10-K

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, 2008

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 o No þ

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 o No þ

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 þ No o

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. þ

Indicate by check mark whether the registrant is a large accelerated filer, an “accelerated filer a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o

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

State the aggregate market value of the voting stock held by non-affiliates of the registrant as of March 31, 2008: approximately $724,718,000.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of November 28, 2008: 34,405,692 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 2009
Annual Meeting of Shareholders	III

ZOLTEK COMPANIES, INC.
INDEX

PART I.
Item 1. Business	3
Item 1A. Risk Factors	8
Item 1B. Unresolved Staff Comments	11
Item 2. Properties	12
Item 3. Legal Proceedings	12
Item 4. Submission of Matters to a Vote of Security Holders	13
Item 4a. Executive Officers of Registrant	13
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
Item 6. Selected Financial Data	15
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	30
Item 8. Financial Statements and Supplementary Data	31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	58
Item 9A. Controls and Procedures	58
Item 9B. Other Information	59
PART III.
Item 10. Directors, Executive Officers and Corporate Governance	60
Item 11. Executive Compensation	60
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	60
Item 13. Certain Relationships, Related Transactions and Director Independence	60
Item 14. Principal Accounting Fees and Services	60
PART IV.
Item 15. Exhibits and Financial Statement Schedules	61
Signatures	63
Exhibit Index	64
Exhibit 10.10
Exhibit 23.1
Exhibit 23.2
Exhibit 31
Exhibit 32

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PART I

ITEM 1. BUSINESS

This Annual Report on Form 10-K for the fiscal year ended September 30, 2008 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

We develop, manufacture and market carbon fibers for commercial applications. Our price-competitive, high-performance carbon fibers are used as reinforcement in advanced composites for a broad range of products, including wind turbine blades and automotive components. Carbon fiber composites offer important attributes compared to alternative structural material due to their superior properties, including light weight, strength, stiffness and resistance to corrosion.

We led the development of the carbon fiber commercialization concept and we are the largest manufacturer primarily focused on producing low-cost carbon fibers for commercial applications. Our mission has been to introduce and facilitate the growth of the concept of commercial applications for carbon fibers across an expanding variety of uses.

We have spent over 15 years developing and refining our proprietary technology and manufacturing processes and capacity. Until a few years ago, the high cost of carbon fibers precluded all but the most demanding applications, limiting carbon fiber use primarily to aerospace and sporting goods applications. 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, significantly higher capital requirements, level of quality documentation and certification costs make the aerospace fibers significantly more costly to produce than carbon fiber suitable for commercial applications.

For years prior to fiscal 2004, as additions of new capacity occasionally outpaced demand from aerospace applications, manufacturers sold excess production at reduced prices into specialty sporting goods and industrial applications. As a result, the distinctive characteristics of carbon fiber and the techniques for fabricating carbon fiber composites became more broadly understood and some new and diverse transitional applications developed. However, our financial results were adversely affected by predatory pricing by the incumbent carbon fiber producers and by industry oversupply conditions which inhibited adoption of carbon fibers for non-aerospace applications as existing and potential customers were reluctant to commit to incorporate carbon fiber composites into their products due to concerns about the availability of carbon fiber in large volumes at predictable prices.

During 2005 and 2006, the Airbus A-380 and Boeing 787 airplanes entered the production phase, utilizing carbon fibers for a substantial portion of their primary structural components and requiring substantial amounts of carbon fibers. We believe the demand for carbon fibers for these two programs has absorbed the substantial majority of capacity of manufacturers for aerospace applications. At about the same time, the adoption of carbon fibers in longer wind turbine blades created a significant demand for commercial carbon fibers. This triggered the permanent divergence of the aerospace and commercial demand for carbon fibers.

The divergence in the aerospace and commercial applications led in fiscal 2006 and 2007 to strains on our ability to meet all the demand from our wind energy customers and we were unable to take on new customers. In view of the supply shortages, we embarked on an expedited capacity expansion which now has been largely completed. As a result we currently have sufficient capacity to meet demand from current wind energy customers and produce carbon fibers for additional large-scale applications. Nonetheless, when we were capacity-constrained, potential customers understandably would not commit to new large-scale applications without demonstrated assurance of adequate future supplies. This has caused our recent sequential quarter growth rates to be uneven. We are aggressively marketing to obtain new business in existing applications and new customers in new applications. New applications tend to require relatively long sales cycles due to the new product development, manufacturing and engineering investments customers must make to incorporate carbon fiber composites into their products. We expect our market development efforts will be successful over the long run.

Our operations consist of two business segments. In addition to our Carbon Fibers business unit, our Technical Fibers business unit develops, manufactures and markets high carbon content fibers and oxidized acrylic fibers used in aircraft brake manufacturing and other heat-resistant and flame-resistant applications.

We sell our carbon fibers under the Panex^® trade name and our oxidized acrylic fibers under the Pyron^® trade name.

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Business Strategy

Our business model focuses on low and sustainable pricing facilitated by low production costs, rapidly scalable capacity and a product line that offers various value-added product and process enhancements.

The principal elements of our business strategy include the following:

Sustainable Price Leadership. We 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 and stiffness that compare favorably with alternative base construction materials. We believe our proprietary process and equipment design technology enable us 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 our higher-cost competitors. We believe that, with our targeted cost structure, we can maintain sustainable pricing that makes it attractive for customers to commit to high-volume applications.

Support New Commercial Markets and Applications Development. To further accelerate the commercialization of carbon fibers and carbon fiber composites across a broad range of mass-market applications, we have pursued various initiatives, including partnerships with potential users of carbon fibers to act as catalysts in the development of new low-cost, high-volume products. We believe that our supply relationships with customers for wind energy and automotive applications are the direct result of these development efforts.

Capacity Leadership to Keep Pace with Increasing Demand. We believe that our decision to build and maintain significant available capacity has directly resulted in long-term supply arrangements with high-volume customers. We have developed, and are continually seeking to improve, proprietary continuous carbonization line designs in order to increase efficiency and shorten lead time from the time of the decision to add lines to the time when the lines become operational. In addition, we have continuously improved our ability to produce acrylic fiber precursor at low costs and in sufficient quantities to support our growth in carbon fiber capacity. The ability to increase capacity in response to the growth of the commercial markets is essential to encouraging development of large-volume applications.

Develop Model for Long-Term Joint Ventures with Strategic Partners. Our industry currently has no practical means for supplying identified large scale applications for which carbon fiber composites have been proven to offer transformational technology, such as structural use in mass produced cars to increase fuel efficiency through reduced weight and improved safety due to superior strength and stiffness. Accordingly, Zoltek is seeking to leverage its proprietary expertise by developing a business model with the goal of proliferating carbon fiber technology to new customers in capital intensive industries who would partner with us to invest in the plants necessary to launch these high volume applications. Although we expect it will take some time and our approach will evolve to address opportunities as they develop, we believe this strategy can support a quantum leap in the commercial carbon fiber industry.

Emerging Applications

We have identified emerging applications for our products with high growth potential across a variety of industries. Among them are:

• Wind Energy

Zoltek continues to be the leading supplier of the low-cost, high-performance carbon fibers used in building the largest and most advanced wind turbines. As the blades on new wind turbines get larger, the use of carbon fibers improves performance and reduces manufacturing costs. Zoltek believes that at some point all major turbine manufacturers will require carbon fibers.

• Deep Sea Drilling

Zoltek is supplying carbon fibers for a second major demonstration project of potential breakthrough significance in the drilling industry. Composite rods utilizing our carbon fibers in fabrication of umbilical products were found by a major producer of deep sea drilling platforms to deliver equal or superior performance at affordable cost, compared to composite rods utilizing aero-space grade carbon fibers. The project is designed to demonstrate the ability of carbon fiber rods to succeed where steel cables begin to fail — in counteracting the greater axial loads encountered in ultra deepwater, meaning depths exceeding 8,000 feet. At these depths, steel is subject to deformation or stretching.

• Aerospace Secondary Structures

Zoltek is actively pursuing a new market with large-volume potential: sales of carbon fiber to leading airplane makers for use in secondary structures such as floors, luggage bins and seats. We believe airplane manufacturers are concerned about future availability and pricing of large quantities of carbon fibers, as all newly designed commercial planes will incorporate extensive utilization of carbon fiber composites. Zoltek can offer considerably lower cost structures than the manufacturers of aerospace-grade carbon fibers and we also have the competitive advantage of being able to deliver large volumes of carbon fibers on a timely basis. Airplane makers are looking for every possible opportunity to reduce fuel burn by eliminating weight, but they are also concerned about their competitive position. They have already turned to carbon fiber for making the flight-worthy primary structures of their most advanced airplanes, and now they are searching for ways to make other structures out of super-lightweight carbon fiber.

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• Automotive

Zoltek believes automotive applications are destined to become the largest user of carbon fibers. For years there has been an upward trend in the use of carbon fiber reinforced composites in the manufacture of small-volume and many times hand-made cars. Examples include the Tesla which uses Zoltek fibers for the entire car and Corvette which use Zoltek carbon fibers for a few special parts. While these applications have been growing steadily, the real explosion in demand will come from expanded adaptation of carbon fiber composites into large scale series models produced on an assembly line.

• Aircraft Brakes

We believe our Technical Fibers segment is the largest supplier of oxidized and carbon fibers to the leading manufacturers of aircraft brakes. A substantial majority of commercial and defense aircraft has incorporated carbon-carbon brakes into their design due to their superior heat resistance, friction properties and light weight. This business should continue to afford a steady revenue stream with significant growth potential.

Customers

During fiscal 2007, we entered into long-term supply contracts with several of our key customers. In May 2007 we entered into a contract with Vestas Wind Systems under which we estimate, based on current prices and minimum purchase commitments, that we will supply approximately $300 million of carbon fiber in increasing volumes over the contract’s five-year term. In August 2007, we entered into a new contract with Gamesa Group, under which we estimate, based on current prices and minimum purchase commitments, that we will supply approximately $140 million of carbon fiber over the contract’s five-year term. In June 2007, we entered into a contract with a third wind turbine manufacturer, DeWind Incorporated, under which we estimate we will supply smaller, yet significant quantities of carbon fibers over the contract’s three-year term. The actual sales under any of these contracts may be greater or less than the amounts identified above.

In the fiscal years 2008, 2007 and 2006, we reported net sales of $75.1 million, $49.9 million and $19.0 million, respectively, to Vestas Wind Systems, which represented 40.4%, 33.0% and 20.5% of our net sales, respectively, during such periods. The Company reported net sales of $25.1 million in fiscal 2007 to Gamesa Group. These were the only customers that represented greater than 10% of consolidated net sales during these years.

Backlog

Sales of our products are generally made pursuant to customer purchase orders. Our backlog is based on annual contract commitments, which turn into customer orders which we expect to ship within the next twelve months. Since orders constituting our current backlog are subject to changes in delivery schedules or cancellation with only limited or no penalties, we believe that the amount of our backlog is not necessarily an accurate indication of our future net sales.

Company Operations

We have manufacturing plants in Nyergesujfalu, Hungary, Guadalajara, Mexico, Abilene, Texas and St. Charles, Missouri. Our plant in Hungary is our major carbon fiber manufacturing facility. Our Hungarian plant also manufactures acrylic fiber precursor, the raw material that we use to make carbon fibers and oxidized fibers. Our Texas plant houses carbon fiber manufacturing lines and value-added processing capabilities. Our Missouri plant is primarily dedicated to the production of technical fibers for aircraft brake and other friction applications and also produces limited amounts of carbon fibers and houses a research and development facility. In addition, we have a facility in Salt Lake City, Utah where we design and build composite manufacturing equipment and can produce resin pre-impregnated carbon fibers, called prepregs.

Our facility in Guadalajara, Mexico was acquired in October 2007. The first phase of retrofitting of its acrylic precursor plant and installation of carbon fibers lines has been substantially completed and the facility is undergoing start-up operations. We expect it will supply our North American operations with low-cost precursor and will serve as an additional site for carbon fiber production beginning in fiscal 2009. The Mexico plant has substantially increased our capacity to produce low-cost carbon fibers on a timely and cost-effective basis, and further extended our leadership in the growing commercial carbon fibers sector.

Acrylic fiber precursor comprises a significant part of the total cost of producing carbon fibers. During 2000, we began to manufacture quantities of precursor at our Hungarian facility. During 2004 and 2005, we converted all of our acrylic fiber capacity to precursor manufacturing and currently all of our carbon fibers are produced from this precursor. With the addition of our Mexico precursor facility, we expect to have ample supply of high quality, low cost precursor to supply our foreseeable future requirements.

An element of our strategy is to offer customers value-added processing of the fibers that we produce. Our longer-term focus is on creating integrated solutions for large potential end users by working directly with carbon fiber customers in the primary market sectors that we target. We perform certain downstream processing, such as weaving, knitting, blending with other fibers, chopping and milling, and preparation of pre-form, pre-cut stacks of fabric. We also manufacture prepreg carbon fibers preimpregnated with bonding resin. In addition, our Salt Lake City-based Entec Composite Machines subsidiary designs and builds composite manufacturing equipment and markets the equipment along with manufacturing technology and materials.

We also provide composite design and engineering for development of applications for carbon fiber reinforced composites. We reported research and development expenses of $8.1 million, $7.2 million, and $4.9 million in fiscal 2008, fiscal 2007 and fiscal 2006, respectively. For historical financial information regarding our various business segments, see Note 11 of the accompanying Notes to Consolidated Financial Statements.

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Competition

Our carbon fibers and technical fibers business segments compete with various other producers of carbon fibers. We are the only publicly-held company that is a “pure-play” in carbon fibers, while all the other six existing competitors’ carbon fiber operations are a small part of their total business. Our existing six major competitors have substantially greater research and development, marketing, financial and managerial resources than we do and represent significant competition for us. We are aware of no single manufacturer of carbon fiber products that competes across all of our product lines and applications. We believe our business plan distinguishes us from other carbon fiber manufacturers in supporting the long-term growth of the commercial carbon fiber market.

To varying degrees, depending on market conditions and supply, we compete with aerospace grade carbon fiber producers, such as Hexcel Corporation and Cytec Industries of the United States and Toray Group, Toho Tenax and Mitsubishi Rayon of Japan. These carbon fiber producers tend to market higher cost products than our products, with a principal focus on aerospace structural and high price industrial applications. SGL Carbon is the most direct competitor which also uses a textile-type precursor which they purchase from various suppliers.

The aerospace carbon fiber manufacturers have tended to enter into direct competition with us primarily when they engage in significant discounting to protect their market share and to sell in spot markets. SGL currently is our principal competitor in the oxidized fiber market.

The principal areas of competition for the carbon fibers and technical fibers business segments are sustainable price, quality, development of new applications and ability to reliably meet the customer’s volume requirements and qualifications for particular programs. Carbon fiber production also requires substantial capital expenditures for manufacturing plants and specialized equipment, know-how to economically manufacture carbon fibers to meet technical specifications and the ability to qualify carbon fibers for acceptable performance in downstream applications.

International

The Company conducts its carbon fiber products operations primarily in the United States and Europe. The Company’s plant in Mexico is undergoing start-up operations. The Company sells its carbon fibers globally. There are unique risks attendant to the Company’s foreign operations, such as currency fluctuations. For additional information regarding our international operations, see Note 11 of the accompanying Notes to Consolidated Financial Statements and the information included under “Item 1A-Risk Factors.”

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

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 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. 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, 2008, we employed approximately 290 persons in our United States operations, approximately 1,100 in our Hungarian operations and approximately 290 in our Mexico operations.

Our 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 Zrt., our Hungarian subsidiary, there are two active unions (some Zoltek Zrt. employees belong to both unions). Management meets with union representatives on a regular basis and there have not been any problems or major disagreements with either union in the past five years. We believe that overall our employee relations are good. At our Mexican subsidiary employees are also represented by a union which was selected by the company.

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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. All of the Company’s filings may be read or copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

This Annual Report on Form 10-K for fiscal 2008 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 and the information incorporated by reference in this Form 10-K contain certain statements that 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 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, any accompanying Form 10-K supplement and the documents incorporated herein by reference, particularly in the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” and include statements regarding the intent, belief or current expectations of us, our directors and officers with respect to, among other things: (1) our financial prospects; (2) our growth strategy and operating strategy, including our focus on facilitating acceleration of the introduction and development of mass market applications for carbon fibers; (3) our current and expected future revenue; and (4) our ability to complete financing arrangements that are adequate to fund current operations and our long-term strategy.

This Form 10-K and the information incorporated by reference in the Form 10-K also contain statements that are based on the current expectations of our company. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The factors that might cause such differences include, among others, our ability to: (1) penetrate existing, identified and emerging markets, including entering into new supply agreements with large volume customers; (2) continue to improve efficiency at our manufacturing facilities on a timely and cost-effective basis to meet current order levels of carbon fibers; (3) successfully add new planned capacity for the production of carbon fiber and precursor raw materials and meet our obligations under long-term supply agreements; (4) maintain profitable operations; (5) increase our borrowing at acceptable costs; (6) manage changes in customers’ forecasted requirements for our products; (7) continue investing in application and market development in a range of industries; (8) manufacture low-cost carbon fibers and profitably market them despite increases in raw material and energy costs; (9) successfully operate our Mexican facility to produce acrylic fiber precursor and add carbon fiber production lines; (10) resolve the pending non-public, fact-finding investigation being conducted by the Securities and Exchange Commission; and (11) manage the risks identified under “Risk Factors” below and in our filings with the SEC.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you 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.

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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 securities, you should know that making such an investment involves a high degree of risk, including the risks described below. The risks that we have 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 securities could decline, and you may lose all or part of your investment.

Our growth and profitability is dependant on growth in demand for carbon fibers and entering into new supply agreements.

Historically, our business has been adversely affected during periods of oversupply and capacity constraints. For years prior to fiscal 2004, our financial results were adversely affected by industry oversupply conditions which inhibited adoption of carbon fibers for non-aerospace applications as existing and potential customers were reluctant to commit to incorporate carbon fiber composites into their products due to concerns about the availability of carbon fiber in large volumes at predictable pricing. During 2006 and 2007, the divergence in the aerospace and commercial applications and our new contracts with wind energy customers led to strains on our ability to meet all the demand from our wind energy customers and we were unable to take on new customers.

We currently have sufficient capacity to meet demand from current wind energy customers and produce carbon fibers for additional large-scale applications. Our future profitability and growth will depend upon our ability to enter into contracts with new customers for existing applications utilizing our carbon fibers and the development of new markets for large-scale applications which incorporate our carbon fiber products. Development of new customers for existing applications and new markets for our carbon fiber products will require substantial technical, marketing and sales efforts and the expenditure of significant funds. Development of new markets for carbon fibers may not occur. Our business, operating results and financial condition could be materially and adversely affected if new customers and markets for our carbon fibers products do not develop.

