,829)     $  (4,920)
                                                                 =========      =========      =========
</TABLE>


Amortization of Financing Fees and Debt Discount
------------------------------------------------

         At the time of issuance of convertible debt securities with
warrants, the Company records the fair value associated with the warrants
using the Black-Scholes option-pricing model. This fair value discount is
recorded as a reduction in the carrying value of the convertible debt
security that is accreted to its face value over the life of the convertible
security and expensed into the Company's income statement. If the
convertible security is converted prior to the redemption date, the
unamortized debt discount associated with the valuation of the warrants is
recorded as a reduction to additional paid-in capital at the time of
conversion.

                                     53

<PAGE>
<PAGE>

         As part of the April 2006 amendment to the September 2005
convertible debt issuance, the Company issued the investors five-year
warrants to purchase 111,113 shares of common stock at an exercise price of
$.01 per share as an inducement to the holders to convert the February 2005
issuance. The fair value of the warrants issued of $3.3 million was expensed
during the quarter ended June 30, 2006 and is included in amortization of
financing fees and debt discount in the statement of operations.

         The February 2005, February 2006, May 2006 and July 2006 issuances
were considered to have a beneficial conversion feature because the adjusted
conversion price after allocating a portion of the proceeds to the warrants,
as discussed above, was less than the Company's market price of common stock
at date of issue. The beneficial conversion is recorded as a reduction in
the carrying value of the convertible debt security and is accreted to its
face value over the life of the convertible security and expensed into the
Company's income statement. If the convertible security is converted prior
to the redemption date, the unamortized balance is recorded in expense at
the time of conversion. During the third quarter of fiscal 2006, the
February 2005 issuance, which had a beneficial conversion feature, was
converted and the Company recorded an expense $5.0 million for the
unamortized portion on the beneficial conversion feature which is included
in amortization of financing fees and debt discount in the statement of
operations.

         See the table below for impact of amortization of financing fees
and debt discount on the financial results for the fiscal year 2006, 2005
and 2004 (amounts in thousands).

<TABLE>
<CAPTION>
                                                                   FISCAL YEAR ENDED SEPTEMBER 30, 2006
                                                                   ------------------------------------
                                                                                CONVERSION
                                                                  WARRANTS       FEATURES        TOTAL
                                                                  --------       --------        -----
<C>                                                             <C>             <C>            <C>
October 2004 issuance........................................... $     204      $     400      $     604
February 2005 issuance..........................................       834          7,830          8,664
September 2005 issuance.........................................       906              -            906
December 2005 issuance..........................................       548              -            548
February 2006 issuance..........................................       312            694          1,006
May 2006 issuance...............................................     3,524            332          3,856
July 2006 issuance..............................................        28             34             62
                                                                 ---------      ---------      ---------
                                                                 $   6,356      $   9,290      $  15,646
                                                                 =========      =========      =========
         Deferred financing costs...............................                                     886
                                                                                               ---------
         Total..................................................                               $  16,532
                                                                                               =========

<CAPTION>
                                                                   FISCAL YEAR ENDED SEPTEMBER 30, 2005
                                                                   ------------------------------------
                                                                                CONVERSION
                                                                 WARRANTS        FEATURES        TOTAL
                                                                 --------        --------        -----
<C>                                                             <C>             <C>           <C>
January 2004 issuance........................................... $     458      $       -      $     458
March 2004 issuance.............................................       863              -            863
October 2004 issuance...........................................       973          1,902          2,875
February 2005 issuance..........................................       850          1,892          2,742
                                                                 ---------      ---------      ---------
                                                                 $   3,144      $   3,794      $   6,938
                                                                 =========      =========      =========
         Deferred financing costs...............................                                   1,531
                                                                                               ---------
         Total..................................................                               $   8,469
                                                                                               =========


<CAPTION>
                                                                   FISCAL YEAR ENDED SEPTEMBER 30, 2004
                                                                   ------------------------------------
                                                                                CONVERSION
                                                                 WARRANTS        FEATURES        TOTAL
                                                                 --------        --------        -----
<C>                                                             <C>             <C>           <C>
January 2004 issuance........................................... $     903      $       -      $     903
March 2004 issuance.............................................     1,150              -          1,150
                                                                 ---------      ---------      ---------

                                                                 $   2,053      $       -      $   2,053
                                                                 =========      =========      =========
         Deferred financing costs...............................                                     524
                                                                                               ---------
         Total..................................................                               $   2,577
                                                                                               =========
</TABLE>

                                     54

<PAGE>
<PAGE>

         The carrying values of unamortized conversion features, debt
discount and financing fees are as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                          SEPTEMBER 30, 2006
                                                                          ------------------
                                                                                CONVERSION
                                                                 WARRANTS        FEATURES        TOTAL
                                                                 --------        --------        -----
<C>                                                             <C>             <C>           <C>
September 2005 issuance......................................... $   1,003      $       -      $   1,003
December 2005 issuance..........................................     1,894              -          1,894
February 2006 issuance..........................................     2,278          2,343          4,621
May 2006 issuance...............................................     6,899         10,187         17,086
July 2006 issuance..............................................       791            952          1,743
                                                                 ---------      ---------      ---------
                                                                 $  12,865      $  13,482         26,347
                                                                 =========      =========      =========
     Debt acquisition cost and financing fees...................                                   1,582
                                                                                               ---------
         Total..................................................                               $  27,929
                                                                                               =========


<CAPTION>
                                                                           SEPTEMBER 30, 2005
                                                                           ------------------
                                                                                CONVERSION
                                                                 WARRANTS        FEATURES        TOTAL
                                                                 --------        --------        -----
<C>                                                             <C>             <C>           <C>
March 2004 issuance............................................. $   2,476      $   4,841      $   7,317
October 2005 issuance...........................................       724          1,612          2,336
September 2005 issuance.........................................    12,513              -         12,513
                                                                 ---------      ---------      ---------
                                                                 $  15,713      $   6,453         22,166
                                                                 =========      =========      =========
     Debt acquisition cost and financing fees...................                                   2,315
                                                                                               ---------
         Total..................................................                               $  24,481
                                                                                               =========
</TABLE>