Increases in sales of our carbon fiber products are subject to long sales cycles of our customers.

Our future profitability and growth will depend primarily upon our ability to enter into contracts with new customers for existing applications utilizing our carbon fibers and the development of new markets for a broad range of large-scale applications which incorporate our carbon fiber products. Our ability to increase sales of our carbon fiber products is subject to relatively long sales cycles of our customers due to new product development, manufacturing and engineering investments our customers must make to incorporate carbon fiber composites into their products.

A limited number of customers generate a significant portion of our revenue and may terminate their contracts with us in the event of certain changes in control or may require that we make penalty payments in the event we fail to perform.

For fiscal 2008, our largest customer represented approximately 40.4% of our revenue and our three next largest customers accounted for 17.7% of revenue. We anticipate that significant customer concentration will continue for the foreseeable future, although the composition of our largest customers may change from period to period. A significant portion of our total sales in fiscal 2008 were to customers in the wind energy market. Significant changes in demand for our customers’ wind turbines, the shares of their requirements that is awarded to us or changes in the design or materials used to construct their products could result in a significant loss of business with these customers. Our contracts with certain customers allow them to terminate their agreements with us or require us to make substantial penalty payments in the event we fail to perform our obligations under our agreements with them. The loss of, or significant reduction in the purchases by, these customers or any other significant customers could have a material adverse effect upon our future revenues and business, results of operations, financial condition or cash flow.

We reported net losses from continuing operations for fiscal year 2007 and each of the five fiscal years preceding it.

Although we reported net income in fiscal 2008, we have reported losses from continuing operations of $7.1 million, $12.3 million, $17.1 million, $38.2 million, $65.8 million and $2.0 million in fiscal years 2002, 2003, 2004, 2005, 2006, and 2007 respectively. Net losses from continuing operations for the fiscal years 2002, 2003, 2004 and 2005 were attributable primarily to the cost of development and preliminary execution of our carbon fiber commercialization strategy.

We have experienced negative cash flows from operations for each of the four fiscal years prior to fiscal 2006 and may experience negative cash flows in the future, which may adversely affect our ability to fund our operations.

We reported negative cash flows from continuing operations of $2.9 million, $2.2 million, $8.1 million and $7.6 million in fiscal years 2002, 2003, 2004 and 2005, respectively. These negative cash flows from operations were attributable to the same reasons that resulted in operating losses for these fiscal years. We have relied on equity financing and borrowings to finance our business over the past five fiscal years. Additional funding may not be available on favorable terms or at all, and our prior history of negative cash flows from operations may adversely affect our ability to borrow funds in the future.

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Demand for our carbon fiber products may be adversely affected by the current economic and credit environment.

The United States and international economies recently have experienced (and continue to experience) a period of slow economic growth. A near-term economic recovery is uncertain. In particular, the current credit and housing crisis, the increase in U.S. sub-prime mortgage defaults, potential terrorist acts and similar events, continued turmoil in the Middle East and war in general could contribute to a slowdown for products that require significant capital expenditures, including demand for large-scale projects that incorporate our carbon fibers. If the economic recovery slows down as a result of recent economic, political or social turmoil, we may experience decreases in the demand for our carbon fiber products, which will harm our operating results.

Our operations and sales in foreign countries are subject to risks.

For fiscal 2008, approximately 74% of our revenues were supplied by our operations in Hungary. Our operations in Hungary and Mexico and our sales in other foreign countries are subject to risks associated with foreign operations and markets generally, including the fact that many members of our senior management are resident in the United States, foreign currency fluctuations, unexpected changes in regulatory, economic or political conditions, tariffs and other trade barriers, longer payment cycles for accounts receivable, 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 our future revenues and business, results of operations, financial condition or cash flow.

Our ability to fund and manage our anticipated growth will affect our operating results.

The growth in our business has placed, and is expected to continue to place, a significant strain on our management and operations. In order to effectively manage potential long-term growth and to reach growth targets, we must add to our carbon fiber manufacturing capacity, have access to adequate financial resources to fund significant capital expenditures and maintain gross profit margins. We must also pursue a growth strategy and continue to strengthen our operations, including our financial and management information systems, and expanding, training and managing our employee workforce. There can be no assurance that we will be able to do so effectively or on a timely basis. Failure to do so could have a material adverse effect upon our future revenues and business, results of operations, financial condition or cash flow. Additionally, in the event that we need to obtain debt financing in the future to fund our growth, recent uncertainty in the credit markets could affect our ability to obtain debt financing on reasonable terms.

Our operations are dependent upon our senior management and technical personnel.

Our future operating results depend upon the continued service of our senior management our technical personnel, and the management personnel in our domestic and foreign operations. Our future success will depend upon our 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 we will retain our key managerial and technical employees or that we will be successful in attracting, assimilating or retaining other highly qualified personnel in the future.

Our 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 and interruptions in plant operations.

Developments by competitors may reduce demand for our products and technologies, which may adversely affect our sales.

We compete with various other participants in the advanced materials and textile fibers markets. All of our six principal competitors have substantially greater research and development, manufacturing, marketing, financial and managerial resources than we do. In addition, existing carbon fiber producers, including those that supply aerospace applications, may refocus their activities to produce carbon fiber for commercial applications that compete more directly with us and certain producers have announced plans to do so. Developments by existing or future competitors may render our products or technologies less competitive. In addition, we may not be able to keep pace with new technological developments.

The price volatility of many of our raw materials and energy costs may result in increased production costs, which we may not be able to pass on to our customers.

A substantial portion of our raw materials are subject to price volatility and a significant portion of our costs are energy costs. We may not always be able to promptly raise product prices and, ultimately, pass on underlying cost increases to our customers. In addition, our competitors may be able to obtain raw materials at a lower cost than we can. Additional raw material and energy cost increases that we are not able to pass on to customers or the loss of a large number of customers to competitors as a result of price increases could have a material adverse effect on our future revenues and business, results of operations, financial condition or cash flow.

We could be adversely affected by environmental and safety requirements.

Our operations require the handling, use, storage and disposal of certain regulated materials and wastes. As a result, we are subject to various laws and regulations pertaining to pollution and protection of the environment, health and safety. These requirements govern, among other things, emissions to air, discharge to waters and the generation, handling, storage, treatment and disposal of waste and remediation of contaminated sites. We have made, and will continue to make, capital and other expenditures in order to comply with these laws and regulations. These laws and regulations are complex, change frequently and could become more stringent in the future.

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In addition, we may be required to comply with evolving environmental, health and safety laws, regulations or requirements that may be adopted or imposed in the future or to address newly discovered information or conditions that require a response. Although most of our properties have been the subject of environmental site assessments, there can be no assurance that all potential instances of soil and groundwater contamination have been identified, even at those sites where assessments have been conducted. Accordingly, we may discover previously unknown environmental conditions and the cost of remediating such conditions may be material.

Our business depends upon the maintenance of our proprietary technology.

We depend upon our proprietary technology that is not subject to patent protection. We rely principally upon trade secret and copyright laws to protect our proprietary technology. We regularly enter into confidentiality agreements with our key employees, customers and potential customers and limit access to and distribution of our trade secrets and other proprietary information. These measures may not be adequate to prevent misappropriation of our technology or to assure that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. In addition, the laws of other countries in which we operate may not protect our proprietary rights to the same extent as the laws of the United States. We are also subject to the risk of adverse claims and litigation alleging infringement of intellectual property rights.

We have incurred and will continue to incur increased costs and demands upon our management as a result of complying with the laws and regulations affecting public companies, which could affect our operating results and make it more difficult to attract and retain qualified management.

As a public company, we have incurred and will continue to incur significant legal, accounting and other expenses, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and the Nasdaq Global Select Market. The expenses incurred by public companies generally for reporting and corporate governance purposes have increased. These rules and regulations have increased our legal and financial compliance costs and have made some activities more time-consuming and costly. It is possible that these new rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we 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 us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.

Our stock price has been volatile and may continue to fluctuate.

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

A change of control of our company may be discouraged, delayed or prevented by our classified board of directors, our ability to issue preferred stock, or the voting control of our principal shareholder.

Our 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 our 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 of such discouragement, delay or prevention of takeover attempts could adversely affect the price of our common stock.

Our Articles of Incorporation also 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 that 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 that may be issued. If issued, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control. The possible impact that the issuance of preferred stock could have on a takeover attempt could adversely affect the price of the common stock. Although we have no present intention to issue any shares of preferred stock, we may do so in the future.

Zsolt Rumy, our founder and principal shareholder, owns approximately 17.6% of outstanding shares of common stock. As a result, he has and will continue to have effective voting control over our company, including the election of directors, and is able to effectively prevent an affirmative vote which would be necessary for a merger, sale of assets or similar transaction, irrespective of whether other shareholders believe such a transaction to be in their best interests.

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Future sales of common stock could affect the price of our 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 our 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 our common stock.

We do not currently intend to pay dividends on our common stock.

We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future.

Item 1B. Unresolved Staff Comments

None.

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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.

		Approximate Area
Location	Use	(in square feet)		Status
St. Louis, Missouri	Administrative, marketing and central engineering offices		30,000	Owned
St. Charles, Missouri	Carbon and Technical fiber manufacturing and R&D facility		107,000	Owned
Abilene, Texas	Carbon fiber manufacturing		278,000	Owned
Salt Lake City, Utah I	Composite fabrication equipment design and manufacturing		65,000	Owned/ Mortgaged
Salt Lake City, Utah II	Carbon fiber prepreg manufacturing		35,000	Leased
Nyergesujfalu, Hungary	Carbon fiber, acrylic fiber precursor		2,000,000	Owned
Guadalajara, Mexico	Carbon fiber, acrylic fiber precursor		1,400,000	Owned

Item 3. Legal Proceedings

Legal contingencies have a high degree of uncertainty. When losses from contingencies become estimatable and probable, reserves are established. The reserves reflect management’s estimate of the probable cost of ultimate resolution of the matters and are revised accordingly as facts and circumstances change and, ultimately, when matters are brought to closure. If any litigation matter is resolved unfavorably, the Company could incur obligations in excess of management’s estimate of the outcome, and such resolution could have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity. As of September 30, 2008, the Company has established an accrual for legal liabilities of $29.1 million. In addition, we may incur additional legal costs in connection with pursuing and defending such actions.

In February 2005, SP Systems and its subsidiary Structural Polymer Systems, Limited (“SP Systems”) filed an action against our Zoltek Corporation subsidiary in the U.S. District Court for the Eastern District of Missouri, Eastern Division alleging that we breached a Supply Agreement relating to our carbon fiber product known as Panex 33. The case was tried in November 2006 and the jury rendered verdicts against our Zoltek Corporation subsidiary. In April 2007, the Court issued an Order setting the amount of a supersedeas bond at $23.5 million in order to stay the execution of the amended judgment pending our appeal. On October 8, 2008, the United States Court of Appeals affirmed the district court’s earlier denial of Zoltek’s motion for a new trial and motion for judgment as a matter of law. The Court of Appeals also denied Structural Polymer Group’s cross appeal of the district court’s reduction of the jury’s damages award. Zoltek filed a motion for rehearing by the full Eighth Circuit Court of Appeals. As of September 30, 2008, the Company had accrued $23.1 million with respect to this matter. The Company expects that the ultimate resolution of the litigation will not have any additional material adverse effect on the Company’s business, financial condition or liquidity.

Zoltek has filed a separate lawsuit alleging that SP Systems breached its supply agreement and committed fraud against Zoltek. Zoltek is claiming actual and punitive damages of in excess of $78 million in that suit, which it will continue to vigorously prosecute.

In September 2004, the Company was named a defendant in a civil action filed by an investment banker that was retained to obtain equity investors, alleging breach by the Company of the Company’s obligations under the agreement signed by the parties. On May 9, 2006, the court entered judgment for Scott Macon in the amount of $3.6 million for placement fees, plus warrants for the purchase of 122,888 of Zoltek stock. In October 2007, the United States Court of Appeals for the Second Circuit upheld the liability against Zoltek affirming the judgment for $2.5 million in cash and warrants to purchase approximately 92,000 shares of the Company’s common stock and remanded back to the District Court for further proceeding fees at issue of approximately $1.1 million and approximately 31,000 warrants of Zoltek common stock plus interest. In October 2008, the Company settled the case for $5.8 million cash which had been fully accrued as a litigation charge as of September 30, 2008.

On May 13, 2008, the Company received a letter from the enforcement staff of the Securities and Exchange Commission indicating that the staff was conducting a non-public, fact finding investigation and requested that the Company retain certain records and produce information and documents related to matters disclosed in the Company’s Current Report on Form 8-K filed May 5, 2008 relating to payments directed by the Company’s former Chief Financial Officer that were not properly authorized or recorded. The Company has cooperated fully with its investigation. The Company has submitted all information requested by the staff.

The Company is exposed to various claims and legal proceedings arising out of the normal course of its business. Although there can be no assurance, in the opinion of management, the ultimate outcome of these other claims and lawsuits should not have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.

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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, 2008.

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 66, is the founder of the Company and has served as its Chairman, Chief Executive Officer and President and as a Director since 1975 and has served as its interim Chief Financial Officer since May 2008. Mr. Rumy received a B.S. degree in Chemical Engineering from the University of Minnesota in 1966.

Karen M. Bomba, age 44, has served as the Chief Operating Officer of the Company since March 2008. Ms. Bomba served as Chairman and CEO of Messier-Bugatti USA, a subsidiary of Messier-Bugatti, SAFRAN Group, a producer of aircraft carbon brakes and systems. Prior positions included Business Line Manager and Focused Factory Manager of Hitco Carbon Composites’ Aircraft Structures, Insulation Products and Carbon Businesses, and Manufacturing Engineering Manager of the B2 Assembly and Systems Checkout. Ms. Bomba has a Mechanical Engineering BS from Rensselaer Polytechnic Institute and was awarded a Northrop Fellowship for graduate work in Manufacturing Engineering at UCLA.

Andrew W. Whipple, age 45, has served as the Chief Accounting Officer of the Company since May 2008. Mr. Whipple served as a Senior Manager in the St. Louis office of Deloitte & Touche, LLP where he worked from 1993 to 1998, when he joined Digital Teleport, Inc. as its Controller and was later promoted to Chief Financial Officer. After Digital Teleport was acquired by CenturyTel in June of 2003, he became Vice President of Operational Support at the telecommunications company and served there for four years prior to joining E3 Biofuels as its Chief Financial Officer from 2007 to 2008. Mr. Whipple is a CPA and received his degree in accounting from Virginia Tech in 1985.

George E. Husman, 63, has served as the Chief Technology Officer of the Company since January 2007. Mr. Husman holds a B.S. in aerospace engineering from the University of Cincinnati and a M.S. in materials engineering from the University of Dayton. He spent 18 years at the Materials Directorate at Wright-Patterson Air Force Base in research and management positions, including Director of the Nonmetallic Materials Division. Upon leaving the Air Force in 1986, he joined BASF Structural Materials, Inc., in Charlotte, North Carolina, as Vice President for Business Development. At BASF, he also served as VP & General Manager of Thermoplastic Composites and Vice President for Research and Development. In 1993, Mr. Husman joined Southern Research Institute in Birmingham, Alabama, as Vice President of the Engineering Division, and prior to joining Zoltek, he was the Associate Director for Research in the School of Engineering at the University of Alabama at Birmingham.

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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 Global Select Market. The number of beneficial holders of the Company’s stock is approximately 35,000, including shareholders whose shares are held in “nominee” or “street” names. As of September 30, 2008, there were 465 holders of record of the Company’s common stock. The Company has not paid cash dividends on any of its common stock and does not intend to pay cash dividends on common stock for the foreseeable future.

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

	Fiscal year ended				Fiscal year ended
	September 30, 2008				September 30, 2007
	High		Low		High		Low
First Quarter	$	47.83	$	34.10	$	27.99	$	18.75
Second Quarter		42.44		20.97		35.12		20.26
Third Quarter		32.25		22.79		42.87		29.70
Fourth Quarter		24.97		15.26		51.39		35.18

Performance Graph

The graph below shows the cumulative total return on common stock for the period from September 30, 2003 through September 30, 2008, in comparison to the cumulative total return on Russell’s 2000 Index and a NASDAQ peer group that we are most comparable to in terms of size and nature of operations. The results shown assume that $100 was invested on September 30, 2003 and that all dividends were reinvested. These indices are included for comparative purposes only and do not reflect whether it is management’s opinion that such indices are an appropriate measure of the relative performance of the stock involved, nor are they intended to forecast or be indicative of future performance of the common stock.

	9/30/2003		9/30/2004		9/30/2005		9/30/2006		9/30/2007		9/30/2008
Zoltek Companies, Inc.		100.00		320.71		469.64		912.50		1558.21		611.07
NASDAQ Industrial Index		100.00		114.53		128.91		138.05		165.51		120.95
The Russell 2000 Index		100.00		117.48		136.83		148.78		165.16		139.35

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Item 6. Selected Financial Data

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

	Year Ended September 30,
Statement of Operations Data: (1)	2008			2007			2006			2005			2004
Net sales	$	185,616		$	150,880		$	92,357		$	55,377		$	34,525
Cost of sales, excluding available unused capacity costs		134,393			107,506			69,994			52,809			29,137
Available unused capacity costs		—			—			—			2,347			4,466
Litigation charge (2)		4,884			5,400			22,795			—			—
Selling, general and administrative expenses (3)		26,332			19,865			15,243			7,847			6,463
Operating income (loss) from continuing operations		20,007			18,109			(15,675	)		(7,626	)		(5,541	)
Other expense		(7,150	)		(18,095	)		(49,202	)		(29,877	)		(11,118	)
Income tax expense		(5,416	)		(1,986	)		(888	)		(708	)		(434	)
Net income (loss) from continuing operations		7,441			(1,972	)		(65,765	)		(38,211	)		(17,093	)
Discontinued operations:
Operating loss, net of taxes		—			(545	)		(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		—			(545	)		(37	)		(2,182	)		(5,714	)
Net income (loss)	$	7,441		$	(2,517	)	$	(65,802	)	$	(40,393	)	$	(22,807	)
Net income (loss) per share:
Basic and diluted income (loss) per share:
Continuing operations	$	0.22		$	(0.07	)	$	(2.91	)	$	(2.12	)	$	(1.04	)
Discontinued operations		0.00			(0.02	)		(0.00	)		(0.12	)		(0.35	)
Total	$	0.22		$	(0.09	)	$	(2.91	)	$	(2.24	)	$	(1.39	)
Basic weighted average common shares outstanding		34,042			28,539			22,575			18,050			16,372
Diluted weighted average common shares outstanding		34,172			28,539			22,575			18,050			16,372

	September 30,
Balance Sheet Data:	2008		2007		2006		2005		2004
Working capital (4)	$	76,000	$	147,956	$	20,042	$	19,072	$	16,802
Total assets (4)		440,164		403,599		187,684		130,429		122,455
Current maturities of long-term debt		12,601		13,813		1,365		374		570
Long-term debt, less current maturities		3,562		6,851		32,002		40,421		42,002
Shareholders’ equity (4)		346,666		320,767		111,661		40,645		44,230

(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 Scott Macon case in fiscal 2007 and the SP Systems case in fiscal 2008 and 2006, as discussed in Note 8 of the accompanying Notes to Consolidated Financial Statements.
(3)	Includes application and development costs of $8,093, $7,230, $4,887, $3,324 and $3,070 for fiscal years 2008, 2007, 2006, 2005 and 2004, respectively.
(4)	The Company completed a public offering of shares in August 2007 and realized net proceeds of $131.5 million, recorded as increases to cash and equity. During fiscal 2008 a substantial portion of those proceeds were used to fund capital expenditure projects in Mexico.