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

         During the fourth quarter of fiscal 2004, the Company discontinued
the nylon fiber operation and the acrylic textile business of Zoltek Rt.
During the fourth quarter of fiscal 2005, the Company discontinued the CMC
operation of Zoltek Rt. 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. During the fourth quarter of fiscal 2006, the
Company formally adopted a plan to sell certain of the assets of its
continuously extruded netting division and to discontinue and exit another
division that manufactures thermoplastic components. The Company incurred no
significant exit costs for the selling or discontinuation of these
businesses. These divisions were not part of the long-term strategy of the
Company and were not expected to be profitable in the foreseeable future due
to the continued pricing pressure from competitive manufacturers. The
results from operations of these two divisions have been reclassified to
discontinued operations. Corporate headquarters costs were allocated to
these businesses as they were part of continuing operations in 2004 and
2005, but were not allocated in 2006. Collectively, these businesses
previously comprised the Specialty Products segment and were disclosed as
such. Certain information with respect to the discontinued operations of the
textile acrylic, nylon fibers and CMC divisions for the fiscal years 2006,
2005 and 2004 is summarized as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                   2006            2005           2004
                                                                 ---------      ---------      ---------
<C>                                                             <C>            <C>            <C>
         Net sales..........................................     $   4,964      $  13,008      $  27,093
         Cost of sales......................................         4,369         11,424         26,572
                                                                 ---------      ---------      ---------
              Gross profit .................................           595          1,584            521
         Selling, general and administrative expenses.......          (383)        (3,735)        (5,820)
                                                                 ---------      ---------      ---------
              Gain (loss) from operations...................           212         (2,151)        (5,299)
         Other income (loss)................................          (399)           (31)           244
                                                                 ---------      ---------      ---------
              Net loss from operations......................          (187)        (2,182)        (5,055)
         Gain (loss) on disposal of discontinued operations.           150              -           (659)
                                                                 ---------      ---------      ---------
         Loss on discontinued operations....................     $     (37)     $  (2,182)     $  (5,714)
                                                                 =========      =========      =========
</TABLE>

                                     55

<PAGE>
<PAGE>

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

Inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
                                                                       SEPTEMBER 30,
                                                                   2006           2005
                                                                 ---------      ---------
<C>                                                             <C>            <C>
         Raw materials......................................     $  14,306      $  13,072
         Work-in-process....................................         1,750            430
         Finished goods.....................................         5,142         10,438
         Supplies and other.................................           523            813
                                                                 ---------      ---------
                                                                 $  21,721      $  24,753
                                                                 =========      =========
</TABLE>

         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 recorded an inventory valuation reserve of $1.3
million and $3.1 million as of September 30, 2006 and 2005, respectively, to
reduce the carrying value of inventories to net realizable value. The
reserves were established primarily due to industry overcapacity for certain
carbon fiber products in prior years.

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

Property and equipment consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
                                                                      SEPTEMBER 30,
                                                                   2006           2005
                                                                 ---------      ---------
<C>                                                             <C>            <C>
Land........................................................     $   1,674      $   1,706
Buildings and improvements..................................        50,887         32,744
Machinery and equipment.....................................       102,673         87,877
Furniture, fixtures and software............................         5,534          5,493
Construction in progress....................................        17,297         10,842
                                                                 ---------      ---------
                                                                   178,065        138,662
Less:  accumulated depreciation.............................       (55,781)       (50,644)
                                                                 ---------      ---------
                                                                 $ 122,284      $  88,018
                                                                 =========      =========
</TABLE>

         During 2004 and 2005, the Company was not operating its Abilene,
Texas facility at full capacity. As a result, the Company elected to
categorize certain costs related to these idle assets as unused capacity
costs. Such costs totaled $2.3 million and $4.5 million for fiscal 2005 and
2004, 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 were fully absorbed in ongoing production fiscal 2006.

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

         The components of income tax expense (benefit) for the fiscal years
ended September 30, 2006, 2005 and 2004 are as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                   2006           2005           2004
                                                                 ---------      ---------      ---------
<C>                                                              <C>            <C>            <C>
From continuing operations:
     Current:
         Federal.....................................            $       -      $       -      $       -
         State.......................................                    -              -              -
         Non-U.S. ...................................                2,258            708            434
                                                                 ---------      ---------      ---------
                                                                     2,258            708            434
                                                                 ---------      ---------      ---------
     Deferred:
         Federal.....................................                    -              -              -
         State.......................................                    -              -              -
         Non-U.S.....................................               (1,370)             -              -
                                                                 ---------      ---------      ---------
                                                                    (1,370)             -              -
                                                                 ---------      ---------      ---------
              Total Continuing Operations............            $     888      $     708      $     434
                                                                 =========      =========      =========

                                     56

<PAGE>
<PAGE>

<CAPTION>
                                                                   2006           2005           2004
                                                                 ---------      ---------      ---------
<C>                                                              <C>            <C>            <C>
From discontinued operations:
     Current:
         Federal.....................................            $       -      $       -      $       -
         State.......................................                    -              -              -
         Non-U.S.....................................                    -              -              -
                                                                 ---------      ---------      ---------
                                                                         -              -              -
                                                                 ---------      ---------      ---------
     Deferred:
         Federal.....................................                    -              -              -
         State.......................................                    -              -              -
         Non-U.S.....................................                    -              -              -
                                                                 ---------      ---------      ---------
              Total Discontinued Operations..........                    -              -              -
                                                                 ---------      ---------      ---------
              Total .................................            $     888      $     708      $     434
                                                                 =========      =========      =========
</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>
                                                                                  2006            2005
                                                                                ---------      ---------
<C>                                                                            <C>            <C>
     Tax effect of regular net operating loss carry-forwards - US............   $  38,807      $  23,758
     Tax effect of regular net operating loss carry-forwards - Foreign.......       2,447          4,031
     Valuation allowance on net operating loss carry-forwards - US...........     (33,132)       (18,899)
     Valuation allowance on net operating loss carry-forwards - Foreign......      (1,085)        (2,979)
     Tax effect of capital loss - US.........................................           -            523
     Valuation allowance on capital loss - US................................           -           (523)
     Depreciation - US.......................................................      (5,824)        (5,029)
     Depreciation - Foreign..................................................      (1,423)        (1,113)
     Employee related cost - US..............................................          94             79
     Prepaids - US...........................................................         (82)           (49)
     Bad debt accrual - US...................................................         131            125
     Bad debt accrual - Foreign..............................................          61             61
     Other - US..............................................................           6             15
                                                                                ---------      ---------
              Total net deferred tax asset...................................   $       -      $       -
                                                                                =========      =========
</TABLE>

         The provision 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>
                                                                   2006           2005           2004
                                                                 ---------      ---------      ---------
<C>                                                             <C>            <C>            <C>
At statutory rate:
         Income taxes on loss from continuing operations........ $ (22,058)     $ (12,751)     $  (5,664)
Increases (decreases):
         Lower effective tax rate on non-U.S. operations........      (985)           525          1,054
         Change in valuation allowance on net operating loss....    12,339          4,125          2,588
         Change in valuation allowance on capital loss..........      (523)             -              -
         Local taxes, non-U.S...................................       888            708            435
         Amortization of warrant discount.......................     5,659          2,359            274
         Fair market value of warrants..........................     9,963          5,635          1,673
         Nonqualified stock option expense......................    (3,617)             -              -
         Other..................................................      (778)           107             75
                                                                 ---------      ---------      ---------
                                                                 $     888      $     708      $     435
                                                                 =========      =========      =========
</TABLE>