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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(“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.

OUR BUSINESS

We are an applied technology and advanced materials company. We are a leader in the commercialization of carbon fiber through our development of a price-competitive, high-performance reinforcement for composites used in a broad range of commercial products which we sell under the Panex^® trade name. In addition to manufacturing carbon fiber, we produce an intermediate product that we refer to as technical fiber, a stabilized and oxidized acrylic fiber used in flame- and heat-resistant applications which we sell under the Pyron^® trade name. We have spent over 15 years developing our proprietary technology and manufacturing processes. We believe that we are the largest manufacturer primarily focused on producing low-cost carbon fiber for commercial applications.

The following factors have affected the net sales of our Carbon Fiber segment in recent years: (1) the growth in emerging applications using carbon fiber, such as wind turbines; (2) increases in our manufacturing capacity; and (3) sellers prices. We would expect that our net sales in future periods will continue to be affected by the first and second of these factors. Although we implemented selected price increases as of January 1, 2008, we cannot predict whether we will be able to implement future price increases similar to those we implemented in the recent past. The net sales of our Technical Fiber segment have been affected in the past, and we expect will continue to be affected in the foreseeable future, by the demand and order patterns resulting from aircraft brake manufacturers.

The primary cost components of our Carbon Fiber and Technical Fiber segments are energy and acrylonitrile, which is a propylene-based product and our primary raw material for the production of acrylic fiber precursor used in our carbon fiber and technical fiber production. We expect that new applications, including those we are attempting to facilitate, will continue to positively affect demand for our products.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED SEPTEMBER 30, 2008 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 2007

The Company’s sales increased 23.0%, or $34.7 million, to $185.6 million in fiscal 2008 from $150.9 million in fiscal 2007. Carbon fiber sales increased 34.1%, or $39.7 million, to $156.0 million during fiscal 2008 from $116.4 million during fiscal 2007 as production and sales of wind energy orders continued to grow. The Company’s sales further benefited from the newly added capacity in Hungary of five carbon fiber lines, two of which were not completed until late March 2008. Technical fiber sales decreased 18.3%, or $5.8 million, to $25.9 million during fiscal 2008 from $31.7 million during fiscal 2007. Technical fiber sales decreased in fiscal 2008 as the Company’s two major aircraft brake customers reduced inventory which they had built up during fiscal 2007 due to concerns that they had with their supply chain. Orders resumed to normal levels with one of these customers during the second quarter of 2008. Sales of other products and services consisting primarily of energy utility services provided to the local community by our Hungarian subsidiary increased $0.9 million to $3.7 million during fiscal 2008 from $2.8 million during fiscal 2007.

The Company’s cost of sales increased by 25.0%, or $26.9 million, to $134.4 million during fiscal 2008 from $107.5 million during fiscal 2007. Carbon fiber cost of sales increased by 34.6%, or $28.5 million, to $110.7 million during fiscal 2008 from $82.2 million for fiscal 2007. The increase in carbon fiber cost of sales resulted primarily from the increased sales of 34.1% discussed above. Technical fiber cost of sales decreased $3.3 million, or 13.9%, to $20.4 million for fiscal 2008 from $23.7 million for fiscal 2007 primarily as a result of the decreased sales noted above. The cost of sales of other products increased for fiscal 2008 to $3.3 million compared to fiscal 2007 of $1.6 million.

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The Company’s gross profit increased by 18.1%, or $7.8 million, to $51.2 million during fiscal 2008 from $43.4 million in fiscal 2007. Carbon fiber gross profit percentage decreased to 29.1% for fiscal 2008 compared to 29.3% for fiscal 2007. Carbon fiber gross profit increased from $34.1 million to $45.3 million during these respective periods. The increase in carbon fiber gross profit resulted from greater volumes and improved efficiencies of the installed carbon fiber lines. Technical fiber gross profit decreased from $8.0 million, or 25.3% of sales, for fiscal 2007 to $5.5 million, or 21.4% of sales, during fiscal 2008. The decrease in technical fiber gross profit and gross profit percentage resulted from the limitation on the ability of the business unit to absorb certain fixed costs due to decreased production of technical fiber products.

Application and market development costs were $8.1 million in fiscal 2008 and $7.2 million in fiscal 2007. 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, offshore oil and gas drilling, fire/heat barrier and alternate energy technologies.

A litigation charge of $4.9 million was recorded in fiscal 2008 related to the affirmance of the judgment of the SP case compared to a charge of $5.4 million during fiscal 2007 related to the confirmation of judgment of the Scott Macon case (see Note 8 of the Notes to Consolidated Financial Statements).

Selling, general and administrative increased by $5.6 million, to $18.2 million in fiscal 2008 from $12.6 million in fiscal 2007. The Company recorded $2.3 million for the cost of employee services received in exchange for equity instruments under Statement of Financial Accounting Standards (SFAS) 123-R “Share-Based Payments” during fiscal 2008 and $1.3 million in fiscal 2007. The Company also increased headcount and administrative services during fiscal 2008 by $2.8 million compared to fiscal 2007. The increase related to staffing of management positions that have been filled to meet the demands of the growing sales and production volume. The Company spent $0.4 million in fiscal 2008 related to a previously disclosed accounting investigation. Bad debt expense increased by $0.9 million from fiscal 2007 to fiscal 2008.

Operating income was $20.0 million for fiscal 2008 compared to income of $18.1 million in fiscal 2007. Carbon fiber operations reported operating income of $34.0 million for fiscal 2008 compared to income of $26.6 million in fiscal 2007. The improvement in operating income in the carbon fiber operation in fiscal 2007 related to the increase in production and sales as the Company added new capacity at its Hungarian facility. Operating income from technical fibers decreased $4.4 million, from $7.4 million for fiscal 2007 to $3.0 million for fiscal 2008, as sales decreased $5.8 million due to decreased orders from aircraft brake customers. Corporate headquarters/other reported an operating loss of $17.0 million for fiscal 2008 compared to a loss of $15.8 million during fiscal 2007. The increase in operating loss was due primarily to increases in administrative headcount and salaries in at the corporate office and in Hungary to support the production growth and an increase of $1.0 million for the cost of employee services received in exchange for equity instruments under SFAS 123-(R).

Interest expense was $1.9 million for fiscal 2008, compared to $2.3 million in fiscal 2007. The decrease in interest expense resulted from the reduced debt balances due to conversion of convertible debt to common stock during fiscal 2007 and 2008.

Amortization of financing fees, which are non-cash expenses, was approximately $6.7 million during fiscal 2008 compared to $9.8 million during fiscal 2007. (See —“Liquidity and Capital Resources—Financing”).

Interest income was $2.9 million for fiscal 2008 compared to $1.8 million for fiscal 2007. The increase was a result of interest earned on short-term investments of cash received from our public offering in August 2007.

Warrant issuance expense was $6.4 million for fiscal 2007. In December 2006, the Company expensed the fair value of warrants issued to induce holders to exercise previously held warrants. The Company used the funds received in connection with posting the bond necessary in connection with the continuing defense of the SP Systems case. The Company did not incur any warrant issuance expense during fiscal 2008.

Loss on value of warrants and conversion feature, which is a non-cash item, was a loss of $0.3 million for fiscal 2007 (see— “Liquidity and Capital Resources—Financing”). The loss was attributable to the increase in the market price of the Company’s common stock. All of the Company’s convertible debt issuances which required derivative accounting were converted to equity instruments as of September 30, 2007.

Loss on foreign currency transactions decreased to $0.4 million for fiscal 2008 compared to $0.7 million for fiscal 2007. During fiscal 2008, both the U.S. dollar and the Euro declined in value against the Forint. As most of the Company’s accounts receivable are denominated in Euros, the decline in value resulted in a significant loss recognized in the income statement of our Hungarian subsidiary. The translation of the Hungarian subsidiary’s financial statements from its functional currency (Forint) to U.S. dollars is not included in determining net income for the period but is recorded in accumulated other comprehensive income in equity. The loss in fiscal 2007 was primarily the result the decline in value of the U.S. dollar.

Other expense, net, was $1.1 million in fiscal 2008 compared to $0.4 million for fiscal 2007. During fiscal 2008, the Company disposed of some obsolete equipment items and incurred cost related to the shutdown of a sales office in Europe. The expenses incurred during fiscal 2007 were primarily fees incurred at our Hungarian subsidiary.

Income tax expense was $5.4 million for fiscal 2008 compared to $2.0 million for fiscal 2007. During fiscal 2008, the Company amortized its deferred tax asset by $2.6 million, reducing the existing net operating loss carryforward. An additional income tax expense of $1.2 million was recorded for fiscal 2008 as the Company accrued for a special Hungarian tax of 4% on pre-tax net income. The Company also incurred $1.4 million expense during fiscal 2008 related to the local Hungarian municipality tax. The Company paid approximately $0.2 million in state and local income taxes in the U.S. and Mexico.

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The foregoing resulted in income from continuing operations of $7.4 million for fiscal 2008 compared to a net loss of $2.5 million for fiscal 2007. Similarly, the Company reported net income from continuing operations per share of $0.22 on a basic and diluted basis for fiscal 2008 and net loss from continuing operations per share of $0.07 on a basic and diluted basis for fiscal 2007. The weighted average common shares outstanding were 34.0 million and 28.5 million for fiscal 2008 and 2007, respectively.

Net loss from discontinued operations was $0.5 for fiscal 2007. The Company reported net loss from discontinued operations per share of $0.02 on a basic and diluted basis for fiscal 2007. The Company did not report any discontinued operations for fiscal 2008.

FISCAL YEAR ENDED SEPTEMBER 30, 2007 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 2006

The Company’s sales increased 63.4%, or $58.5 million, to $150.9 million in fiscal 2007 from $92.4 million in fiscal 2006. Carbon fiber sales increased 77.2%, or $50.7 million, to $116.4 million in fiscal 2007 from $65.7 million in fiscal 2006 as production and sales of wind energy orders continued to grow. The Company’s carbon fiber sales benefited from a price increase on January 1, 2007, the newly added capacity in Hungary of seven carbon fiber lines since June 30, 2006 and the continued improvement in the operations of the Abilene facility. Technical fiber sales increased 25.8%, or $6.5 million, to $31.7 million in fiscal 2007 from $25.2 million in fiscal 2006. Technical fiber sales increased as the Company experienced a significant increase in orders from its aircraft brake customers due to issues that they had with a competitive supplier and added a technical fiber production line in its facility in Hungary in order to meet the increased demand. Sales of other products and services increased $1.3 million to $2.8 million during fiscal 2007 from $1.5 million during fiscal 2006 related to our Energy sales division.

The Company’s cost of sales increased by 53.6%, or $37.5 million, to $107.5 million in fiscal 2007 from $70.0 million in fiscal 2006. Carbon fiber cost of sales increased by 66.5%, or $32.8 million, to $82.2 million for fiscal 2007 from $49.4 million for fiscal 2006. The increase in carbon fiber cost of sales reflected increased sales of 77.2% discussed above offset by increased margins due to greater volumes and improved efficiencies of the installed carbon fiber lines at the Abilene, Texas facility. Technical fiber cost of sales increased $4.5 million, or 23.3%, to $23.7 million for fiscal 2007 from $19.2 million for fiscal 2006. The increase in technical fiber cost of sales resulted from the increased sales of 25.8% discussed above. The cost of sales of the other products increased for fiscal 2007 to $1.6 million compared to fiscal 2006 of $1.4 million.

Application and market development costs were $7.2 million in fiscal 2007 and $4.9 million in fiscal 2006. 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 expenses associated with application development of the towpreg product at the Company’s prepreg facility in Utah. Management’s growth strategies include establishing an enhanced global marketing presence, with a technical support function to assist customers in processing Zoltek’s low-cost carbon fiber and incorporating them into their composite products. Additionally, the Company has refocused and increased its research and development programs designed to leverage its proprietary technologies, and drive value-added offerings such as carbon fiber fabrics and pre-pregs to facilitate new applications.

A charge of $5.4 million was recorded in the fourth quarter of 2007 related to the investment banker litigation. The expenses included $0.8 million for legal fees. 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 million estimated damages.

Selling, general and administrative expenses for continuing operations were $12.6 million in fiscal 2007 compared to $10.4 million in fiscal 2006. The increase related to staffing of management positions that have been filled to meet the new demands of the growing sales and production volume, particularly at our Hungarian operations. The Company also recorded $1.3 million for the cost of employee services received in exchange for equity instruments under SFAS 123-(R) during fiscal 2007, an increase of $0.3 million above fiscal 2006 expense. Zoltek has expanded and strengthened its management team over the past year and expects it will continue to add experienced professionals across its organization.

Operating income from fiscal 2007 was $18.1 million, an increase of $33.8 million from the operating loss of $15.7 million incurred during fiscal 2006. This improvement resulted primarily from an increase in gross margin of $21.0 million and a litigation charge of $22.8 million related to the SP Systems case recorded during fiscal 2006, partially offset by a litigation charge of $5.4 million related to the investment banker case recorded during fiscal 2007. Carbon fiber operating income improved from $10.4 million in fiscal 2006 to $26.5 million in fiscal 2007. 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. Operating income from technical fibers improved from $4.6 million in fiscal 2006 to $7.4 million in fiscal 2007 due to increased orders from the European aircraft brake customers and new sales within the automotive heat resistance applications. Other products/ headquarters operating loss decreased from a loss of $30.7 million in fiscal 2006 to a loss of $15.8 million in fiscal 2007 due to a litigation charge of $22.8 million related to the SP Systems case recorded during fiscal 2006, offset by increases during fiscal 2007 in administrative headcount and salaries in Hungary to support the production growth and an increase of $0.3 million during fiscal 2007 for the cost of employee services received in exchange for equity instruments under SFAS 123-(R).

Interest expense was approximately $2.3 million in fiscal 2007 compared to $2.6 million in the corresponding period of fiscal 2006. Due to the limited variable rate debt, the impact of the increase in market interest rates was immaterial.

18

Amortization of financing fees and debt discounts, which are non-cash expenses, were approximately $9.8 million for fiscal 2007 compared to $16.5 million for fiscal 2006. The decrease in amortization resulted from the expensing of $6.7 million of a beneficial conversion feature related to a partial conversion in June 2006 of the September 2005 issuance 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 during the fiscal year 2006 (see “Liquidity and Capital Resources”). During fiscal 2007, an additional $6.4 million warrant issue expense was recorded as the Company entered into an amendment of its convertible debt financing package with institutional investors under which the Company issued the investors warrants to purchase 827,789 shares of common stock with an exercise price of $28.06 per share.

Loss on value of warrants and conversion feature, which is a non-cash item, decreased $29.0 million from $29.3 million in fiscal 2006 to $0.3 million in fiscal 2007 (see “—Liquidity— Financing”). The reduction in the loss was attributable the exercise of the majority of outstanding warrants and convertible debt during fiscal 2006.

Interest income was $1.8 million in fiscal 2007 compared to $0.3 million in fiscal 2006. The increase was primarily a result of interest earned on cash received from our public offering in August 2007 and interest earned on a $10 million loan from the Company’s Chief Executive Officer used to finance a bond required in connection with an appeal of certain litigation.

Loss on foreign currency transactions increased to $0.7 million for fiscal 2007 compared to $0.3 million for fiscal 2006. During fiscal 2007, both the U.S. dollar and the Euro declined in value against the Forint. As most of the Company’s accounts receivables are denominated in Euros, the decline in value resulted in a loss recognized in the income statement of our Hungarian subsidiary. The translation of the Hungarian subsidiary’s financial statements from its functional currency (Forint) to U.S. dollars is not included in determining net income for the period but is recorded in accumulated other comprehensive income in equity.

Other expense, net, was $0.4 million in fiscal 2007 compared to $0.7 million for fiscal 2006.

Income tax expense was $2.0 million for fiscal 2007 compared to $0.9 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 fiscal 2006 due to uncertainties in the Company’s ability to utilize net operating loss carryforward in the future. An income tax expense of $0.8 million was recorded for fiscal 2007, as we established a deferred tax liability for book to tax differences within the Hungarian operation. An expense of $1.2 million and $0.9 million was recorded in fiscal 2007 and 2006, respectively, related to local taxes for the Hungarian operations.

The foregoing resulted in a loss from continuing operations of $2.0 million for fiscal 2007 compared to a loss of $65.8 million for fiscal 2006. Similarly, the Company reported loss from continuing operations per share of $0.07 and $2.91 on a basic and diluted basis for fiscal 2007 and 2006, respectively. The weighted average common shares outstanding were 28.5 million and 22.6 million for fiscal 2007 and 2006, respectively.

The loss from discontinued operations of $0.5 million for fiscal 2007 compares to a loss of $0.04 million for fiscal 2006. The decrease in sales was offset by a significant decrease in cost during fiscal 2007 as the Company liquidated existing inventory balances. The Company reported a loss from discontinued operations per share of $0.02 and $0.00 on a basic and diluted basis for fiscal 2007 and 2006, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company believes its cash currently on hand and cash flow from operations should be sufficient to fund its identified liquidity needs.

On August 14, 2007, the Company completed a public offering of 3,615,000 shares of common stock at $38.76 per share, less underwriting discounts. The Company recorded the proceeds of $131.5 million, net of $0.8 million financing costs, as an increase to shareholders’ equity.