         The consolidated loss from continuing operations before income
taxes by domestic and foreign sources for the years ended September 30,
2006, 2005 and 2004 was as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                   2006           2005           2004
                                                                 ---------      ---------      ---------
<C>                                                             <C>            <C>            <C>
Domestic........................................................ $ (71,069)     $ (35,936)     $ (15,932)
Foreign.........................................................     6,192         (1,567)          (727)
                                                                 ---------      ---------      ---------
Loss from continuing operations before income taxes............. $ (64,877)     $ (37,503)     $ (16,659)
                                                                 =========      =========      =========
</TABLE>

         Zoltek Rt.'s accumulated deficit of $(5,317,328) and $(8,085,380)
at September 30, 2006 and September 30, 2005, respectively, and accumulated
earnings of $957,000 at September 30, 2004 are considered to be permanently
reinvested and, accordingly, no provision for income taxes has been
recorded.

                                     57

<PAGE>
<PAGE>

         The Company currently has a net operating loss carry-forward of
approximately $115.4 million, which expires between 2020 and 2026. 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.

         The Company currently has a foreign net operating loss
carry-forward of approximately $13.6 million which expires between 2009 and
2010. 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 consists of a revolving line of credit and term loan of $5.5 million,
which matures January 1, 2007. The availability of the revolving line of
credit and term loan was $5.5 million at September 30, 2006. The Company has
issued $6.6 million in letters of credit that are collateralized by the cash
and cash equivalents in an equal amount and are therefore restricted. In
December 2006, the Company extended this line of credit until January 1, 2008.
The renewal of the credit facility included an amendment which increased the
amount available under the original revolving credit facility from $5.5
million to $6.7 million and established a new $10.0 million term loan,
collateralized by certain real estate of the Company. The amendment also
provided that the $6.6 million letter of credit previously collateralized by
the Company's cash and cash equivalents and presented as restricted cash in
the Company's consolidated balance sheet will be collateralized by the
availability under the $6.7 million revolving credit facility thereby
eliminating the cash restriction. No financial covenants currently apply to
the credit facility from the U.S. bank.

         Hungarian Operations - The Company's Hungarian subsidiary has a
credit facility with a Hungarian bank. Total borrowings under this credit
facility were $3.2 million at September 30, 2006. The credit facility is a
term loan with quarterly interest payments and repayment of principal at the
maturity date on December 31, 2007.

         The subordinated debt agreements of 2004 and 2005 (see Note 2)
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, 2006.

         The Hungarian Government has pledged a grant of 2.9 billion HUF
(approximately $14.1 million) to Zoltek's Hungarian subsidiary for use in
modernizing its facility, establishing a research and development center
there, and supporting a rapid buildup of manufacturing capacity for both
acrylic fiber precursor raw material and carbon fiber. As of September 30,
2006, no amount has been funded under this program.

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

<TABLE>
<CAPTION>
                                                                                                     SEPTEMBER 30,
                                                                                                 2006           2005
                                                                                               ---------      ---------
<C>                                                                                            <C>            <C>
     Note payable with interest at 9%, payable in monthly installments of
         principal and interest of $15 to maturity in January 2007...........................  $   1,346      $   1,442

     Non-interest bearing note payable (discounted at 8%) to the City of Abilene, Texas
         to be repaid from real estate and personal property tax abatements .................      1,946          1,865

     Facilities with Hungarian banks (interest rate of 5.5% to 10.6%)........................      3,217          2,766

     Term loan, $0.3 million payable in quarterly installments of $0.1 million in 2006,
         bearing interest at prime plus 2.0% (prime rate at September 30, 2006 was 8.25%)....          -            300

     Revolving credit agreement, maturing in January 2007, bearing interest at prime
         plus 2.0% (prime rate at September 30, 2006 was 8.25%)..............................          -          3,788

     Convertible debentures due February 2008 bearing interest at 7.0%.......................      2,700          7,800
     Convertible debentures due April 2008 bearing interest at 7.0%..........................          -         20,000
     Convertible debentures due August 2008 bearing interest at LIBOR plus 4.0% (LIBOR at
         September 30, 2006 was 5.35%).......................................................          -         20,000

     Convertible debentures due March 2009 bearing interest at 7.5%..........................      3,000          5,000
     Convertible debentures due May 2009 bearing interest at 7.5%............................     15,000              -
     Convertible debentures due August 2009 bearing interest at 7.5%.........................     10,000              -
     Convertible debentures due November 2009 bearing interest at 7.5%.......................     20,000              -
     Convertible debentures due January 2010 bearing interest at 7.5%........................      2,505              -
                                                                                               ---------      ---------

         Total debt..........................................................................     59,714         62,961
         Less: Beneficial conversion feature and debt discount associated with warrants......    (26,347)       (22,166)
         Less: amounts payable within one year...............................................     (1,365)          (374)
                                                                                               ---------      ---------
     Total long-term debt ...................................................................  $  32,002      $  40,421
                                                                                               =========      =========
</TABLE>

                                     58

<PAGE>
<PAGE>

     Value of derivative liabilities at (amounts in thousands):
     ----------------------------------------------------------

<TABLE>
<CAPTION>
                                                                            SEPTEMBER 30, 2006
                                                                            ------------------
                                                                                CONVERSION
                                                                 WARRANTS        FEATURES        TOTAL
                                                                 --------        --------        -----
<C>                                                             <C>            <C>            <C>
         January 2004 issuance.................................. $     903      $      -       $     903
                                                                 ---------      ---------      ---------
                  Totals........................................ $     903      $      -       $     903
                                                                 =========      =========      =========

<CAPTION>
                                                                            SEPTEMBER 30, 2005
                                                                            ------------------
                                                                                CONVERSION
                                                                 WARRANTS        FEATURES        TOTAL
                                                                 --------        --------        -----
<C>                                                             <C>            <C>            <C>
         January 2004 issuance.................................. $   1,818      $      -       $   1,818
         March 2004 issuance....................................       868             -             868
         October 2004 issuance..................................     5,034        11,141          16,175
         February 2005 issuance.................................     3,637         6,526          10,163
                                                                 ---------      ---------      ---------
                  Totals........................................ $  11,357      $ 17,667       $  29,024
                                                                 =========      ========       =========
</TABLE>

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, 2006, 2005 and
2004.