Cash Provided By Operating Activities

Continuing operating activities provided $20.2 million of net cash for the fiscal 2008 compared to net cash provided of $5.9 million in fiscal 2007. Cash flows were positively affected by a $9.2 million improvement in operating income before depreciation for fiscal 2008 of $36.5 million compared to fiscal 2007 of $27.3 million. The Company’s sales benefited from the newly added capacity in Hungary. Increased inventory levels and accounts receivable used $17.4 million and $4.4 million, respectively, of cash during fiscal 2008 compared to an increase of $5.4 million and $18.3 million, respectively, during fiscal 2007 as the Company grew the inventory and accounts receivable levels to sustain current and anticipated increased revenue in the future.

The Company also has intensified efforts to improve operations, while building inventories to assure potential users that previous carbon fiber shortage conditions will not recur. Zoltek believes that availability of a ready, ample low-cost supply will encourage potential customers to invest the resources necessary to incorporate carbon fiber into their products.

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Cash Used In Investing Activities

Net cash used in investing activities for fiscal 2008 was $110.6 million which consisted of capital expenditures of $107.7 million to acquire the Mexican facility, expand and improve production lines of the Company’s Hungarian and Mexican precursor facility and carbon fiber operations and the U.S. to meet the additional demand for carbon fiber products. This was offset by $3.3 million of funds received from the Hungarian government as a conditional grant to reimburse capital expenditures and related outlays (see Note 4 of the Notes to the Consolidated Financial Statements).

Net cash used in investing activities for fiscal 2007 was $51.2 million which consisted of capital expenditures primarily at the Hungarian subsidiary related to expansion of its precursor facility and its carbon fiber lines.

Restrictions on cash increased by $9.7 million during fiscal 2008 as the Company incurred funding commitments to post the $23.5 million bond related to ongoing litigation. Restrictions on cash increased by $7.2 million during fiscal 2007 as the Company entered into an amendment of its revolving credit facility which provided that the letter of credit previously collateralized by the Company’s cash will be collateralized by the availability under the credit facility, thereby eliminating the restriction.

Historically, cash used in investing activities has been expended for equipment additions and the expansion of the Company’s carbon fiber production capacity. The Company expects continued capital expenditures in connection with the expansion of our Mexico facility, including retrofit of existing equipment to produce precursor and installation of carbon fiber lines.

Cash Used and Provided By Financing Activities

Net cash used in financing activities was $2.3 million for fiscal 2008 and net cash provided was $155.5 million for fiscal 2007 which consisted primarily of $132.3 million in proceeds from the Company’s secondary stock offering and $13.8 million from exercise of stock options and warrants. During fiscal 2008, the Company repaid $1.5 million of its Hungarian term loan and $2.3 million of its U.S. term loan and received cash from proceeds from the exercise of stock options and warrants of $1.5 million.

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Future Contractual Obligations

In the table below, we set forth our enforceable and legally binding obligations as of September 30, 2008. Some of the figures included in this table (amounts in thousands) 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 Notes 3 and 4 of the Notes to Consolidated Financial Statements for discussion of the Company’s debt agreements.

			Payments Due by Period
			Less than		1-3		3-5		Over
	Total		1 year		years		years		5 years
Convertible debentures (a)	$	15,049	$	9,971	$	5,078		—		—
Other long-term debt, including current maturities (a)		6,359		6,359		—		—		—
Total long-term debt obligations		21,408		16,330		5,078		—		—
Operating lease obligations		354		245		90		17		2
Capital leases obligations		323		202		121		—		—
Total debt and leases		22,085		16,777		5,289		17		2
Legal liabilities (b)		29,083		29,083		—		—		—
Contractual interest payments (c)		1,329		1,126		203		—		—
Purchase obligations (d)		1,709		1,709		—		—		—
Total contractual obligations	$	54,206	$	48,695	$	5,492	$	17		2

(a)	Convertible debentures and long-term debt are presented on the balance sheet net of debt discount of $5.2 million.
(b)	Amount includes $23.1 million accrued for potential damages and litigation cost related to SP Systems case and $5.8 million related to the investment banker case and $0.2 million accrued for other pending litigation. See Note 4 of the Notes to Consolidated Financial Statements.
(c)	Amounts represent the expected cash payment for interest on our debt.
(d)	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.

The future contractual obligations and debt could be reduced by up to $16.4 million in exchange for up to 0.6 million shares of common stock. The following table sets forth our contractual obligations on a pro forma basis assuming all the convertible debt was converted as of September 30, 2008 (amounts in thousands):

	Conversion					Less than			1-3			3-5		Over
	price		Total			1 year			years			years		5 years
Total contractual obligations			$	54,206		$	48,695		$	5,492		$	17	$	2
May 2006 issuance	$	25.51		(9,000	)		(7,200	)		(1,800	)		—		—
July and October 2006 issuance	$	25.51		(6,049	)		(2,771	)		(3,278	)		—		—
Interest payments				(1,329	)		(1,126	)		(203	)		—		—
Total contractual obligations assuming conversion on September 30, 2008			$	37,828		$	37,598		$	211		$	17	$	2

As of November 28, 2008 the last reported sale price of the Company’s common stock was $8.05 per share.

Bond Related to SP Systems Case

In December 2006, the Company obtained the financing to post a bond of up to $40.0 million, which represented the potential bond necessary in connection with the continuing defense of the SP Systems case. The Company raised the financing with a $10.0 million loan commitment from its U.S. bank collateralized by certain real estate of the Company at an interest rate of 7.5%, a $10.0 million loan commitment from the Company’s Chief Executive Officer at 8% interest, the proceeds from the exercise of 827,789 warrants for $11.9 million by existing institutional investors and the remainder with the Company’s cash on hand.

In April 2007, the Company reported the results of various post-trial motions in ongoing litigation (see Note 8 of the Notes to the Consolidated Financial Statements). In April 2007 the Company posted a supersedeas bond, collateralized by a $23.5 million letter of credit issued by the Company’s U.S. bank. As of September 30, 2008, the letter of credit is collateralized by $23.5 million of restricted cash. The Company repaid the loan from the Chief Executive Officer and terminated the $10.0 million loan commitment from its U.S. bank during the fourth quarter of fiscal 2007.

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Revolving Credit Facility

In December 2007, the Company extended its existing line of credit until January 1, 2009. The renewal of this credit facility included an amendment which increased the amount available under the original revolving credit facility from $5.5 million to $6.7 million. The revolving credit facility has a total commitment of the lesser of (1) $6.7 million or (2) an amount equal to a percentage of eligible accounts receivable plus a percentage of eligible inventories, which as of September 30, 2008 totaled $10.3 million. The amendment provides that the letter of credit will be collateralized by the availability under the revolving credit facility.

In October 2008, the Company settled a civil action filed by an investment banker (see Note 8 of the Notes to the Consolidated Financial Statements) for $5.8 million cash. The Company paid the settlement amount out of cash on hand. An appeal bond posted by the Company in this case was previously collateralized by the Company’s revolving credit facility. Accordingly, as of September 30, 2008, there is no draw down of credit by the Company under the revolving credit facility. The borrowing base of the revolving credit facility is now fully available to the Company subsequent to this settlement. No financial covenants currently apply to the credit facility from the U.S. bank.

The Company intends to extend its existing line of credit before its expiration on January 1, 2009. Based on the history of relationships with its bank and its current financial position, the Company does not expect any issues with extending its line of credit beyond the expiration date. However, we can make no assurances that we will be successful in executing such an extension.

Hungarian Grant

The Hungarian government has pledged a grant of 2.9 billion HUF (approximately $17.2 million) to Zoltek’s Hungarian subsidiary that will partially provide the capital resources to modernize its facility, establish a research and development center, and support buildup of manufacturing capacity of carbon fiber. Zoltek’s Hungarian subsidiary received approximately $3.3 and $9.4 million in grant funding during fiscal 2008 and 2007, respectively. These funds have been recorded as a liability on the Company’s balance sheet. The liability will be amortized over the life of the assets procured by the grant funds, offsetting the assets’ depreciation expense into which the proceeds of the grant are invested.

The Company has presented bank guarantees amounting to 120% of the amount of the grant as received. The Hungarian subsidiary may be required to pay back all or a portion of the grant if, among other things, the Hungarian subsidiary fails to achieve certain revenue and employment targets. Currently, management anticipates the Company will comply with the requirements of the grant agreement.

Financing Activity

On August 14, 2007, the Company completed a public offering of 3,615,000 shares of common stock, par value $0.01 per share, at $38.76 per share, less underwriting discounts. The Company recorded the proceeds of $131.5 million, net of $0.8 million financing costs, as an increase to shareholders’ equity.

Convertible Debt

The following tables summarize the activity regarding our convertible debt conversions during the fiscal years ended 2008, 2007 and 2006.

	2008						2007						2006
	Number						Number						Number
	of shares		Conversion				of shares		Conversion				of shares		Conversion
	converted		price		Equity value		converted		price		Equity value		converted		price		Equity value
February 2003		—	$	3.50	$	—		771,431	$	3.50	$	2,700,009		1,457,147	$	3.50	$	5,100,015
October 2004		—		9.50		—		—		9.50		—		2,108,199		9.50		20,027,891
February 2005		—		20.00		—		—		20.00		—		1,006,035		20.00		20,120,700
September 2005		—		12.50		—		—		12.50		—		167,105		12.50		2,088,812
December 2005		—		12.50		—		1,444,489		12.50		18,056,112		—		12.50		—
February 2006		—		13.07		—		760,622		13.07		9,941,330		—		13.07		—
May 2006		203,679		25.51		5,195,856		141,120		25.51		3,599,971		—		25.51		—
July 2006		117,840		25.51		3,006,092		—		25.51		—		—		25.51		—
October 2006		115,578		25.51		2,948,383		—		25.51		—		—		25.51		—
		437,097			$	11,150,331		3,117,662			$	34,297,422		4,738,486			$	47,337,418

	As of September 30, 2008						As of September 30, 2007						As of September 30, 2006
	Number						Number						Number
	of shares		Conversion		Proceeds		of shares		Conversion		Proceeds		of shares		Conversion		Proceeds
	outstanding		price		outstanding		outstanding		price		outstanding		outstanding		price		outstanding
February 2003		—	$	3.50	$	—		—	$	3.50	$	—		771,431	$	3.50	$	2,700,008
December 2005		—		12.50		—		—		12.50		—		1,444,489		12.50		—
February 2006		—		13.07		—		—		13.07		—		760,622		13.07		—
May 2006		352,803		25.51		9,000,005		556,482		25.51		14,195,860		697,602		25.51		17,795,832
July 2006		58,800		25.51		1,499,988		176,640		25.51		4,506,080		176,640		25.51		4,506,080
October 2006		178,342		25.51		4,549,504		293,919		25.51		7,497,887		293,919		25.51		7,497,887
		589,945			$	15,049,497		1,027,041			$	26,199,827		4,144,703			$	32,499,807

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The terms of repayment for each convertible debt issuance in May, July and October 2006 stipulate that the Company shall pay the principal balance in ten equal quarterly installments commencing on the date 15 months following the closing date and continues for each of the nine quarters thereafter. Under certain circumstances, the Company may settle the principal and accrued unpaid interest in common stock Additionally, the May, July and October 2006 issuances allow the Company to require conversion if the price of the Company’s common stock stays above $42.50 per share for a period of 20 consecutive days beginning six months after the date of registration of the resale of the underlying shares. At that time, the Company may require the investor to convert with at least 30 days notice. The May  , July and October 2006 issuances also provide stipulation that the investor may require the Company to pay out the quarterly installment due in cash if the Company’s common stock Volume-Weighted Average Price average is below $12.50 on the date of conversion.

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

Outstanding Convertible Debt Issuances

	May 2006 (1)			July 2006 (1)			October 2006 (1)
Original principal amount of debentures (millions)	$	20.0		$	2.5		$	7.5
Per share conversion price on debenture	$	25.51		$	25.51		$	25.51
Interest rate		7.5	%		7.5	%		7.5	%
Term of debenture	42 months			42 months			42 months
Warrants issued	274,406 shares			34,370 shares			102,835 shares
Term of warrants	60 months			60 months			60 months
Per share exercise price of warrants	$	28.06		$	28.06		$	28.06
Fair value per warrant at issuance	$	26.03		$	23.89		$	22.13
Value per share of conversion feature at issuance	$	18.80		$	19.21		$	19.57
Stock price on date of agreement	$	32.25		$	29.28		$	26.81
Stock volatility at issuance		106	%		111	%		117	%
Dividend yield		0.0	%		0.0	%		0.0	%
Risk-free interest rate at issuance		4.88	%		4.88	%		4.65	%
Principal shares converted	Partial			Partial			Partial
Warrants exercised	No			No			Partial

(1) The May 2006, July 2006 and October 2006 issuances had a beneficial conversion feature.

In September 2005, Zoltek entered into an agreement for 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. As of September 30, 2008, all debentures converted and all warrants exercised related to the September 2005 offering.

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. As of September 30, 2008, all debenturess were converted and all warrants exercised related to the December 2005 offering.

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. As of September 30, 2008, all debentures were converted and all warrants exercised related to the February 2006 offering.

23

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 have a stated maturity of 42 months and bear interest at a fixed rate of 7.5% per annum. The convertible debentures are convertible into 293,767 shares of 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. The fair value of the debt discount associated with the warrants and conversion features at the time of issuance was $2.8 million and are being accreted to the debt’s face value over the life of the convertible debentures.

24

Warrant and Conversion Features

In January, March and October 2004 and February 2005, the Company issued convertible notes and warrants that required the Company to register the resale of the shares of common stock issuable 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 Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting For Derivative Instruments And Hedging Activities,” and Emerging Issues Task Force (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. The Company recorded the fair value of the conversion feature and warrants as long-term liabilities. The Company is required to carry these embedded derivatives on its balance sheet at fair value and unrealized changes in the values of these embedded derivatives are reflected in the consolidated statement of operations as “Loss on value of warrants and conversion feature.”

As of September 30, 2008, all such convertible notes and warrants have been exercised. See table below for impact on the results for fiscal years ended September 30, 2007 and 2006 (amounts in thousands).

	Fiscal Year Ended September 30, 2007
				Conversion
	Warrants			Features		Total
January 2004 issuance — mark to market	$	(314	)	$	—	$	(314	)
Loss on value of warrants and conversion feature	$	(314	)	$	—	$	(314	)

	Fiscal Year Ended September 30, 2006
				Conversion
	Warrants			Features			Total
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	)

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.

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, July 2006 and October 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 years 2008, 2007 and 2006 (amounts in thousands).

	Fiscal Year Ended September 30, 2008
			Conversion
	Warrants		Features		Total
May 2006 issuance	$	1,943	$	2,867		4,810
July 2006issuance		230		280		510
October 2006 issuance		392		452		844
	$	2,565		3,599		6,164
Deferred financing costs						518
Total					$	6,682

25

	Fiscal Year Ended September 30, 2007
			Conversion
	Warrants		Features		Total
September 2005 issuance	$	158	$	—	$	158
December 2005 issuance		285		—		285
February 2006 issuance		1,830		1,882		3,712
May 2006 issuance		1,560		2,302		3,862
July 2006 issuance		113		138		251
October 2006 issuance		235		269		504
	$	4,181	$	4,591	$	8,772
Deferred financing costs						999
Total					$	9,771

	Fiscal Year Ended September 30, 2006
			Conversion
	Warrants		Features		Total
October 2004 issuance	$	204	$	400	$	604
February 2005 issuance		834		7,830		8,664
September 2005 issuance		905		—		905
December 2005 issuance		548		—		548
February 2005 issuance		312		694		1,006
May 2006 issuance		3,524		332		3,856
July 2006 issuance		28		34		62
	$	6,355	$	9,290	$	15,645
Deferred financing costs						887
Total					$	16,532

26

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

	September 30, 2008
			Conversion
	Warrants		Feature		Total
May 2006 issuance	$	1,566		2,313	$	3,879
July 2006 issuance		259		311		570
October 2006 issuance		370		426		796
	$	2,195	$	3,050		5,245
Debt acquisition cost and financing fees						416
Total					$	5,661

	September 30, 2007
			Conversion
	Warrants		Feature		Total
May 2006 issuance	$	4,728	$	6,981	$	11,709
July 2006 issuance		403		485		888
October 2006 issuance		1,236		1,422		2,658
	$	6,367	$	8,888		15,255
Debt acquisition cost and financing fees						985
Total					$	16,240

Earnings Per Share

 In accordance with SFAS No. 128, “Earnings per Share,” the Company has evaluated its diluted income per share calculation. The Company does have outstanding warrants and convertible debt at September 30, 2008, 2007 and 2006 which are not included in the determination of diluted loss per share for the fiscal year ended September 30, 2008, 2007 and 2006 because the shares are anti-dilutive. Had these securities been dilutive, an additional 0.7 million, 1.4 million and 4.3 million shares, respectively, would have been included in the Company’s diluted loss per share calculation.

The following is the diluted impact of the convertible debt and warrants on net income (loss) per share for the fiscal years ended September 30, 2008, 2007 and 2006 respectively:

	Fiscal Year Ended September 30,
	2008		2007			2006
Numerators:
Net income (loss)	$	7,441	$	(2,517	)	$	(65,802	)
Denominators:
Average shares outstanding — basic		34,042		28,539			22,575
Impact of convertible debt, warrants and stock options		130		—			—
Average shares outstanding — diluted		34,172		28,539			22,575
Income (loss) per share — basic:
Continuing operations	$	0.22	$	(0.07	)	$	(2.91	)
Discontinued operations		0.00		(0.02	)		0.00
Basic income (loss) per share	$	0.22	$	(0.09	)	$	(2.91	)
Income (loss) per share — diluted:
Continuing operations	$	0.22	$	(0.07	)	$	(2.91	)
Discontinued operations		0.00		(0.02	)		0.00
Diluted income (loss) per share	$	0.22	$	(0.09	)	$	(2.91	)

27

Legal Contingencies

 Legal contingencies have a high degree of uncertainty. When losses from contingencies become estimatable and probable, reserves are established. The reserves reflect management’s estimate of the probable cost of ultimate resolution of the matters and are revised accordingly as facts and circumstances change and, ultimately, when matters are brought to closure. If any litigation matter is resolved unfavorably, the Company could incur obligations in excess of management’s estimate of the outcome, and such resolution could have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity. As of September 30, 2008, the Company has established an accrual for legal liabilities of $29.1 million. In addition, we will incur additional legal costs in connection with pursuing and defending such actions.

See Note 8 of the Notes to the Company’s Consolidated Financial Statements for a description of our significant legal matters.

 CRITICAL ACCOUNTING ESTIMATES

Certain of our accounting policies require our management to make difficult, subjective or complex judgments. All of the Company’s accounting policies are in compliance with U.S. generally accepted accounting principles (“GAAP”). The Company considers the following policies to be the most critical in understanding the estimates, assumptions and judgments that are involved in preparing our financial statements, and the uncertainties that could affect our results of operations, financial condition and cash flows.

ACCOUNTS RECEIVABLE COLLECTIBILITY

The Company evaluates the collectability 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 $1.3 million for 2008, $0.4 million for 2007 and $0.3 million for 2006.

INVENTORIES

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

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. 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.

CONTINGENT LIABILITIES

The Company is subject to lawsuits, investigations and other claims related to employment, environmental, service providers, supply agreements, taxing authorities and other matters, and is required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the amount of reserves and disclosures required, if any, for these contingencies is made after considerable analysis of each individual issue. We accrue for contingent liabilities when an assessment of the risk of loss is probable and can be reasonably estimated.

Our contingent liabilities contain uncertainties because the eventual outcome will result from future events, and determination of current reserves requires estimates and judgments related to future changes in facts and circumstances, differing interpretations of the law and assessments of the amount of damages, and the effectiveness of strategies or other factors beyond our control. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material.

28

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.

STOCK-BASED COMPENSATION

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

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 of the Notes to the Company’s Consolidated Financial Statements.

29

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 and other variable rate debt. Assuming the current level of borrowings of $5.2 million at variable rates and a two-percentage point change in the average interest rate under these borrowings, it is estimated our interest expense for the twelve months ended September 30, 2008 would have changed by approximately $0.1 million. In the event of an adverse change in interest rates, we would seek to take actions to mitigate our exposure to interest rate risk. Further, no consideration has been given to the effects of the change in the level of overall economic activity that could exist in such an environment. 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, 2008, the Company did not have any interest rate swap agreements outstanding.

The consolidated balance sheet of the Company’s international subsidiaries, Zoltek Zrt. and Zoltek de Mexico, were translated from Hungarian Forints and Mexican Pesos to U.S. Dollars, respectively, 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 Zrt. are included in the results of operations in other expenses. The Company views as long-term its investments in Zoltek Zrt. and Zoltek de Mexico, which have functional currencies other than the U.S. dollar. As a result, the Company is exposed to foreign currency risks related to these investments. The Company does not currently employ a foreign currency hedging strategy related to the sales from Hungary or Mexico. In terms of foreign currency translation risk, the Company is exposed to Zoltek Zrt.’s and Zoltek de Mexico’s functional currency, which is the Hungarian Forint and the Mexican Peso, respectively. Neither Hungary nor Mexico is considered to be a highly inflationary or deflationary economy.

As of September 30, 2008, the Company had a long-term loan to its Zoltek Zrt. subsidiary of $108.0 million. The potential loss in value of the Company’s net foreign currency investment in Zoltek Zrt. resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rate of the Hungarian Forint against the U.S. dollar at September 30, 2008 and 2007 amounted to $10.8 million and $10.7 million, respectively. The Company does not expect repayment of the loan in the near future. As such, the Company considers this loan as a permanent investment. In addition, Zoltek Zrt. routinely sells its products to customers located primarily throughout Europe in sales transactions that are denominated in foreign currencies other than the Hungarian Forint. Also, Zoltek Zrt. has debt that is denominated in foreign currencies other than the Hungarian Forint.

As of September 30, 2008, the Company had a long-term loan to its Zoltek de Mexico subsidiary. The potential loss in value of the Company’s net foreign currency investment in Zoltek de Mexico of $78.5 million resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rate of the Mexican Peso against the U.S. Dollar at September 30, 2008 would have amounted to $7.9 million. The Company does not expect repayment of the loan in the near future. As such, the Company considers this loan as a permanent investment.

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 at September 30, 2006. All such derivative financial instruments have been fully exercised or converted as of September 30, 2007. Any unrealized changes, which are 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.

30

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 no material weaknesses existed as of September 30, 2008.

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, Grant Thornton LLP has direct access to the Audit Committee.

The Reports of Grant Thornton LLP and 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 and Chief Financial Officer

December 1, 2008

31

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Zoltek Companies, Inc.

We have audited the accompanying consolidated balance sheets of Zoltek Companies, Inc. (a Missouri corporation) and Subsidiaries (the “Company”) as of September 30, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended. 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 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zoltek Companies, Inc. and Subsidiaries as of September 30, 2008 and 2007, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying Schedule II is presented to comply with SEC reporting requirements and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Zoltek Companies, Inc. and Subsidiaries’ internal control over financial reporting as of September 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated December 1, 2008 expressed an unqualified opinion.

/s/ GRANT THORNTON LLP

Chicago, Illinois

December 1, 2008

32

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Zoltek Companies, Inc.

We have audited Zoltek Companies, Inc. (a Missouri Corporation) and Subsidiaries’ (the “Company”) internal control over financial reporting as of September 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Zoltek Companies, Inc.’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, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on Zoltek Companies, Inc.’s internal control over financial reporting based on our audit.

We conducted our audit 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. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.

In our opinion, Zoltek Companies, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of September 30, 2008, based on criteria established in Internal Control — Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Zoltek Companies, Inc. and subsidiaries as of September 30, 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended and our report dated December 1, 2008 expressed an unqualified opinion on those financial statements.

/s/ GRANT THORNTON LLP

Chicago, Illinois

December 1, 2008

33

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In our opinion, the consolidated statement of operations, shareholders’ equity and cash flows, for the year ended September 30, 2006 present fairly, in all material respects, the results of operations and cash flows of Zoltek Companies, Inc. and its subsidiaries for the year ended September 30, 2006, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for the year ended September 30, 2006 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit 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 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 audit provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

St. Louis, Missouri

December 27, 2006

34

ZOLTEK COMPANIES, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share data)

	September 30,
	2008			2007
Assets
Current assets:
Cash and cash equivalents	$	29,224		$	121,761
Restricted cash		23,500			13,815
Accounts receivable, less allowance for doubtful accounts of $1,754 and $729, respectively		42,690			37,495
Inventories, net		45,659			27,941
Other current assets		9,432			10,858
Total current assets		150,505			211,870
Property and equipment, net		288,894			188,801
Other assets		765			2,928
Total assets	$	440,164		$	403,599
Liabilities and shareholders’ equity
Current liabilities:
Construction payables	$	8,450		$	4,859
Current maturities of long-term debt		12,601			13,813
Trade accounts payable		15,093			12,394
Legal liabilities		29,083			24,543
Accrued expenses and other liabilities		9,278			8,305
Total current liabilities		74,505			63,914
Long-term debt, less current maturities		3,562			6,851
Hungarian grant, long-term		10,882			7,969
Deferred tax liabilities		4,521			4,046
Other long-term liabilities		28			52
Total liabilities		93,498			82,832
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, 34,389,428 and 33,653,735 shares issued and outstanding in 2008 and 2007, respectively		344			337
Additional paid-in capital		491,175			476,205
Accumulated other comprehensive income		11,730			8,249
Accumulated deficit		(156,583	)		(164,024	)
Total shareholders’ equity		346,666			320,767
Total liabilities and shareholders’ equity	$	440,164		$	403,599

The accompanying notes are an integral part of the consolidated financial statements.

35

ZOLTEK COMPANIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands)

	Fiscal Year Ended September 30,
	2008			2007			2006
Net sales	$	185,616		$	150,880		$	92,357
Cost of sales		134,393			107,506			69,994
Gross profit		51,223			43,374			22,363
Application and development costs		8,093			7,230			4,887
Litigation charge (see Note 8)		4,884			5,400			22,795
Selling, general and administrative expenses		18,239			12,635			10,356
Operating income (loss) from continuing operations		20,007			18,109			(15,675	)
Other income (expense):
Interest expense, excluding amortization of financing fees, debt discount and beneficial conversion feature		(1,862	)		(2,346	)		(2,645	)
Warrant issue expense		—			(6,362	)		—
Amortization of financing fees and debt discount		(6,682	)		(9,771	)		(16,532	)
Loss on value of warrants and beneficial conversion feature		—			(314	)		(29,303	)
Interest income		2,904			1,829			281
Loss on foreign currency transactions		(385	)		(707	)		(341	)
Other, net		(1,125	)		(424	)		(662	)
Income (loss) from continuing operations before income taxes		12,857			14			(64,877	)
Income tax expense		5,416			1,986			888
Net income (loss) from continuing operations		7,441			(1,972	)		(65,765	)
Discontinued operations:
Operating loss, net of taxes		—			(545	)		(187	)
Gain on disposal of discontinued operation, net of taxes		—			—			150
Net loss on discontinued operations, net of taxes		—			(545	)		(37	)
Net income (loss)	$	7,441		$	(2,517	)	$	(65,802	)
Net income (loss) per share:
Basic and diluted income (loss) per share:
Continuing operations	$	0.22		$	(0.07	)	$	(2.91	)
Discontinued operations		—			(0.02	)		—
Total	$	0.22		$	(0.09	)	$	(2.91	)
Weighted average common shares outstanding — basic		34,042			28,539			22,575
Weighted average common shares outstanding — diluted		34,172			28,539			22,575

The accompanying notes are an integral part of the consolidated financial statements.

36

ZOLTEK COMPANIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Amounts in thousands)

	Total					Additional			Accumulated Other
	Shareholders’			Common		Paid-In			Comprehensive			Accumulated
	Equity			Stock		Capital			Income (Loss)			Deficit
Balance, September 30, 2005		40,645			189		148,982			(12,821	)		(95,705	)
Net loss		(65,802	)										(65,802	)
Foreign currency translation adjustment		(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	)
Net loss		(2,517	)										(2,517	)
Foreign currency translation adjustment		22,638								22,638
Comprehensive income		20,121
Convertible debt converted		34,497			30		34,467
Unamortized value of convertible debt discount at time of conversion		(2,785	)				(2,785	)
Warrants exercised		12,405			9		12,396
Warrants issued in December 2006		6,362					6,362
Value of warrants related to January 2004 issuance		1,218					1,218
Issuance cost related to convertible debt conversions		2,796					2,796
Interest paid in stock		322					322
Stock option awards		1,253					1,253
Exercise of stock options		1,392			1		1,392
Secondary offering funds received, less issue costs of $760		131,525			39		131,486
Balance, September 30, 2007	$	320,767		$	337	$	476,205		$	8,249		$	(164,024	)
Net income		7,441											7,441
Foreign currency translation adjustment		3,481								3,481
Comprehensive income		10,922
Convertible debt converted		11,151			6		11,145
Warrants exercised		150					150
Restricted stock expense		329					329
Stock option awards		1,987			1		1,986
Exercise of stock options		1,360					1,360
Balance, September 30, 2008	$	346,666		$	344	$	491,175		$	11,730		$	(156,583	)

The accompanying notes are an integral part of the consolidated financial statements.

37

ZOLTEK COMPANIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

	Fiscal Year Ended September 30,
	2008			2007			2006
Cash flows from operating activities:
Net income (loss)	$	7,441		$	(2,517	)	$	(65,802	)
Net loss from discontinued operations		—			545			37
Net income (loss) from continuing operations		7,441			(1,972	)		(65,765	)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization		16,476			9,205			5,853
Amortization of financing fees and debt discount		6,682			9,771			16,532
Deferred taxes		1,501			828			—
Warrant issue expense		—			6,362			—
Loss on value of warrants and conversion feature		—			314			29,303
Foreign currency transaction gains		(431	)		606			—
Stock option compensation expense		2,316			1,253			969
Changes in assets and liabilities:
Increase in accounts receivable		(4,381	)		(18,320	)		(6,772	)
(Increase) decrease in inventories		(17,427	)		(5,388	)		2,318
Increase in other current assets and other assets		(214	)		(725	)		(3,686	)
Increase in trade accounts payable		1,902			3,224			658
Decrease (increase) in accrued expenses and other liabilities		2,002			(278	)		1,922
Increase in legal liabilities		4,355			818			21,948
Increase (decrease) in other long-term liabilities		(27	)		171			(25	)
Net cash provided by continuing operations		20,195			5,869			3,255
Net cash provided by (used in) discontinued operations		—			1,010			(450	)
Net cash provided by operating activities		20,195			6,879			2,805
Cash flows from investing activities:
Purchases of property and equipment		(107,715	)		(53,412	)		(40,795	)
Increase in construction payables		3,591			—			—
Proceeds received from Hungarian grant		3,253			9,435			—
Change in cash restricted for letters of credit		(9,685	)		(7,181	)		(6,634	)
Net cash used for investing activities by continuing operations		(110,556	)		(51,158	)		(47,429	)
Net cash used for investing activities by discontinued operations		—			—			(11	)
Net cash used in investing activities		(110,556	)		(51,158	)		(47,440	)
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants		1,510			13,797			13,234
Payment of issue costs related to secondary stock offering		—			(760	)		—
Proceeds from secondary stock offering		—			132,284			—
Proceeds from issuance of convertible debt		—			7,495			47,505
Payment of financing fees		—			(900	)		(1,541	)
Repayment (borrowings) of notes payable and long-term debt		(3,786	)		3,538			(3,744	)
Net cash (used) provided by financing activities		(2,276	)		155,454			55,454
Effect of exchange rate changes on cash and cash equivalents		100			(216	)		(272	)
Net (decrease) increase in cash and cash equivalents		(92,537	)		110,959			10,547
Cash and cash equivalents at beginning of year		121,761			10,802			255
Cash and cash equivalents at end of year	$	29,224		$	121,761		$	10,802
Supplemental disclosures of cash flow information:
Net cash paid during the year for:
Interest	$	1,491		$	3,856		$	3,793
Income taxes		2,800			—			888
Non-cash conversion of convertible debentures		11,150			34,497			47,308

The accompanying notes are an integral part of the consolidated financial statements.

38

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 Zrt., Zoltek de Mexico SA de CV, Zoltek de Occidente SA de CV, and Engineering Technology Corporation (“Entec Composite Machines”). Zoltek Corporation (“Zoltek”) develops, manufactures and markets carbon fibers and technical fibers in the United States. Carbon fibers are a low-cost but high performance reinforcement for composites used as the primary building material in everyday commercial products. Zoltek Zrt. is a Hungarian subsidiary that manufactures and markets carbon fibers and technical fibers and manufactures precursor raw material used in production of carbon fibers. Zoltek de Mexico SA de CV and Zoltek de Occidente SA de CV were acquired in October 2007 and are Mexican subsidiaries that manufactures carbon fiber and precursor raw material used in production of carbon fibers. Entec Composite Machines manufactures and sells filament winding and pultrusion equipment used in the production of large volume composite parts. The Company’s primary sales markets are in Europe and the United States.

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 orders or sales agreements which are based on fixed pricing terms. The Company recognizes sales for manufactured products on the date title to the product transfers to the customer ordinarily upon shipping. 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 reported revenue of $5.9 million, $3.9 million and $4.1 million for fiscal 2008, 2007 and 2006, respectively. Revenues are reported net of any value-added tax or other such tax assessed by a governmental authority on our revenue-producing activities. Costs associated with shipping and handling are included in costs of sales.

ACCOUNTS RECEIVABLE

The Company reviews its accounts receivable balance on a quarterly basis to identify any specific customers for collectability 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. The Company evaluates the collectability 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 $1.3 million for 2008, $0.4 million for 2007 and $0.3 million for 2006.

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 2008, 2007 and 2006, we reported net sales of $75.1 million, $49.9 million and $19.0 million, respectively, to Vestas Wind Systems, which represented 40.4%, 33.0% and 20.5% of our net sales, respectively, during such periods. The Company reported net sales of $25.1 million in fiscal 2007 to Gamesa Group. These were the only customers that represented greater than 10% of consolidated net sales during these years.

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 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 $250,000 for U.S. banks. The Company has invested all unallocated funds received from its August 2007 equity offering into money market accounts. As of September 30, 2008, the Company had $24.5 million cash in these money market accounts.

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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 $0.5 million and $0.6 million as of September 30, 2008 and 2007, respectively, to reduce the carrying value of inventories to a net realizable value. This evaluation includes analyses of sales levels by product and projections of future demand within specific time horizons. If future demand or market conditions are less favorable than the Company’s projections, additional inventory write-downs may be required and would be reflected in cost of sales on the Company’s statement of operations in the period in which the revision is made.

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 $4.5 million, $5.3 million and $3.1 million during fiscal 2008, 2007 and 2006, respectively. 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	30 to 40 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 $16.5 million, $9.2 million and $5.9 million for fiscal years ended 2008, 2007 and 2006, 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 charges for long-lived assets were recorded during fiscal 2008, 2007 and 2006.

FOREIGN CURRENCY TRANSLATION

The consolidated balance sheet of the Company’s international subsidiaries, Zoltek Zrt. and Zoltek de Mexico, were translated from Hungarian Forints and Mexican Pesos 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 Zrt. and Zoltek de Mexico are included in the results of operations as other income (expense). The Hungarian Forint strengthened by 5.0% against the US dollar during fiscal 2008. Hungarian assets net of liabilities, excluding the permanent intercompany loan were approximately $177.6 million as of September 30, 2008. The Mexican Peso strengthened by 0.7% against the US dollar during fiscal 2008. Mexican assets net of liabilities, excluding the permanent intercompany loan were approximately $78.5 million as of September 30, 2008.

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, 2008 and 2007.

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, 2008 and 2007.

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 conversion feature of its convertible notes in accordance with Statement of Financial Accounting Standards (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.

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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 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 $8.1 million, $7.2 million and $4.9 million for the years ended September 30, 2008, 2007 and 2006, respectively. Application and development expenses are presented as an operating item on the Company’s consolidated statement of operations. Given the Company’s position and strategy within the carbon fiber industry, it is expected that similar or greater levels of application and development expenses 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. The Company classifies income tax related interest and penalties as other expense, net.

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, 2008 and 2007 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 0.7 million shares for fiscal 2008, 1.4 million shares for fiscal 2007 and 4.3 million shares for fiscal 2006 would have been included in the Company’s diluted earnings per share calculation.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board  (“FASB”) issued FASB Statement No. 157 “Fair Value Measurements” , which 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 not have a material impact on the Company’s financial statements in future periods.

FASB Statement No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement 115”, was issued February of 2007. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The guidance will become effective as of the beginning of a company’s fiscal year beginning after November 15, 2007. The Company believes that this new pronouncement will not have a material impact on the Company’s financial statements in future periods.