LEGAL

         Structural Polymer Group Limited (SP Systems) and its subsidiary
Structural Polymer Systems, Limited filed an action against Zoltek Corporation
in the U. S. District Court for the Eastern District of Missouri, Eastern
Division alleging that the Company breached a Supply Agreement relating to
Zoltek's carbon fiber product known as Panex 33. The case was tried in
November 2006 and on November 29, 2006, the jury in the case rendered verdicts
against Zoltek Corporation in the amounts of $21.1 million and $14.9 million,
respectively, which verdicts were subsequently entered as judgments against
Zoltek Corporation. The Company believes that any damages should be limited to
$21.1 million because the verdicts are duplicative. Zoltek Corporation is
filing various post-trial motions. If such motions are unsuccessful, Zoltek
Corporation intends to file an appeal with the U. S. Court of Appeals for the
8th Circuit seeking reversal or a new trial. Although the litigation process
is inherently uncertain, the Company believes it has grounds for the judgment
to be substantially reduced or, possibly, overturned entirely. Management,
recognizing the judgment that has been rendered against the Company and the
uncertainty surrounding the Company's planned appeals process, accrued $21.8
million during the fourth quarter in respect of the potential liability in
this matter, which it believes is the best estimate of the liability
associated with this obligation. This amount includes $21.1 million related to
the aforementioned judgment and approximately $0.7 million related to legal
fees. The Company has already incurred legal expenses of approximately $1.0
million. Management believes that the ultimate resolution of this litigation
will not have a material adverse effect on the Company's results of
operations, financial condition or cash flow, however, if the Company's appeal
is unsuccessful, the resulting settlement could materially impact the
Company's results of operations, financial condition and cash flows. The
Company will be required to post a bond of approximately $40 million during
the appeals process, or a lesser amount if its post-trial motion to reduce the
amount of the judgment is granted. The Company

                                     59

<PAGE>
<PAGE>

has raised the funds necessary for the bond with a $10.0 million loan
collateralized by certain real estate of the Company, a $10.0 million loan
from the Company's Chief Executive Officer, the proceeds from the exercise of
827,789 warrants for $11.9 million by existing institutional shareholders and
the remainder with the Company's cash on hand.

         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 $1.3 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. In July
2006, the Company was successful in its appeal of the lower court's ruling
and the case was remanded to the Court of Common Pleas for retrial.
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. The Company executed a
guaranty of Hardcore Composite's lease obligations of approximately $30,000
per month to the former owner. The lease of the Hardcore Composites
manufacturing facility expires March 31, 2008. Hardcore no longer occupies
the facility and, accordingly, in connection with the ongoing litigation
with the former owner, Zoltek is asserting that Zoltek has no further
ongoing guarantee obligation with respect to the lease. The Company also is
the obligee on aggregate original value of unsecured promissory notes of
$9.3 million in connection with the sale of Hardcore, for which a full
valuation allowance has been recorded. A full valuation allowance is
appropriate in light of Hardcore's current financial condition which, among
other relevant factors, make the collection of the promissory notes
doubtful.

         In September 2004, the Company was named a defendant in a civil
action filed by a former investment banker that was retained by the Company to
obtain equity investors, alleging breach by the Company of its obligations
under the agreement signed by the parties. The investment banker alleges it is
owed commission from the equity investment obtained by the Company from a
different source. The Company has asserted various defenses, including that
the investment banker breached the agreement by not performing reasonable
efforts to obtain financing for the Company, and therefore, the agreement was
terminated by the Company prior to obtaining new financing. A decision
granting summary judgment against the Company was entered in April 2005 and a
trial on damages took place in December 2005, after which a judgment was filed
in May 2006 against the Company in the amount of $4.1 million in cash and an
order to issue warrants to purchase 122,888 shares of the Company's common
stock at various prices. To date the Company has not made payments of any
portion of this obligation, although it posted an appeal bond in the amount of
$6.6 million. During the second quarter of 2006, the Company accrued $0.5
million in respect of the possible liability in this matter. Management
currently believes that the ultimate resolution of this litigation will not
have a material adverse effect on the Company's results of operations,
financial condition or cash flow, however, if the Company's appeal is
unsuccessful, the resulting settlement could materially impact the Company's
results of operations. The Company is vigorously defending this matter and has
filed counterclaims and an appeal.

         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. 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.


                                     60

<PAGE>
<PAGE>

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.

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.

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 fiscal years ended
September 30, 2006, 2005, and 2004.

10.      STOCK COMPENSATION EXPENSE
------------------------------------------------------------------------------

         The Company maintains a Long-term Incentive Plan that authorizes
the Board of Directors or its Compensation Committee (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. All issuances are granted out of shares
authorized, as the Company has no treasury stock. Currently, 1,500,000
shares of common stock may be issued pursuant to awards under the plan of
which approximately 260,000 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 through 2004 primarily vest 100% three
years from date of grant. Options granted in 2005 and thereafter primarily
vest 100% two years from date of grant. All options were issued at an option
price equal to the market price on the date of grant.

         The Company also maintains a Directors Stock Option Plan under
which options to purchase 7,500 shares of common stock at the then fair
market value are currently issued to each non-employee director annually. In
addition, newly elected non-employee directors receive options to purchase
7,500 shares of common stock, at the then fair market value. The options
expire from 2006 through 2015, respectively.

         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
                                                   ---------     --------------     -----------     --------------

<C>                                               <C>           <C>               <C>               <C>
         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
             Granted.............................    197,500          10.06
             Exercised...........................   (537,833)          5.21
             Cancelled...........................   (158,500)         12.52
                                                   ---------     ----------
         Balance, September 30, 2006                 552,834          10.94           343,495             12.65
                                                   =========     ==========        ==========        ==========
</TABLE>

                                     61

<PAGE>
<PAGE>

         The following table summarizes information for options currently
outstanding and exercisable at September 30, 2006:

<TABLE>
<CAPTION>
                                   OPTIONS OUTSTANDING                                   OPTIONS EXERCISABLE
           --------------------------------------------------------------------      ----------------------------
             RANGE OF                           WTD. AVG.           WTD. AVG.                        WTD. AVG.
              PRICES           NUMBER        REMAINING LIFE      EXERCISE PRICE      NUMBER        EXERCISE PRICE
           -----------         -------       --------------      --------------      ------        --------------
          <C>                  <C>              <C>                  <C>             <C>              <C>
          $  1.33-2.80         122,000          6 years              $ 2.51          103,495          $  2.45
             3.25-5.67          42,500          6 years                5.45           22,500             5.25
             7.69-9.25         192,500          8 years                8.34           52,500             7.64
           10.00-39.00         195,834          6 years               19.74          165,000            21.40
                               -------                                               -------
            1.33-39.00         552,834          6 years               10.87          343,495          $ 12.53
                               =======                                               =======
</TABLE>

         The Company historically accounted for stock-based compensation in
accordance with that prescribed by Accounting Principles Board Opinion No.
25 ("APB 25"), "Accounting for Stock Issued to Employees", and its related
interpretations, as permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation". APB 25 required the use of the intrinsic value method, which
measures compensation cost as the excess, if any, of the quoted market price
of the stock over the amount the employee must pay for the stock.
Compensation expense for substantially all of the Company's equity based
awards was measured under APB 25 on the date the shares were granted. Under
APB 25, no compensation expense was recognized for stock options. The total
intrinsic value of options outstanding at September 30, 2006 and 2005 was
approximately $4,279,000 and $5,197,000, respectively.