Effective October 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – and Interpretation of FASB No. 09” (“FIN 48”). FIN 48 addresses the diversity in practice and clarifies the accounting for uncertain tax positions. FIN 48 prescribes a comprehensive model as to how a company should recognize, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on its tax return. FIN 48 specifically requires companies to presume that the taxing authorities have full knowledge of the positions and all relevant facts. Furthermore, based on this presumption, FIN 48 requires that the financial statements reflect expected future consequences of such positions.

Under FIN 48 an uncertain tax position needs to be sustainable at a more likely than not level based upon its technical merits before any benefit can be recognized. The tax benefit is measured as the largest amount that has a cumulative probability of greater than 50% of being the final outcome. FIN 48 substantially changes the applicable accounting model (as the prior model followed the criteria of FAS 5, “Accounting for Contingencies”, recording a liability against an uncertain tax benefit when it was probable and estimable) and is likely to cause greater volatility in income statements as more items are recognized within income tax expense. FIN 48 also revises disclosure requirements and introduces a prescriptive, annual, tabular roll-forward of the unrecognized tax benefits. As of September 30, 2007 and 2008, the Company’s accrual for these contingencies, included in long-term deferred tax liabilities in the accompanying consolidated balance sheet, was approximately $600,000.

FASB Statement No. 141 (R) “Business Combinations”, was issued in December of 2007. This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. The Company believes that this new pronouncement will not have a material impact on the Company’s financial statements.

 FASB Statement No. 160 “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51”, was issued December of 2007. This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. The Company believes that this new pronouncement will not have a material impact on the Company’s financial statements in future periods.

41

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133”, which requires companies to disclose their objectives and strategies for using derivative instruments, whether or not designated as hedging instruments under SFAS 133.  The Company will adopt SFAS 161 effective October 1, 2009.  Management is continuing to evaluate the impact that the adoption of SFAS 161 will have on the financial statements.

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), in order to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other applications of GAAP. FSP FAS 142-3 becomes effective for the Company on October 1, 2009. Management has concluded that the adoption of FSP FAS 142-3 will not have a material impact on its financial statements.

In May 2008, FASB Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” was issued.  FSP No. APB 14-1 requires that issuers of convertible debt instruments that may be settled in cash upon conversion separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate as interest cost is recognized in subsequent periods.  The Company will adopt FSP No. APB 14-1 effective October 1, 2009.  The Company is continuing to evaluate the full impact that the adoption of FSP No. APB 14-1 will have on its financial statements

In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-6-1). FSP EITF 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 becomes effective for the Company on October 1, 2009. Management has concluded that the adoption of FSP EITF 03-6-1 will not have a material impact on the financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation and presentation of financial statements in accordance with accounting principles generally accepted in the United States of America. SFAS 162 became effective November 15, 2008. The Company is continuing to evaluate the full impact that the adoption of SFAS 162 will have on its financial statements.

2. FINANCING TRANSACTIONS

Bond Related to SP Systems Case

In December 2006, the Company obtained the financing to post a bond of up to $40.0 million, which represented the potential bond necessary in connection with the continuing defense of the SP Systems case. The Company raised the financing with a $10.0 million loan commitment from its U.S. bank collateralized by certain real estate of the Company at an interest rate of 7.5%, a $10.0 million loan commitment from the Company’s Chief Executive Officer at 8% interest, the proceeds from the exercise of 827,789 warrants for $11.9 million by existing institutional investors and the remainder with the Company’s cash on hand.

In April 2007, the Company reported the results of various post-trial motions in ongoing litigation (see Note 8 of the Notes to the Consolidated Financial Statements). In April 2007 the Company posted a supersedeas bond, collateralized by a $23.5 million letter of credit issued by the Company’s U.S. bank. As of September 30, 2008, the letter of credit is collateralized by $23.5 million of restricted cash. The Company repaid the loan from the Chief Executive Officer and terminated the $10.0 million loan commitment from its U.S. bank during the fourth quarter of fiscal 2007.

Revolving Credit Facility

In December 2007, the Company extended its existing line of credit until January 1, 2009. The renewal of this credit facility included an amendment which increased the amount available under the original revolving credit facility from $5.5 million to $6.7 million. The revolving credit facility has a total commitment of the lesser of (1) $6.7 million or (2) an amount equal to a percentage of eligible accounts receivable plus a percentage of eligible inventories, which as of September 30, 2008 totaled $10.3 million. The amendment provides that the letter of credit will be collateralized by the availability under the revolving credit facility.

In October 2008, the Company settled a civil action filed by an investment banker (see Note 8 of the Notes to the Consolidated Financial Statements) for $5.8 million cash. The Company paid the settlement amount out of cash on hand. An appeal bond posted by the Company in this case was previously collateralized by the Company’s revolving credit facility. Accordingly, as of September 30, 2008, there is no draw down of credit by the Company under the revolving credit facility. The borrowing base of the revolving credit facility is now fully available to the Company subsequent to this settlement. No financial covenants currently apply to the credit facility from the U.S. bank.

The Company intends to extend its existing line of credit before its expiration on January 1, 2009. Based on the history of relationships with its bank and its current financial position, the Company does not expect any issues with extending its line of credit beyond the expiration date. However, we can make no assurances that we will be successful in executing such an extension.

42

Hungarian Grant

The Hungarian government has pledged a grant of 2.9 billion HUF (approximately $17.2 million) to Zoltek’s Hungarian subsidiary that will partially provide the capital resources to modernize its facility, establish a research and development center, and support buildup of manufacturing capacity of carbon fibers. Zoltek’s Hungarian subsidiary received approximately $3.3 and $9.4 million in grant funding during fiscal 2008 and 2007, respectively. These funds have been recorded as a liability on the Company’s balance sheet. The liability will be amortized over the life of the assets procured by the grant funds, offsetting the assets’ depreciation expense into which the proceeds of the grant are invested.

The Company has presented bank guarantees amounting to 120% of the amount of the grant as received. The Hungarian subsidiary may be required to pay back all or a portion of the grant if, among other things, the Hungarian subsidiary fails to achieve certain revenue and employment targets. Currently, management anticipates the Company will comply with the requirements of the grant agreement.

Financing Activity

On August 14, 2007, the Company completed a public offering of 3,615,000 shares of common stock, par value $0.01 per share, at $38.76 per share, less underwriting discounts. The Company recorded the proceeds of $131.5 million, net of $0.8 million financing costs, as an increase to shareholders’ equity.

Convertible Debt

The following tables summarize the activity regarding our convertible debt conversions during the fiscal years ended 2008, 2007 and 2006.

	2008						2007						2006
	Number						Number						Number
	of shares		Conversion				of shares		Conversion				of shares		Conversion
	converted		price		Equity value		converted		price		Equity value		converted		price		Equity value
February 2003		—	$	3.50	$	—		771,431	$	3.50	$	2,700,009		1,457,147	$	3.50	$	5,100,015
October 2004		—		9.50		—		—		9.50		—		2,108,199		9.50		20,027,891
February 2005		—		20.00		—		—		20.00		—		1,006,035		20.00		20,120,700
September 2005		—		12.50		—		—		12.50		—		167,105		12.50		2,088,812
December 2005		—		12.50		—		1,444,489		12.50		18,056,112		—		12.50		—
February 2006		—		13.07		—		760,622		13.07		9,941,330		—		13.07		—
May 2006		203,679		25.51		5,195,856		141,120		25.51		3,599,971		—		25.51		—
July 2006		117,840		25.51		3,006,092		—		25.51		—		—		25.51		—
October 2006		115,578		25.51		2,948,383		—		25.51		—		—		25.51		—
		437,097			$	11,150,331		3,117,662			$	34,297,422		4,738,486			$	47,337,418

	As of September 30, 2008						As of September 30, 2007						As of September 30, 2006
	Number						Number						Number
	of shares		Conversion		Proceeds		of shares		Conversion		Proceeds		of shares		Conversion		Proceeds
	outstanding		price		outstanding		outstanding		price		outstanding		outstanding		price		outstanding
February 2003		—	$	3.50	$	—		—	$	3.50	$	—		771,431	$	3.50	$	2,700,008
December 2005		—		12.50		—		—		12.50		—		1,444,489		12.50		—
February 2006		—		13.07		—		—		13.07		—		760,622		13.07		—
May 2006		352,803		25.51		9,000,005		556,482		25.51		14,195,860		697,602		25.51		17,795,832
July 2006		58,800		25.51		1,499,988		176,640		25.51		4,506,080		176,640		25.51		4,506,080
October 2006		178,342		25.51		4,549,504		293,919		25.51		7,497,887		293,919		25.51		7,497,887
		589,945			$	15,049,497		1,027,041			$	26,199,827		4,144,703			$	32,499,807

The terms of repayment for each convertible debt issuance in May, July and October 2006 stipulate that the Company shall pay the principal balance in ten equal quarterly installments commencing on the date 15 months following the closing date and continues for each of the nine quarters thereafter. Under certain circumstances, the Company may settle the principal and accrued unpaid interest in common stock Additionally, the May, July and October 2006 issuances allow the Company to require conversion if the price of the Company’s common stock stays above $42.50 per share for a period of 20 consecutive days beginning six months after the date of registration of the resale of the underlying shares. At that time, the Company may require the investor to convert with at least 30 days notice. The May  , July and October 2006 issuances also provide stipulation that the investor may require the Company to pay out the quarterly installment due in cash if the Company’s common stock Volume-Weighted Average Price average is below $12.50 on the date of conversion.

43

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

Outstanding Convertible Debt Issuances

	May 2006 (1)			July 2006 (1)			October 2006 (1)
Original principal amount of debentures (millions)	$	20.0		$	2.5		$	7.5
Per share conversion price on debenture	$	25.51		$	25.51		$	25.51
Interest rate		7.5	%		7.5	%		7.5	%
Term of debenture	42 months			42 months			42 months
Warrants issued	274,406 shares			34,370 shares			102,835 shares
Term of warrants	60 months			60 months			60 months
Per share exercise price of warrants	$	28.06		$	28.06		$	28.06
Fair value per warrant at issuance	$	26.03		$	23.89		$	22.13
Value per share of conversion feature at issuance	$	18.80		$	19.21		$	19.57
Stock price on date of agreement	$	32.25		$	29.28		$	26.81
Stock volatility at issuance		106	%		111	%		117	%
Dividend yield		0.0	%		0.0	%		0.0	%
Risk-free interest rate at issuance		4.88	%		4.88	%		4.65	%
Principal shares converted	Partial			Partial			Partial
Warrants exercised	No			No			Partial

(1) The May 2006, July 2006 and October 2006 issuances had a beneficial conversion feature.

In September 2005, Zoltek entered into an agreement for 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. As of September 30, 2008, all debentures converted and all warrants exercised related to the September 2005 offering.

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. As of September 30, 2008, all debenturess were converted and all warrants exercised related to the December 2005 offering.

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. As of September 30, 2008, all debentures were converted and all warrants exercised related to the February 2006 offering.

44

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 have a stated maturity of 42 months and bear interest at a fixed rate of 7.5% per annum. The convertible debentures are convertible into 293,767 shares of 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. The fair value of the debt discount associated with the warrants and conversion features at the time of issuance was $2.8 million and are being accreted to the debt’s face value over the life of the convertible debentures.

45

Warrant and Conversion Features

In January, March and October 2004 and February 2005, the Company issued convertible notes and warrants that required the Company to register the resale of the shares of common stock issuable 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 Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting For Derivative Instruments And Hedging Activities,” and Emerging Issues Task Force (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. The Company recorded the fair value of the conversion feature and warrants as long-term liabilities. The Company is required to carry these embedded derivatives on its balance sheet at fair value and unrealized changes in the values of these embedded derivatives are reflected in the consolidated statement of operations as “Loss on value of warrants and conversion feature.”

As of September 30, 2008, all such convertible notes and warrants have been exercised. See table below for impact on the results for fiscal years ended September 30, 2007 and 2006 (amounts in thousands).

	Fiscal Year Ended September 30, 2007
				Conversion
	Warrants			Features		Total
January 2004 issuance — mark to market	$	(314	)	$	—	$	(314	)
Loss on value of warrants and conversion feature	$	(314	)	$	—	$	(314	)

	Fiscal Year Ended September 30, 2006
				Conversion
	Warrants			Features			Total
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	)

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.

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, July 2006 and October 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 years 2008, 2007 and 2006 (amounts in thousands).

	Fiscal Year Ended September 30, 2008
			Conversion
	Warrants		Features		Total
May 2006 issuance	$	1,943	$	2,867		4,810
July 2006 issuance		230		280		510
October 2006 issuance		392		452		844
	$	2,565		3,599		6,164
Deferred financing costs						518
Total					$	6,682

46

	Fiscal Year Ended September 30, 2007
			Conversion
	Warrants		Features		Total
September 2005 issuance	$	158	$	—	$	158
December 2005 issuance		285		—		285
February 2006 issuance		1,830		1,882		3,712
May 2006 issuance		1,560		2,302		3,862
July 2006 issuance		113		138		251
October 2006 issuance		235		269		504
	$	4,181	$	4,591	$	8,772
Deferred financing costs						999
Total					$	9,771

	Fiscal Year Ended September 30, 2006
			Conversion
	Warrants		Features		Total
October 2004 issuance	$	204	$	400	$	604
February 2005 issuance		834		7,830		8,664
September 2005 issuance		905		—		905
December 2005 issuance		548		—		548
February 2005 issuance		312		694		1,006
May 2006 issuance		3,524		332		3,856
July 2006 issuance		28		34		62
	$	6,355	$	9,290	$	15,645
Deferred financing costs						887
Total					$	16,532

47

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

	September 30, 2008
			Conversion
	Warrants		Feature		Total
May 2006 issuance	$	1,566		2,313	$	3,879
July 2006 issuance		259		311		570
October 2006 issuance		370		426		796
	$	2,195	$	3,050		5,245
Debt acquisition cost and financing fees						416
Total					$	5,661

	September 30, 2007
			Conversion
	Warrants		Feature		Total
May 2006 issuance	$	4,728	$	6,981	$	11,709
July 2006 issuance		403		485		888
October 2006 issuance		1,236		1,422		2,658
	$	6,367	$	8,888		15,255
Debt acquisition cost and financing fees						985
Total					$	16,240

Earnings Per Share

In accordance with SFAS No. 128, “Earnings per Share,” the Company has evaluated its diluted income per share calculation. The Company does have outstanding warrants and convertible debt at September 30, 2008, 2007 and 2006 which are not included in the determination of diluted loss per share for the fiscal year ended September 30, 2008, 2007 and 2006 because the shares are anti-dilutive. Had these securities been dilutive, an additional 0.7 million, 1.4 million and 4.3 million shares, respectively, would have been included in the Company’s diluted loss per share calculation.

The following is the diluted impact of the convertible debt and warrants on net income (loss) per share for the fiscal years ended September 30, 2008, 2007 and 2006 respectively:

	Fiscal Year Ended September 30,
	2008		2007			2006
Numerators:
Net income (loss)	$	7,441	$	(2,517	)	$	(65,802	)
Denominators:
Average shares outstanding — basic		34,042		28,539			22,575
Impact of convertible debt, warrants and stock options		130		—			—
Average shares outstanding — diluted		34,172		28,539			22,575
Income (loss) per share — basic:
Continuing operations	$	0.22	$	(0.07	)	$	(2.91	)
Discontinued operations		0.00		(0.02	)		0.00
Basic income (loss) per share	$	0.22	$	(0.09	)	$	(2.91	)
Income (loss) per share — diluted:
Continuing operations	$	0.22	$	(0.07	)	$	(2.91	)
Discontinued operations		0.00		(0.02	)		0.00
Diluted income (loss) per share	$	0.22	$	(0.09	)	$	(2.91	)

48

3. DISCONTINUED OPERATIONS

During the fourth quarter of fiscal 2006, the Company formally adopted a plan to discontinue operations and sell the assets of its continuously extruded netting and thermoplastic compounding product lines. These operations have since been reported as discontinued operations. Beginning in fiscal 2007, the remaining operations related these products are immaterial to the Company’s overall operations and therefore no longer segregated from continuing operations.

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. The results of operations of these two product lines have been reclassified to discontinued operations for fiscal 2007.

	2007			2006
Net sales	$	1,843		$	4,964
Cost of sales		2,220			4,369
Gross profit		(377	)		595
Selling, general and administrative expenses		(144	)		(383	)
Income (loss) from operations		(521	)		212
Other loss		(24	)		(399	)
Net loss from operations		(545	)		(187	)
Gain on disposal of discontinued operations		—			150
Loss on discontinued operations	$	(545	)	$	(37	)

4. INVENTORIES

Inventories consist of the following (amounts in thousands):

	September 30,
	2008		2007
Raw materials	$	10,749	$	7,941
Work-in-process		14,962		11,832
Finished goods		18,844		7,632
Supplies and other		1,104		536
	$	45,659	$	27,941

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 $0.5 million and $0.6 million as of September 30, 2008 and 2007, respectively, to reduce the carrying value of inventories to net realizable value. The reserves were established primarily due to slow moving inventories produced in prior years.

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following (amounts in thousands):

	September 30,
	2008			2007
Land	$	15,450		$	2,265
Buildings and improvements		55,267			46,153
Machinery and equipment		225,342			166,021
Furniture, fixtures and software		6,788			6,042
Construction in progress		72,214			36,183
		375,061			256,664
Less: accumulated depreciation		(86,167	)		(67,863	)
	$	288,894		$	188,801

49

6. INCOME TAXES

The components of income tax expense (benefit) for the fiscal years ended September 30, 2008, 2007 and 2006 are as follows (amounts in thousands):

	2008		2007			2006
From continuing operations:
Current:
Federal	$	—	$	—		$	—
State		107		—			—
Mexico		80		—			—
Hungary		2,644		1,158			888
		2,831		1,158			888
Deferred:
Federal		—		—			—
State		—		(157	)		—
Mexico		—		—			—
Hungary		2,585		985			—
		2,585		828			—
Total continuing operations	$	5,416	$	1,986		$	888
From discontinued operations:
Current:
Federal	$	—	$	—		$	—
State		—		—			—
Non-U.S		—		19			—
		—		19			—
Deferred:
Federal		—		—			—
Non-U.S		—		—			—
Total discontinued operations	$	—	$	19		$	—
Total	$	5,416	$	2,005		$	888

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 liability at September 30 are as follows (amounts in thousands):

	September 30,
	2008			2007
Deferred tax assets:
Legal liabilities	$	7,990		$	1,812
Accrued employee compensation		119			117
Other assets		—			416
Reserves		181			178
Net operating loss and credit carryforwards		24,933			37,493
		33,223			40,016
Deferred tax liabilities:
Property, plant and equipment		(10,841	)		(9,943	)
Employee compensation		—			(391	)
Prepaid expenses		(118	)		(185	)
Other liabilities		(664	)		(567	)
		(11,623	)		(11,086	)
Total deferred taxes		21,600			28,930
Less: valuation allowance		(25,188	)		(29,758	)
Net deferred tax liability	$	(3,588	)	$	(828	)
Classification of deferred taxes:
Current deferred tax asset (included in Other current assets)	$	933		$	3,218
Long-term deferred tax liability		(4,521	)		(4,046	)
	$	(3,588	)	$	(828	)

In the consolidated balance sheets, these deferred tax assets and liabilities are classified as either current or non-current based on the classification of the related liability or asset for financial reporting. A deferred tax asset or liability that is not related to an asset or liability for financial reporting, including deferred taxes related to carryforwards, is classified according to the expected reversal date of the temporary differences as of the end of the year.