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

         For the fiscal year ended September 30, 2006, the Company recorded
into selling and general administrative expense and into its corporate/other
segment $1.0 million for the cost of employee services received in exchange
for equity instruments based on the grant-date fair value of those instruments
in accordance with the provisions of SFAS No. 123-R. Stock-based employee
compensation cost as of September 30, 2006 was $40,000. There were no
recognized tax benefits during the fiscal year ended September 30, 2006, as
any benefit is offset by the Company's full valuation allowance on its net
deferred tax asset. The Company has not recognized the windfall tax benefit as
the resulting deduction has not been realized via a reduction of income taxes
payable.

         During fiscal 2005 and 2004, had the cost of employee services
received in exchange for equity instruments been recognized based on the
grant-date fair value of those instruments in accordance with the provisions
of SFAS No. 123-R, the Company's net loss and loss per share would have been
impacted as shown in the following table (amounts in thousands).

<TABLE>
<CAPTION>
                                                                             FISCAL YEAR ENDED SEPTEMBER 30
                                                                             ------------------------------
                                                                                   2005           2004
                                                                                   ----           ----
<C>                                                                            <C>            <C>
         Reported net loss.................................................     $  (40,393)    $  (22,807)
         Total stock-based employee compensation expense
           determined under fair value based method for all awards.........           (294)          (168)
                                                                                ----------     ----------
         Pro forma net loss................................................     $  (40,687)    $  (22,975)
                                                                                ==========     ==========
         Reported basic loss per share.....................................     $    (2.23)    $    (1.40)
                                                                                ==========     ==========
         Pro forma basic loss per share....................................     $    (2.25)    $    (1.40)
                                                                                ==========     ==========
         Reported diluted loss per share...................................     $    (2.23)    $    (1.40)
                                                                                ==========     ==========
         Pro forma diluted loss per share..................................     $    (2.25)    $    (1.40)
                                                                                ==========     ==========
</TABLE>

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

         The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:

<TABLE>
<CAPTION>
                                                                                     FISCAL YEAR ENDED SEPTEMBER 30
                                                                                     ------------------------------
         ASSUMPTIONS                                                               2006           2005           2004
         -----------                                                               ----           ----           ----
<C>                                                                             <C>           <C>            <C>
         Expected life of option...........................................      3-8 years     4-8 years      4-8 years
         Risk-free interest rate...........................................        4.32%         3.80%          2.60%
         Volatility of stock...............................................          96%           76%           154%
         Cancellation experience...........................................          30%           51%            47%
</TABLE>

                                     62

<PAGE>

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

         The fair value of the options granted during fiscal 2006, 2005 and
2004 was $1,088,964, $684,221 and $159,961, respectively. As of September 30,
2006, the Company had $0.3 million of total unrecognized compensation expense
related to stock option plans that will be recognized over a weighted average
period over fiscal years 2007 and 2008.

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 Corporate/Other Products. In the fourth quarter of fiscal 2004, the
Company formally adopted a plan to discontinue and exit two businesses of its
Zoltek Rt. operations, which manufacture textile acrylic and nylon fibers and
yarns. In the fourth quarter of fiscal 2005, the Company formally adopted a
plan to discontinue the CMC business of its Zoltek Rt. operations. During the
fourth quarter of fiscal 2006, the Company formally adopted a plan to sell
certain of the assets of its continuously extruded netting division and to
discontinue and exit another division that manufactures thermoplastic
components. These divisions are not part of the long-term strategy of the
Company and are not expected to be profitable in the foreseeable future due to
the continued pricing pressure from competitive manufacturers. The results
from operations of these divisions have been reclassified to discontinued
operations. Collectively, these businesses previously comprised the Specialty
Products segment and were disclosed as such. The remaining business
represented in the Corporate/Other Product segment relate to water treatment
and electrical services provided in the Hungary operations.

         The Carbon Fibers segment manufactures low-cost carbon fibers used
as reinforcement material in composites, carbon fiber composite products and
filament winding equipment used in the composite industry. The Technical
Fibers segment manufactures carbon fibers used to manufacture aircraft brake
pads and oxidized acrylic fibers for heat/fire barrier applications. These
two segments also facilitate development of product and process applications
to increase the demand for carbon fibers and technical fibers and seek to
aggressively market carbon fibers and technical fibers. The Carbon Fibers
and Technical Fibers segments are located geographically in the United
States and Hungary. With the exception of the Carbon 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, 2006, 2005 and
2004 (amounts in thousands):

<TABLE>
<CAPTION>
                                                              FISCAL YEAR ENDED SEPTEMBER 30, 2006
                                                              ------------------------------------
                                                          CARBON     TECHNICAL   CORPORATE/
                                                          FIBERS       FIBERS      OTHER        TOTAL
                                                          ------       ------      -----        -----
<C>                                                   <C>          <C>          <C>          <C>
Net sales............................................. $  65,677    $  25,195    $   1,485    $  92,357
Cost of sales.........................................    49,386       19,211        1,397       69,994
Operating income (loss)...............................    10,383        4,620      (30,678)     (15,675)
Depreciation and amortization expense.................     4,601        1,125          127        5,853
Capital expenditures..................................    31,742        7,833        1,220       40,795


<CAPTION>
                                                              FISCAL YEAR ENDED SEPTEMBER 30, 2005
                                                              ------------------------------------
                                                          CARBON     TECHNICAL   CORPORATE/
                                                          FIBERS       FIBERS      OTHER        TOTAL
                                                          ------       ------      -----        -----
<C>                                                   <C>          <C>          <C>          <C>
Net sales............................................. $  34,487    $  19,693    $   1,197    $  55,377
Cost of sales, excluding available unused capacity
  expenses............................................    36,677       15,361          771       52,809
Available unused capacity expenses....................     2,347            -            -        2,347
Operating income (loss)...............................    (8,214)       2,658       (2,070)      (7,626)
Depreciation and amortization expense.................     3,922          877          343        5,142
Capital expenditures..................................    11,850        2,611          304       14,765


                                     63

<PAGE>
<PAGE>

<CAPTION>
                                                             FISCAL YEAR ENDED SEPTEMBER 30, 2004
                                                             ------------------------------------
                                                          CARBON     TECHNICAL   CORPORATE/
                                                          FIBERS       FIBERS      OTHER        TOTAL
                                                          ------       ------      -----        -----
<C>                                                   <C>          <C>          <C>          <C>
Net sales............................................. $  18,431    $  14,831    $   1,263    $  34,525
Cost of sales, excluding available unused capacity
  expenses............................................    15,607       12,477        1,053       29,137
Available unused capacity expenses....................     4,466            -            -        4,466
Operating income (loss)...............................    (5,792)       1,164         (913)      (5,541)
Depreciation and amortization expense.................     3,969        1,091          402        5,462
Capital expenditures..................................     5,391          389          139        5,919


<CAPTION>
                                                                          TOTAL ASSETS
                                                                          ------------
                                                          CARBON     TECHNICAL   CORPORATE/
                                                          FIBERS       FIBERS      OTHER        TOTAL
                                                          ------       ------      -----        -----
<C>                                                   <C>          <C>          <C>          <C>
September 30, 2006.................................... $ 128,747    $  25,199    $  33,738    $ 187,684
September 30, 2005....................................    93,386       22,662       14,381      130,429
September 30, 2004....................................    63,306       19,701       39,448      122,455
</TABLE>

                                     64

<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, 2006, 2005 and 2004 (amounts in thousands):

<TABLE>
<CAPTION>
                                     2006                           2005                          2004
                          --------------------------     ---------------------------    --------------------------
                                             NET                             NET                           NET
                                          LONG LIVED                      LONG LIVED                    LONG LIVED
                          NET SALES(a)     ASSETS(b)     NET SALES(a)      ASSETS(b)    NET SALES(a)     ASSETS(b)
                          ------------     ---------     ------------      ---------    ------------    ----------
<C>                       <C>              <C>             <C>             <C>            <C>            <C>
United States...........   $ 36,359        $ 49,497        $ 21,533        $ 45,978       $ 19,020       $ 46,582
Western Europe..........     38,108               -          22,764               -          9,012              -
Eastern Europe..........      9,621          72,787           6,058          42,040          3,934         33,832
Asia....................        698               -           4,879               -          2,361              -
Other areas.............      7,571               -             143               -            198              -
                           --------        --------        --------        --------       --------       --------
   Total................   $ 92,357        $122,284        $ 55,377        $ 88,018       $ 34,525       $ 80,414
                           ========        ========        ========        ========       ========       ========

<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)
------------------------------------------------------------------------------

<TABLE>
<CAPTION>
(Amounts in thousands, except per share data)

FISCAL YEAR 2006                                    1ST QUARTER      2ND QUARTER     3RD QUARTER       4TH QUARTER
-------------------------------------------------------------------------------------------------------------------
<C>                                                    <C>              <C>             <C>               <C>
Net sales..........................................    $ 15,557         $ 26,199        $ 26,787          $ 23,814
Income (loss) from continuing operations...........       6,128          (27,784)        (21,216)          (22,893)
Income (loss) from discontinued operations.........         160               41            (252)               14
                                                       --------         --------        --------          --------
Net income (loss)..................................    $  6,288         $(27,743)       $(21,468)         $(22,879)
                                                       ========         ========        ========          ========

Basic and diluted income (loss) per share:
  Continuing operations - basic....................    $   0.31         $  (1.31)       $  (0.90)         $  (0.89)
  Discontinued operations - basic..................        0.01             0.00           (0.01)            (0.00)
                                                       --------         --------        --------          --------
       Total basic.................................    $   0.32         $  (1.31)       $  (0.91)         $  (0.89)
                                                       ========         ========        ========          ========

  Continuing operations - diluted..................    $   0.27         $  (1.31)       $  (0.90)         $  (0.89)
  Discontinued operations - diluted................         .01             0.00           (0.01)            (0.00)
                                                       --------         --------        --------          --------
       Total diluted...............................    $   0.28         $  (1.31)       $  (0.91)         $  (0.89)
                                                       ========         ========        ========          ========

<CAPTION>
FISCAL YEAR 2005                                    1ST QUARTER      2ND QUARTER     3RD QUARTER       4TH QUARTER
-------------------------------------------------------------------------------------------------------------------
<C>                                                    <C>              <C>             <C>               <C>
Net sales..........................................    $ 11,194         $ 13,230        $ 16,073          $ 14,880
Income (loss) from continuing operations...........     (29,187)           2,621          (1,293)          (10,352)
Loss from discontinued operations..................        (742)            (475)           (175)             (790)
                                                       --------         --------        --------          --------
Net income (loss)..................................    $(29,929)        $  2,146        $ (1,468)         $(11,142)
                                                       ========         ========        ========          ========

Basic and diluted income (loss) per share:
  Continuing operations - basic....................    $  (1.62)        $   0.14        $  (0.07)         $  (0.57)
  Discontinued operations - basic..................       (0.04)           (0.02)          (0.01)            (0.04)
                                                       --------         --------        --------          --------
       Total basic.................................    $  (1.66)        $   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)
                                                       ========         ========        ========          ========
</TABLE>

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

None.

                                     65

<PAGE>
<PAGE>

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 management, under the supervision and with the participation
of the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange
Act of 1934, as amended (the "Exchange Act")). The Company's disclosure
controls and procedures are designed to ensure that information required to
be disclosed in reports it files or submits under the Exchange Act are
recorded, processed, summarized and reported within the time period
specified in SEC rules and forms and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosures.

         Based on the evaluation described above and 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, 2006, the Company's disclosure controls and procedures were
ineffective.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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

         Under the supervision and with the participation of management,
including the Company's Chief Executive Officer and Chief Financial Officer,
we conducted an assessment of the effectiveness of the Company's internal
control over financial reporting as of September 30, 2006. In making this
assessment, the Company used the criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the "COSO").

         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. 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, 2006.

         The Company did not maintain effective controls over the accounting
for inventory that resulted in the following material weaknesses.

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

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 and
         (ii) perform the proper analysis and review of inventory
         manufacturing variances for capitalization at period-end.

                                     66

<PAGE>
<PAGE>

The control deficiencies described 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 above constitute
a material weakness.

         Because of the material weaknesses described above, management has
concluded that the Company did not maintain effective internal control over
financial reporting based on the criteria established in Internal Control -
Integrated Framework by the COSO.

         Management's assessment of the effectiveness of the Company's
internal control over financial reporting as of September 30, 2006, has been
audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report, which appears elsewhere herein.