50

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):

	2008			2007			2006
At statutory rate:
Income taxes on income (loss) from continuing operations	$	4,507		$	5		$	(22,058	)
Increases (decreases):
Lower effective tax rate on non-U.S. operations		(1,446	)		(2,805	)		(985	)
Change in valuation allowance on net operating loss		(3,416	)		1,428			12,339
Change in valuation allowance on capital loss		—			—			(523	)
State taxes, net of federal benefit		17			(157	)		—
Local taxes, non-U.S		2,724			1,177			888
Amortization of warrant discount		3,425			3,926			5,659
Fair market value of warrants		—			107			9,963
Non-qualified stock option expense		(567	)		(1,115	)		(3,617	)
Other		172			(561	)		(778	)
	$	5,416		$	2,005		$	888

The consolidated income (loss) from continuing operations before income taxes by domestic and foreign sources for the years ended September 30, 2008, 2007 and 2006 was as follows (amounts in thousands):

	2008		2007			2006
Domestic	$	6,831	$	(16,093	)	$	(71,069	)
Foreign		6,026		16,107			6,192
Income (loss) from continuing operations before income taxes	$	12,857	$	14		$	(64,877	)

Zoltek Zrt’s retained earnings of $37.8 million and accumulated deficit of $27.1 million at September 30, 2008 and September 30, 2007, respectively, are considered to be permanently reinvested and, accordingly, no provision for income taxes has been recorded.

The Company currently has domestic net operating loss carryforwards of approximately $82.1 million available to offset future tax liabilities, which expire between 2020 and 2027. Included in the net operating loss carry-forwards are stock option deductions of approximately $15.0 million. The benefits of these tax deductions, referred to as excess tax benefits, will be credited to additional paid-in capital upon being realized or recognized. 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 carryforward of approximately $5.0 million which expires in 2009. During the years ended September 30, 2007 and 2008, the Company utilized approximately $1.4 million and $2.2 million, respectively, of its foreign deferred tax assets for which no benefit had been previously recorded.

The Company estimates its contingent income tax liabilities based on its assessment of probable income tax-related exposures and the anticipated settlement of those exposures translating into actual future liabilities. As of September 30, 2007 and 2008, the Company’s accrual for these contingencies, included in long-term deferred tax liabilities in the accompanying consolidated balance sheet, was approximately $600,000.

7. DEBT

Credit Facilities

U.S. Operations — In December 2007, the Company extended its existing line of credit until January 1, 2009. The renewal of this credit facility included an amendment which increased the amount available under the original revolving credit facility from $5.5 million to $6.7 million. The revolving credit facility has a total commitment of the lesser of (1) $6.7 million or (2) an amount equal to a percentage of eligible accounts receivable plus a percentage of eligible inventories, which as of September 30, 2008 totaled $10.3 million. The amendment provides that the letter of credit will be collateralized by the availability under the revolving credit facility.

In October 2008, the Company settled a civil action filed by an investment banker (see Note 8 of the Notes to the Consolidated Financial Statements) for $5.8 million cash. The Company paid the settlement amount out of cash on hand. An appeal bond posted by the Company in this case was previously collateralized by the Company’s revolving credit facility. Accordingly, as of September 30, 2008, there is no draw down of credit by the Company under the revolving credit facility. The borrowing base of the revolving credit facility is now fully available to the Company subsequent to this settlement. No financial covenants currently apply to the credit facility from the U.S. bank.

The Company intends to extend its existing line of credit before its expiration on January 1, 2009. Based on the history of relationships with its bank and its current financial position, the Company does not expect any issues with extending its line of credit beyond the expiration date. However, we can make no assurances that we will be successful in executing such an extension.

Hungarian Operations — The Company’s Hungarian subsidiary has a credit facility with a Hungarian bank. Total borrowings under this credit facility were $5.2 million at September 30, 2008. The credit facility is a term loan with quarterly interest payments.

51

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, 2008.

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

	September 30,
	2008			2007
Note payable with interest at 7.2%, payable in monthly installments of principal and interest of $15 to maturity in January 2009	$	1,184		$	1,272
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		—			2,030
Facilities with Hungarian banks (interest rate of 5.5% to 7.0%) with maturity in February 2009		5,175			6,417
Convertible debentures due November 2009 bearing interest of 7.5%		9,000			16,200
Convertible debentures due January 2010 bearing interest of 7.5%		1,500			2,505
Convertible debentures due April 2010 bearing interest of 7.5%		4,549			7,495
Total debt		21,408			35,919
Less: beneficial conversion feature and debt discount associated with warrants		(5,245	)		(15,255	)
Less: amounts payable within one year		(12,601	)		(13,813	)
Total long-term debt	$	3,562		$	6,851

The aggregate annual maturities of long-term debt at September 30, 2008 are set forth below (amounts in thousands):

	Annual
September 30,	Maturities
2009	$	16,356
2010		4,546
2011		506
Total	$	21,408

8. COMMITMENTS AND CONTINGENCIES

LEASES

We rent office facilities and equipment under various operating leases. Rent expense for all operating leases was $285,382, $265,660 and $57,991 for the fiscal years ended September 30, 2008, 2007, and 2006, respectively. There are no material future minimum payments under non-cancelable operating leases with initial or remaining terms in excess of one year at September 30, 2008.

The following table sets forth the future minimum lease commitments under operating leases at September 30, 2008:

	Future
	Commitments
	for Operating
September 30,	Leases
2009	$	245
2010		81
2011		9
2012		9
2013		8
Thereafter		2
Total	$	354

During 2007, we began to lease forklifts and telecommunication equipment under various capital leases. Lease expense for all capital leases for the fiscal years ended September 30, 2008 and 2007 was $211,104 and $102,368, respectively.

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The following table sets forth the future minimum lease commitments under capital leases and the present value of net minimum lease payments at September 30, 2008:

	Future
	Minimum
	Lease
September 30,	Payments
2009	$	202
2010		121
Total	$	323

LEGAL

Legal contingencies have a high degree of uncertainty. When losses from contingencies become estimatable and probable, reserves are established. The reserves reflect management’s estimate of the probable cost of ultimate resolution of the matters and are revised accordingly as facts and circumstances change and, ultimately, when matters are brought to closure. If any litigation matter is resolved unfavorably, the Company could incur obligations in excess of management’s estimate of the outcome, and such resolution could have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity. As of September 30, 2008, the Company has established an accrual for legal liabilities of $29.1 million. In addition, we may incur additional legal costs in connection with pursuing and defending such actions.

In February 2005, SP Systems and its subsidiary Structural Polymer Systems, Limited (“SP Systems”) filed an action against our Zoltek Corporation subsidiary in the U.S. District Court for the Eastern District of Missouri, Eastern Division alleging that we breached a Supply Agreement relating to our carbon fiber product known as Panex 33. The case was tried in November 2006 and the jury rendered verdicts against our Zoltek Corporation subsidiary. In April 2007, the Court issued an Order setting the amount of a supersedeas bond at $23.5 million in order to stay the execution of the amended judgment pending our appeal. On October 8, 2008, the United States Court of Appeals affirmed the district court’s earlier denial of Zoltek’s motion for a new trial and motion for judgment as a matter of law. The Court of Appeals also denied Structural Polymer Group’s cross appeal of the district court’s reduction of the jury’s damages award. Zoltek filed a motion for rehearing by the full Eighth Circuit Court of Appeals. As of September 30, 2008, the Company had recorded $23.1 million with respect to this matter. The Company expects that the ultimate resolution of the litigation will not have any additional material adverse effect on the Company’s future business, financial condition or liquidity.

Zoltek has filed a separate lawsuit alleging that SP Systems breached its supply agreement and committed fraud against Zoltek. Zoltek is claiming actual and punitive damages of in excess of $78 million in that suit, which it will continue to vigorously prosecute.

In September 2004, the Company was named a defendant in a civil action filed by an investment banker that was retained to obtain equity investors, alleging breach by the Company of the Company’s obligations under the agreement signed by the parties. On May 9, 2006, the court entered judgment for Scott Macon in the amount of $3.6 million for placement fees, plus warrants for the purchase of 122,888 of Zoltek stock. In October 2007, the United States Court of Appeals for the Second Circuit upheld the liability against Zoltek affirming the judgment for $2.5 million in cash and warrants to purchase approximately 92,000 shares of the Company’s common stock and remanded back to the District Court for further proceeding fees at issue of approximately $1.1 million and approximately 31,000 warrants of Zoltek common stock plus interest. In October 2008, the Company settled the case for $5.8 million cash which had been fully accrued as a litigation charge as of September 30, 2008.

On May 13, 2008, the Company received a letter from the enforcement staff of the Securities and Exchange Commission indicating that the staff was conducting a non-public, fact finding investigation and requested that the Company retain certain records and produce information and documents related to matters disclosed in the Company’s Current Report on Form 8-K filed May 5, 2008 relating to payments directed by the Company’s former Chief Financial Officer that were not properly authorized or recorded. The Company has cooperated fully with its investigation. The Company now has submitted all information requested by the staff.

The Company is exposed to various claims and legal proceedings arising out of the normal course of its business. Although there can be no assurance, in the opinion of management, the ultimate outcome of these other claims and lawsuits should not have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.

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, worked 501 or more hours this year and attained 21 years of age. No contributions were made by the Company for the fiscal years ended September 30, 2008, 2007 and 2006.

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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, officers and directors 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.

Stock option awards. Outstanding stock options expire 10 years from the date of grant or upon termination of employment. Options granted to employees in 2007 and 2008 vest 17% in the first year, 33% in the second year and 50% in the third year from date of grant. Options granted to employees in 2005 and 2006 vest two years from the date of grant. The fair value of all options is amortized on a straight-line basis over the vesting period. Annually options to purchase 7,500 shares of common stock are issued to each director, other than the CEO. In addition, newly elected directors receive options to purchase 7,500 shares of common stock. All options granted to directors vest immediately at time at grant. All options are issued at a price equal to the market price on the date the Board of Directors approves the grant. These options expire from 2009 through 2018.

Presented below is a summary of stock option plans activity for the fiscal years 2006 through 2008:

				Wtd. Avg.		Options		Wtd. Avg.
	Options			Exercise Price		Exercisable		Exercise Price
Balance, September 30, 2006		552,834		$	10.94		343,495	$	12.65
Granted		77,500			29.51
Exercised		(220,524	)		6.31
Cancelled		(40,000	)		28.01
Balance, September 30, 2007		369,810		$	16.02		264,800	$	17.23
Granted		245,000			27.92
Exercised		(169,223	)		8.03
Cancelled		(30,000	)		39.00
Balance, September 30, 2008		415,587		$	25.52		220,587	$	23.50

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The following table summarizes information for options currently outstanding and exercisable at September 30, 2008:

Options Outstanding							Options Exercisable
Range of				Wtd. Avg.	Wtd. Avg.				Wtd. Avg.
Exercise Prices		Number		Remaining Life	Exercise Price		Number		Exercise Price
$	1.33-2.80		2,000	4 years	$	2.07		2,000	$	2.07
	6.25-9.25		35,087	6 years		8.58		35,087		8.58
	9.60-24.12		91,000	7 years		14.30		56,000		8.32
	26.22-29.70		175,000	9 years		29.20		37,500		28.54
	30.00-39.00		90,000	9 years		33.43		90,000		33.43
	1.33-39.00		393,087	8 years		25.52		220,587		23.50

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:

Assumptions	Fiscal 2008			Fiscal 2007			Fiscal 2006
Expected life of option	4 & 7.5 years			3 & 7.5 years			3 & 8 years
Risk-free interest rate		1.8	%		4.9	%		4.32	%
Volatility of stock		66	%		68	%		96	%
Forfeiture experience		30	%		30	%		30	%

The fair value of the options granted during fiscal 2008, 2007 and 2006 was $5,541,041, $1,377,648 and $1,088,964, respectively. As of September 30, 2008, the Company had $2.2 million of total unrecognized compensation expense related to stock option plans that will be recognized over the fiscal years 2009, 2010 and 2011. Cash proceeds received from the exercise of stock options were $1.4 million, $1.4 million and $2.8 million for fiscal 2008, 2007 and 2006, respectively.

Restricted stock awards. Under the Company’s equity incentive plans, employees and directors may be granted restricted stock awards which are valued based upon the fair market value on the date of the grant. Restricted shares granted in fiscal 2008 vest 17% in the first year, 33% in the second year and 50% in the third year from date of grant. The fair value of all options is amortized on a straight-line basis over the vesting period. Presented below is a summary of restricted stock activity during the nine months ended September 30, 2008:

	Shares
Balance, September 30, 2007		0
Granted		67,500
Balance, September 30, 2008		67,500

As of September 30, 2008, the remaining unamortized compensation cost related to restricted stock awards was $1.4 million which is expected to be recognized over the remaining vesting period of three years.

For the fiscal years ended September 30, 2008, 2007 and 2006, the Company recorded into selling and general administrative expense and into its corporate/other segment $2.4 million, $1.3 million and $1.0 million, respectively, for the cost of employee services received in exchange for equity instruments based on the grant-date fair value of those instruments in accordance with the provisions of SFAS No. 123-(R). There were no recognized tax benefits during the fiscal years 2008, 2007 or 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.

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.

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. 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 oxidized acrylic fibers used to manufacture aircraft brake pads and 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 North America, Mexico and Hungary.

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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 manufactured thermoplastic components. These operations have since been reported as discontinued operations. Beginning in fiscal 2007, the remaining operations related to exiting the thermoplastic division are immaterial to the Company’s overall operations and will, therefore, no longer be segregated from continuing operations. The remaining business represented in the Corporate/Other Products segment relate to water treatment and electrical services provided by the Hungarian operations.

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, 2008, 2007 and 2006 (amounts in thousands):

	Fiscal Year Ended September 30, 2008
	Carbon		Technical		Corporate/
	Fibers		Fibers		Other			Total
Net sales	$	156,033	$	25,910	$	3,673		$	185,616
Cost of sales		110,691		20,378		3,324			134,393
Gross profit		45,342		5,532		349			51,223
Operating income (loss)		33,961		3,019		(16,973	)		20,007
Depreciation and amortization expense		13,353		2,030		1,093			16,476
Capital expenditures		101,628		2,568		3,519			107,715

	Fiscal Year Ended September 30, 2007
	Carbon		Technical		Corporate/
	Fibers		Fibers		Other			Total
Net sales	$	116,365	$	31,697	$	2,818		$	150,880
Cost of sales		82,223		23,689		1,594			107,506
Gross profit		34,142		8,008		1,224			43,374
Operating income (loss)		26,536		7,435		(15,862	)		18,109
Depreciation and amortization expense		7,387		1,333		485			9,205
Capital expenditures		47,321		2,148		3,943			53,412

	Fiscal Year Ended September 30, 2006
	Carbon		Technical		Corporate/
	Fibers		Fibers		Other			Total
Net sales	$	65,677	$	25,195	$	1,485		$	92,357
Cost of sales		49,386		19,211		1,397			69,994
Gross profit		16,291		5,984		88			22,363
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

	Total Assets
	Carbon		Technical		Corporate/
	Fibers		Fibers		Other		Total
September 30, 2008	$	344,974	$	32,705	$	62,485	$	440,164
September 30, 2007		217,662		36,833		149,104		403,599
September 30, 2006		128,747		25,199		33,738		187,684

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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, 2008, 2007 and 2006 (amounts in thousands):

	2008				2007				2006
			Net				Net				Net
			Long Lived				Long Lived				Long Lived
	Net Sales(a)		Assets(b)		Net Sales(a)		Assets(b)		Net Sales(a)		Assets(b)
United States	$	42,205	$	47,617	$	38,505	$	48,744	$	36,359	$	49,497
Europe		133,286		158,694		106,798		140,457		47,829		—
Asia		10,106		—		4,983		—		598		72,787
Mexico		—		82,583		—		—		—		—
Other areas		19		—		594		—		7,571		—
Total	$	185,616	$	288,894	$	150,880	$	188,801	$	92,357	$	122,284

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

12. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

(Amounts in thousands, except per share data)

Fiscal year 2008	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter
Net sales	$	40,072	$	49,581	$	44,950	$	51,013
Gross profit		10,759		14,025		13,638		12,801
Net income (loss) from continuing operations		2,604		4,311		2,316		(1,790	)
Net income (loss)		2,604		4,311		2,316		(1,790	)
Basic and diluted income (loss) per share:
Continuing operations — basic	$	0.08	$	0.13	$	0.07	$	(0.05	)
Continuing operations — diluted	$	0.08	$	0.13	$	0.07	$	(0.05	)

Fiscal year 2007	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
Net sales	$	30,285		$	36,742		$	40,274		$	43,579
Gross profit		7,851			10,588			11,940			12,995
Net income (loss) from continuing operations		(5,595	)		(57	)		5,020			(1,340	)
Income (loss) from discontinued operations, net of taxes		(68	)		51			(24	)		(504	)
Net income (loss)		(5,663	)		(6	)		4,996			(1,844	)
Basic and diluted income (loss) per share:
Continuing operations — basic	$	(0.22	)	$	(0.00	)	$	0.17		$	(0.04	)
Discontinued operations — basic		(0.00	)		0.00			(0.00	)		(0.02	)
Total basic	$	(0.22	)	$	(0.00	)	$	0.17		$	(0.06	)
Continuing operations — diluted	$	(0.23	)	$	(0.00	)	$	0.17		$	(0.04	)
Discontinued operations — diluted		(0.00	)		0.00			(0.00	)		(0.02	)
Total diluted	$	(0.23	)	$	(0.00	)	$	0.17		$	(0.06	)

Fiscal year 2006	1st Quarter		2nd Quarter			3rd Quarter			4th Quarter
Net sales	$	15,557	$	26,199		$	26,787		$	23,814
Gross profit		2,530		7,275			7,727			4,831
Net income (loss) from continuing operations		6,128		(27,784	)		(21,216	)		(22,893	)
Income (loss) from discontinued operations, net of taxes		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	)

Annual earnings per share may not equal the sum of the individual quarters due to differences in the average number of shares outstanding during the respective periods.