REMEDIATION OF MATERIAL WEAKNESSES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Continuing Remediation

         As discussed above, management has identified certain material
weaknesses that exist in the Company's internal control over financial
reporting and is taking steps to strengthen its internal control over
financial reporting. Management is actively engaged in the implementation of
remediation efforts to address the material weaknesses in the Company's
internal control over financial reporting as of September 30, 2006. These
remediation efforts, including the actions below, are designed to address
the material weaknesses identified by management and to enhance the
Company's overall control environment.

o    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 in a timely manner.

o    Designing and implementing controls over the inventory costing and
     valuation process based on feedback and input from Accounting,
     Engineering and Plant personnel, including formal identification of
     current costs of manufactured products, development of new cost
     standards to be utilized in the manufacturing process, and
     implementation of routine review of manufacturing variances against
     benchmarks to validate production costs and inventory values.

Completed Remediation

         As discussed below, we significantly improved our internal control
over financial reporting during fiscal 2006. Management, under the
supervision and with the participation of our Chief Executive Officer, Chief
Financial Officer and Director of Compliance and Information Technology, has
been actively engaged in the implementation of remediation efforts to
address the material weaknesses that were in existence as of September 30,
2005 and previously disclosed in our 2005 Annual Report on Form 10-K.

         The following describes the remedial actions that have been
implemented during the fourth quarter of fiscal 2006 to address the material
weaknesses in our internal control over financial reporting which existed as
of September 30, 2005:

o    In recognition of the importance of having staff with 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, the Company expanded its
     finance organization and hired a General Ledger Accountant, a Director
     of Compliance and Information Technology and a Director of Financial
     and Managerial Reporting.

o    The Company increased its supervisory review of its financial
     statements, including consolidating and eliminating entries.
     Specifically, the Director of Financial and Managerial Reporting
     validates the preparation and completeness of entries in the Company's
     consolidating internal financial statements to underlying support.
     Thereafter, the Chief Financial Officer performs a review verifying the
     Company's financial statements are a complete, fair and accurate
     depiction of the


                                     67

<PAGE>
<PAGE>

     Company's financial position and operating results. In addition, a
     more comprehensive quarterly reporting package serving as the basis for
     performance of an analytical review was developed.

o    The Company increased its supervisory review of its financial
     statements and disclosures. Specifically, the Director of Financial and
     Managerial Reporting is responsible for:

     o    Tie-out of all consolidating entities' account balances "keyed" in
          the consolidating database to their respective General Ledger
          trial balances or Hungarian reporting package;

     o    Retrieval and accumulation of underlying support for related
          disclosures; and

     o    Maintenance of quarterly reporting package serving as basis for
          performance of analytical review.

o    At quarter-end, a reasonableness calculation is prepared analyzing the
     cumulative translation adjustment reflected in the Company's financial
     statements. The CFO prepares the analysis, which in turn is validated
     by the Director of Financial and Managerial Reporting.

o    A policy was implemented in which the Chief Financial Officer or
     Director of Compliance and Information Technology, and
     Controller-Hungary review and approve (in writing) all United States
     and Hungarian journal entries, respectively, on a monthly basis.

o    The Company commenced documented approval of monthly reconciliation of
     significant accounts to underlying support. Significant reconciling
     items are researched and resolved on a timely basis.

o    The Company implemented a formal control process regarding its review
     and determination of allowance for doubtful accounts at its Hungarian
     subsidiary.

o    The Company updated written procedures for its annual physical
     inventory to ensure that all inventory items are appropriately
     identified and accounted for. In addition, the Company expanded the use
     of an outside inventory firm to all major US manufacturing facilities
     enabling a greater percentage of the results of the Company's inventory
     to be captured via UPC-wanding technology. Comprehensive binders
     containing documents used, produced and accumulated during physical
     inventories were prepared and reviewed by the Chief Financial Officer
     ensuring the Company's perpetual inventory records were updated for the
     results of the annual physical inventory.

o    An inventory reserve database template calculating an adjustment to
     cost inventory at its net realizable value was developed. On a monthly
     basis, the template is prepared by the Controller-North America and
     approved by the Chief Financial Officer. In connection with this
     monthly analysis, management ensures significant inventory components
     continue to be actively sold and current selling prices are supportive
     of net realizable value used to determine the inventory reserve. In
     addition, the template serves as the underlying support for the
     applicable recorded journal entry, which in turn is approved by the
     Chief Financial Officer (as more fully discussed above).

o    The Company established procedures over fixed asset acquisitions,
     including propriety of accounting treatment for internal capitalized
     labor, and identification and recognition of interest incurred in
     financing the construction and acquisition of assets. In conjunction
     with monthly approval of journal entries, the Chief Financial Officer
     reviews and approves the capitalization of internal labor verifying
     compliance with GAAP. On a quarterly basis, in accordance with
     Statement of Financial Accounting Standards No. 34 "Capitalization of
     Interest Cost", interest incurred during construction is capitalized.
     The amount capitalized is based on the product of average capitalized
     construction-in-progress costs for the quarter and rates applicable to
     outstanding borrowings. The Chief Financial Officer approves the
     calculation of capitalized interest.

o    The increased staffing of competent and trained employees referred to
     above enabled the Company to enhance its review of significant
     non-routine and complex accounting issues, including establishing
     controls over accounting for derivatives embedded in convertible debt.
     Specifically, the Company implemented a process whereby the Director of
     Financial and Managerial Reporting reviews debt transactions for
     accounting implications and documents recommended accounting treatment,
     including rationale for selection, in an Issue Summary memorandum. The
     Chief Financial Officer reviews and approves the Issue Summary
     memorandum. The recommended accounting treatment serves as guidance for
     the basis in which the accounting group records the underlying debt
     transaction.

                                     68

<PAGE>
<PAGE>

o    The Company developed a template (based on dilutive sequencing depicted
     within Statement of Financial Accounting Standards No. 128 "Earnings
     per Share") for calculating earnings (loss) per share. The Company's
     methodology properly addresses common stock equivalents associated with
     outstanding options and warrants, and convertible debt instruments.
     This template is prepared on a quarterly basis for current reporting
     and year-to-date periods and serves as the basis for disclosures. A
     party independent of the preparation process validates disclosures in
     Company filings to this underlying support. Management also stays
     abreast of potential dilutive instruments to ensure they are properly
     considered in the Company's diluted EPS calculation.

o    Due to limitations within the user security features inherent in the
     Company's ERP system, management implemented various manual
     compensating controls to monitor processes in the Company's financial
     reporting process that lacked appropriate segregation of duties. These
     new controls focus on ensuring adequate critical review and approval of
     transactions subject to segregation of duties situations (including (i)
     purchases and payables, (ii) payroll, (iii) debt and related interest
     expense, (iv) revenue and accounts receivable, (v) fixed assets, and
     (vi) inventory) is performed.

     The following describes the remedial actions that have been implemented
to date to address our information technology general control ("ITGC")
deficiencies existing as of September 30, 2005:

     o    Instituted compensating controls consisting of manual oversight
          and reasonableness checking to assure the accuracy of the
          financial information processed via financially significant
          applications.

     o    Expanded and strengthened oversight of our information technology
          structure through the creation of compliance role (Director of
          Compliance and Technology) reporting directly to our Chief
          Financial Officer, with responsibility for information technology
          related finance and legal compliance controls.

     o    Upgraded the capabilities of the existing information technology
          structure via replacement of staff with an individual whose
          experience and expertise aligned with Company needs.

     We believe that the foregoing Continuing Remediation actions described
above will continue to improve our internal control over financial
reporting, as well as our disclosure controls and procedures. We also
believe that the foregoing Completed Remediation actions described above
have significantly improved our internal control over financial reporting,
as well as our disclosure controls and procedures. Our management, with the
oversight of our audit committee, will continue to take steps to remedy the
known material weaknesses as expeditiously as possible.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

     As described above, the Completed Remediation actions depict changes in
the Company's internal control over financial reporting in the fourth quarter
of fiscal 2006 that materially affected, or are reasonably likely to
materially affect, its internal control over financial reporting.

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

         Not Applicable.


                                     69

<PAGE>
<PAGE>


                                  PART III

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

         The information set forth under the captions "Election of Directors",
"Other Matters" and "Compliance with Section 16(a) of the Securities Exchange
Act of 1934" in the registrant's Proxy Statement for its 2007 Annual Meeting
of Shareholders is incorporated herein by this reference. See also Item 4A of
Part I of this report.

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 2007 Annual Meeting of Shareholders is incorporated herein by this
reference.


                                     70

<PAGE>
<PAGE>

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 2007 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, 2007.

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

<S>                                         <C>                         <C>                          <C>
Equity Compensation Plans
Approved by Security Holders                  552,834(1)                  $10.94                    696,000(1)

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

Total                                         552,834                     $10.94                    696,000

<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 security holders.
</TABLE>

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

         The information set forth under the caption "Certain Transactions"
in the registrant's Proxy Statement for its 2007 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 2007 Annual
Meeting of Shareholders is incorporated herein by this reference.


                                     71

<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, 2006
               and 2005

               Consolidated Statement of Operations for the years ended
               September 30, 2006, 2005 and 2004

               Consolidated Statement of Changes in Shareholders' Equity
               for the years ended September 30, 2006, 2005 and 2004

               Consolidated Statement of Cash Flows for the years ended
               September 30, 2006, 2005 and 2004

               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

         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

                                     72

<PAGE>
<PAGE>

         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 fiscal
                  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 fiscal
                  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 fiscal 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 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

                                     73

<PAGE>
<PAGE>

         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

         4.24     Waiver and Consent, dated as of February 3, 2006, by and
                  among the Registrant and the Lender parties thereto, filed
                  as Exhibit 4.5 to the Registrant's Current Report on Form
                  8-K dated February 6, 2006 and incorporated herein by
                  reference.

         4.25     Amendment No. 1 to Loan and Warrant Agreement and
                  Registration Rights Agreement among the Registrant and the
                  Lender parties thereto, filed as Exhibit 4.2 to the
                  Registrant's Current Report on Form 8-K dated April 28,
                  2006 and incorporated herein by reference.

         4.26     Form of Note, filed as Exhibit 4.3 to the Registrant's
                  Current Report on Form 8-K dated April 28, 2006 and
                  incorporated herein by reference.

         4.27     Form of Warrant, filed as Exhibit 4.4 to the Registrant's
                  Current Report on Form 8-K dated April 28, 2006 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 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

                                     74

<PAGE>
<PAGE>

         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*

         10.14    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


                                     75

<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 27, 2006

         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.

Signature              Title                                  Date
---------              -----                                  ----

/s/ Zsolt Rumy         Chairman, President,                   December 27, 2006
--------------------   Chief Executive Officer and Director
Zsolt Rumy



/s/ Kevin Schott       Chief Financial Officer                December 27, 2006
--------------------
Kevin Schott



/s/ Linn H. Bealke     Director                               December 27, 2006
--------------------
Linn H. Bealke



/s/ James W. Betts     Director                               December 27, 2006
--------------------
James W. Betts



/s/ Charles A. Dill    Director                               December 27, 2006
--------------------
Charles A. Dill



/s/ John L. Kardos     Director                               December 27, 2006
--------------------
John L. Kardos


                                     76

<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 December 27, 2006, appearing in the 2006 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
December 27, 2006

                                     77

<PAGE>
<PAGE>

<TABLE>
                                       FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2006

                                 Rule 12-09 Valuation and Qualifying Accounts and Reserves

                                                   (Amounts in thousands)

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

<C>                                  <C>               <C>                  <C>                <C>                <C>
RESERVE FOR DOUBTFUL ACCOUNTS        $   718           $   306              $    -             $  295(1)          $   729
                                     =======           =======              ======             ======             =======

RESERVE FOR INVENTORY VALUATION      $ 3,100           $     -              $    -             $1,800(2)          $ 1,300
                                     =======           =======              ======             ======             =======

DEFERRED TAX VALUATION               $22,401           $14,233              $    -             $2,417(3)          $34,217
                                     =======           =======              ======             ======             =======

                                            ---------------------------------

<CAPTION>
                                       FOR THE FISCAL 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
                                    ---------          --------            --------            --------          ---------

<C>                                  <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           $ 7,904              $    -             $                  $22,401
                                     =======           =======              ======             ======             =======

                                            ---------------------------------

<CAPTION>
                                       FOR THE FISCAL 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
                                    ---------          --------            --------            --------          ---------

<C>                                  <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
                                     =======           =======              ======             ======             =======

<FN>
--------
(1) Write-off of uncollectible receivable, net of recovery.
(2) Reduction in inventory reserve for inventory items sold during fiscal 2005.
(3) Expiration of capital loss carryforward and utilization against current
    foreign income taxes payable.
</TABLE>


                                     78

<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 fiscal
                  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 fiscal
                  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 fiscal 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

                                     79

<PAGE>
<PAGE>

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

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

         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

         4.24     Amendment No. 2 to Loan and Warrant Agreement and
                  Registration Rights Agreement, dated as of December 14,
                  2006, among the Registrant and the Lenders on Form 8-K dated
                  December 14, 2006 and incorporated herein by reference

         4.25     Form of Warrant, filed as Exhibit 4.4 to the Registrant's
                  Current Report on Form 8-K dated December 14, 2006 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*

         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*

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<PAGE>
<PAGE>

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

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

         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

         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


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