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13. SUBSEQUENT EVENTS

In October 2008, the Company settled the Scott Macon case for $5.8 million cash which had been fully accrued as a litigation charge as of September 30, 2008. The lawsuit was filed in September 2004 by Scott Macon, an investment banker that was retained to obtain equity investors, alleging breach by the Company of the Company’s obligations under the agreement signed by the parties. In October 2007, the United States Court of Appeals for the Second Circuit upheld the liability against Zoltek affirming the judgment for $2.5 million in cash and warrants to purchase approximately 92,000 shares of the Company’s common stock.

On October 8, 2008, the United States Court of Appeals affirmed the district court’s earlier denial of Zoltek’s motion for a new trial and motion for judgment as a matter of law regarding the SP Systems case. In addition, the Court of Appeals denied Structural Polymer Group’s cross appeal of the district court’s reduction of the jury’s damages award. Zoltek filed a motion for rehearing by the full Eighth Circuit Court of Appeals. As of September 30, 2008, the Company had recorded $23.1 million with respect to this matter. The Company expects that the ultimate resolution of the litigation will not have a material adverse effect on the Company’s business, financial condition or liquidity.

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

None.

Item 9A. Controls and Procedures

Evaluation of Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and interim Chief Financial Officer, we conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and interim Chief Financial Officer has concluded that the Company’s disclosure controls and procedures as of September 30, 2008 were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including the Chief Executive Officer and interim Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2008. All internal control systems have inherent limitations, including the possibility of circumvention and overriding the control. Accordingly, even effective internal control can provide only reasonable assurance as to the reliability of financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

In making its evaluation, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based upon this evaluation, our management has concluded that our internal control over financial reporting as of September 30, 2008 is effective.

Our independent registered public accounting firm, Grant Thornton LLP, has audited the effectiveness of our internal control over financial reporting, as stated in its report which is included herein.

Changes in Internal Control Over Financial Reporting

As described below, the remediation actions to cure prior period reported material weaknesses represent changes in the Company’s internal control over financial reporting in the fourth quarter of fiscal 2008 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

1. Enhancements were enacted to entity level controls and procedures to prevent certain accounting entries from being recorded prior to formal documentation of the arrangements being obtained as more fully enumerated below:

Contract Modifications — Customer Sales Arrangements

To ensure revenue was reported in accordance with underlying customer arrangements, the Company:

• Conducted periodic meetings involving senior management, accounting, financial reporting and sales/operating personnel confirming documented terms, conditions and terms have not been altered and are being adhered with;

• Memorialized in writing terms and arrangements with certain of the Company’s customers;

58

• Employed reporting matrix to track and monitor activity between the Company and certain of its customers;

• Periodically exchanged reporting matrix with impacted customers to confirm Company’s accounting treatment; and

• Ensured underlying accounting records, subsidiary and general ledgers, were in agreement with that reflected in the reporting matrix.

Stock Option Grants

To ensure use of an appropriate measurement date for the valuation of certain share-based payments, the Company:

• Enhanced the knowledge base of our personnel including providing instruction to the share-based compensation administrator, Human Resources department, Compensation Committee and Chief Executive Officer regarding the definition of measurement date issues for administration and instruction regarding the requirements of FAS 123(R) to properly account for share-based compensation;

• Developed protocol of inter-departmental communication whereby the share-based compensation administrator timely notifies financial reporting personnel of grants, modifications to grants, or other relevant information so that accounting can make the necessary fair value adjustments; and

• Enacted policy ensuring agreement of measurement date and grant date for accounting purposes.

2. To ensure proper assessment of reserves for possible liability arising from certain litigation matters, the Company:

• Enhanced communication of case status between interested parties — senior management, accounting and financial reporting, and outside legal counsel;

• As facts and circumstances warrant, prepared memo with range of legal reserve requirements, analyzing need for adjustment to accrued litigation liability; and

• As necessary and on a quarterly basis reviewed accounting treatment with the Audit Committee.

Item 9B. Other Information

On November 26, 2008, Zoltek Companies, Inc. (the “Company”) entered into an Executive Employment Agreement (the “Agreement”) with Andrew W. Whipple, age 45, to serve as the Company’s Chief Accounting Officer. Under the Agreement, Mr. Whipple will receive an annual salary of $200,000, an annual bonus opportunity. Mr. Whipple will also be entitled to participate in the Company’s standard employee benefit program, including a group insurance program, 401(k) plan and other benefits. In the event Mr. Whipple resigns following a change in control of the Company, Mr. Whipple is entitled to all compensation he otherwise would have received, absent his resignation, for the remainder of the term of the Agreement. Unless terminated earlier by its terms, the Agreement will terminate on November 26, 2011.

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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 2008 Annual Meeting of Shareholders is incorporated herein by this reference.

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

The information set forth under the captions “Voting Securities and Principal Holders Thereof” and “Security Ownership By Management” in the registrant’s Proxy Statement for its 2008 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, 2008.

					Number of securities
					remaining available for
	Number of securities		Weighted-average		future issuance under
	to be issued upon		exercise price		equity compensation
	exercise of outstanding		of outstanding		plans (excluding
	options, warrants		options, warrants		securities reflected in
	and rights		and rights		column (a))
Plan category	(a)		(b)		(c)
Equity compensation plans approved by security holders		369,810		16.02		345,000
Equity compensation plans not approved by security holders		—		—		—
Total		369,810		16.02		345,000

The Company currently has no equity compensation plans that are not approved by security holders.

Item 13. Certain Relationships and Related Transactions and Director Independence

The information set forth under the captions “Certain Transactions” and “Election of Directors” in the registrant’s Proxy Statement for its 2008 Annual Meeting of Shareholders is incorporated herein by this reference.

Item 14. Principal Accounting Fees and Services

The information set forth under the caption “Principal Accountant Fees and Services” in the registrant’s Proxy Statement for its 2008 Annual Meeting of Shareholders is incorporated herein by this reference.

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PART IV

Item 15. Exhibits and Financial Statement Schedule

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

Report of Management	31
Report of Independent Registered Public Accounting Firm — Grant Thornton LLP	32
Report of Independent Registered Public Accounting Firm — Grant Thornton LLP	33
Report of Independent Registered Public Accounting Firm — PricewaterhouseCooper LLP	34
Consolidated Balance Sheets as of September 30, 2008 and 2007	35
Consolidated Statements of Operations for the years ended September 30, 2008, 2007 and 2006	36
Consolidated Statements of Changes in Shareholders’ Equity for the years ended September 30, 2008, 2007 and 2006	37
Consolidated Statements of Cash Flows for the years ended September 30, 2008, 2007 and 2006	38
Notes to Consolidated Financial Statements	39

(2) The following financial statement schedule is included in Part IV of this report:

Rule 12-09 Valuation and Qualifying Accounts and Reserves

For the fiscal year ended September 30, 2008

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
Reserve for doubtful accounts	$	781	$	1,300	$	—	$	327		$	1,754
Reserve for inventory valuation	$	645	$	—	$	—	$	145	(7)	$	500
Deferred tax valuation	$	29,758	$	1,057	$	—	$	—		$	30,815

For the fiscal year ended September 30, 2007

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
Reserve for doubtful accounts	$	729	$	52	$	—		$	—		$	781
Reserve for inventory valuation	$	1,300	$	—	$	—		$	655	(7)	$	645
Deferred tax valuation	$	34,217	$	—	$	628	(5)	$	5,087	(3) (4) (6)	$	29,758

61

For the fiscal year ended September 30, 2006

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
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

(1)	Write-off of uncollectible receivable, net of recovery.
(2)	Reduction in inventory reserve for inventory items related to discontinued operations.
(3)	Expiration of capital loss carryforward and utilization against current foreign income taxes payable.
(4)	Removal of NOL’s related to non-qualified stock options and the related valuation allowance.
(5)	Addition of a valuation allowance on the Texas tax credits that were created from prior years Texas NOL. The credits are created and calculated under the newly enacted Texas margin tax law.
(6)	Prior year true-ups.
(7)	Company used and sold materials for which reserves were established primarily for slow moving product.

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.

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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 1, 2008

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 Zsolt Rumy	Chairman, President, Chief Executive Officer, Chief Financial Officer and Director (Principal Executive Officer and Principal Financial Officer)	December 1, 2008
/s/ Andrew W. Whipple Andrew W. Whipple	Chief Accounting Officer  (Principal Accounting Officer)	December 1, 2008
/s/ James W. Betts James W. Betts	Director	December 1, 2008
/s/ Charles A. Dill Charles A. Dill	Director	December 1, 2008
/s/ George E. Husman George E. Husman	Director	December 1, 2008
/s/ Michael D. Latta Michael D. Latta	Director	December 1, 2008
/s/ Linn H. Bealke Linn H. Bealke	Director	December 1, 2008

63

Exhibit Index

Exhibit
Number		Description
	3.1	Restated Articles of Incorporation of the Registrant dated October 7, 1992, filed as Exhibit 3.1 to Registrant’s Registration Statement on Form S-3 (Reg. No.333-143996) and incorporated herein by reference.
	3.2	Certificate of Amendment of Restated Articles of Incorporation of the Registrant dated February 15, 1996, filed as Exhibit 3.2 to Registrant’s Registration Statement on Form S-3 (Reg. No.333-143996) and incorporated herein by reference.
	3.3	Certificate of Amendment of Restated Articles of Incorporation of the Registrant dated February 7, 1997, filed as Exhibit 3.3 to Registrant’s Registration Statement on Form S-3 (Reg. No.333-143996) and incorporated herein by reference.
	3.4	Restated By-Laws of the Registrant dated September 22, 1992, filed as Exhibit 3.4 to Registrant’s Registration Statement on Form S-3 (Reg. No.333-143996) and incorporated herein by 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) and incorporated herein by 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, filed as Exhibit 4.2 to Registrant’s Annual Report on Form 10-K for the year ended September 30, 2001 and incorporated herein by reference.
	4.3	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 and incorporated herein by reference.
	4.4	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 and incorporated herein by reference.
	4.17	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 and incorporated herein by reference.
	4.18	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) and incorporated herein by reference.
	4.19	Form of 6% Convertible Debenture, filed as Exhibit 4.3 to Registrant’s Registration Statement on Form S-3 (Reg. No. 333-115043) and incorporated herein by reference.
	4.20	Form of Warrant, filed as Exhibit 4.4 to Registrant’s Registration Statement on Form S-3 (Reg. No. 333-115043) and incorporated herein by reference.
	4.21	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 and incorporated herein by reference.
	4.22	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 and incorporated herein by reference.
	4.23	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 and incorporated herein by reference.
	4.24	Form of Warrant, filed as Exhibit 4.5 to Registrant’s Current Report on Form 8-K dated October 19, 2004 and incorporated herein by reference.
	4.25	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.
	4.26	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.
	4.27	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.
	4.28	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.
	4.29	Loan and Warrant Agreement, dated 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.
	4.30	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.
	4.31	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.
	4.32	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.
	4.33	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.

64

Exhibit
Number		Description
	4.34	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.
	4.35	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.
	4.36	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.
	4.37	Amendment No. 2 to Loan and Warrant Agreement and Registration Rights Agreement, dated as of December 14, 2006, among the Registrant and the Lenders, filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K dated December 14, 2006 and incorporated herein by reference.
	4.38	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	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.*
	10.2	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.*
	10.3	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, filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, is incorporate herein by reference.
	10.4	First Amendment to Credit Agreement, dated as of February 13, 2003, by and among Zoltek Companies, Inc., Zoltek Corporation, Cape Composites, Inc., Engineering Technology Corporation, Zoltek Properties, Inc. and Southwest Bank of St. Louis, filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-k dated February 18, 2003 is incorporated herein by reference.
	10.5	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.*
	10.6	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.
	10.7	Zoltek Companies, Inc. 2008 Director Incentive Plan, filed as Appendix A to the Registrant’s Proxy Statement on Schedule 14A filed on January 2, 2008 and incorporated herein by this reference.*
	10.8	Zoltek Companies, Inc. 2008 Long Term Incentive Plan, filed as Appendix B to the Registrant’s Proxy Statement on Schedule 14A filed on January 2, 2008 and incorporated herein by this reference.*
	10.9	Employment Agreement, dated March 1, 2008, between the Registrant and Karen Bomba, filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 and incorporated herein by reference.
	10.10	Employment Agreement, dated November 26, 2008, between the Registrant and Andrew W. Whipple.
	21	Subsidiaries of the Registrant filed as Exhibit 21 to the Registrant’s Annual Report on Form 10-k for the fiscal year ended September 30, 2007 and incorporated herein by reference.
	23.1	Consent of Grant Thornton LLP.
	23.2	Consent of PricewaterhouseCoopers LLP.
	31	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended is filed herewith.
	32	Certification of Chief Executive Officer and 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.

* Management compensatory plan or arrangement

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EX-10.10

Exhibit 10.10

EXECUTIVE EMPLOYMENT AGREEMENT

THIS EXECUTIVE EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of this 26^th day of November, 2008 by and between Zoltek Companies, Inc. (“Company”), and Andrew W. Whipple (“Executive”). In consideration of the mutual covenants and promises herein contained, the adequacy of which is hereby acknowledged, Company and Executive hereby agree as follows.

I. Employment

Company employs Executive, and Executive accepts employment by Company upon all of the terms and conditions set out in this Agreement.

II. Positions and Duties

2.1 Positions. Executive shall serve as Chief Accounting Officer of Company during the term of this Agreement.

2.2 Duties, Responsibilities and Involvement. Executive will report to the Chief Executive Officer and will perform those duties customarily performed by a Chief Accounting Officer. Executive shall also have such other responsibilities as may be reasonably assigned to him from time to time by the Chief Executive Officer and/or the Board.

2.3 Commitment to Company. Executive shall devote his full-time efforts to the business of Company, and shall not, during the term of this Agreement, be engaged in any other business activity which requires a significant portion of his personal time and attention whether or not such business activity is pursued for gain, profit or other pecuniary advantage. This shall not be construed as preventing Executive from investing Executive’s assets in such form or manner consistent with the restrictions in Section 10.1, below, which will not require any services on the part of Executive in the operation or affairs of the entities in which such investments are made.

2.4 Compliance. Executive agrees to abide by the Articles of Incorporation and Bylaws of Company and such reasonable rules and regulations, as are adopted from time to time by the Board. Executive also agrees to conduct himself so as to be in compliance with all applicable laws and regulations issued by local, state or federal authorities.

III. Term of Employment

3.1 Initial Term. The term of Executive’s employment under this Agreement shall commence on November 26, 2008 and continue until November 26, 2011 or until sooner if terminated as provided in this Agreement.

3.2 Renewal or Adjustment. At the end of the initial term, this Agreement may be extended, renewed or adjusted upon the mutual agreement of Company and Executive.

3.3 Termination. Except for post-employment termination payments provided in this Agreement, this Agreement shall terminate upon the termination of Executive’s employment with Company.

IV. Compensation

4.1 Regular Compensation. For all services rendered by Executive in any capacity, Executive shall be entitled to receive regular compensation at the rate of $200,000 per annum. Such compensation shall be payable in accordance with Company’s normal payroll procedures but not less than monthly.

4.2 Long-Term Incentive Plan. Executive shall be entitled to participate in Company’s Long-Term Incentive Plan on terms consistent with Executive’s position and other similarly situated executives of Company.

4.3 Withholding. All payments of regular compensation shall be reduced by amounts that are required to be withheld by federal, state or local law.

V. Fringe Benefits

5.1 General. Executive shall be entitled to participate with other employees of Company, so long as Executive meets the applicable eligibility requirements, in Company’s employee benefit plans and subject to the terms of those plans, including 401(k) plans, health, dental and disability insurance, and other similar employee fringe benefits as may be adopted from time to time.

5.2 Vacation. Executive shall be entitled to paid vacation according to Company’s standard vacation plan.

VI. Expenses

6.1 General. Reasonable expenses incurred by Executive in the conduct of his employment by Company, including expenses for transportation, travel, telephone, and similar items, shall be reimbursed by Company in accordance with Company’s normal and customary reimbursement procedures. Such expenses shall be paid by Company or reimbursed to Executive upon Executive’s presenting to Company an itemized expense statement with supporting receipts or vouchers with respect thereto; provided that no such reimbursement will be made later than the end of the calendar year following the calendar year in which the expenses are incurred.

VII. Death or Disability of Executive

7.1 Death. In the event of Executive’s death during the term of this Agreement (whether Executive is then actively engaged in the performance of services for Company or is being compensated for Disability), this Agreement shall terminate immediately and Executive’s estate shall be entitled to receive from Company an amount equal to the Base Salary then in effect which had accrued to the date of Executive’s death along with accrued but unused vacation days and any benefits receivable under the Long-Term Incentive Plan or pursuant to a bonus payable under Article V hereof, and Executive’s heirs or estate shall be entitled to no further compensation or benefits from Company.

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7.2 Disability. Upon Executive’s Disability Executive’s employment may be terminated. If Executive’s employment is terminated by reason of Disability, Executive shall be entitled to receive from Company only the unpaid portion of the Base Salary then in effect which has accrued to the date of termination along with accrued but unused vacation days and any benefits receivable under the Long-Term Incentive Plan or pursuant to a bonus payable under Article V, and Executive will be entitled to no further compensation or benefits from Company.VIII.

VIII. Termination of Employment

8.1 Termination of Employment. In the event of a termination of Executive by Company for Cause, or if Executive voluntarily terminates his employment with Company for other than Good Reason (other than voluntary termination following a Change of Control), Company shall pay Executive the Base Salary then in effect which has accrued to the termination date, along with accrued but unused vacation days, and Executive will be entitled to no further compensation or benefits from Company.

In the event Executive’s employment pursuant to this Agreement is terminated by Company for any reason other than Cause or by Executive for Good Reason or following a Change of Control, Company shall continue to pay Executive the Base Salary then in effect for the remaining term of this Agreement following such termination and Executive will continue to receive such other compensation and benefits from Company as Executive would have received as if Executive’s employment had not been terminated, including Long-Term Incentive Plan benefits, through the end of the term of this Agreement. In lieu of providing any benefits due Executive under this paragraph, the Company may, in its discretion and subject to the limitations described below, substitute cash payments for the current value of such benefits to Executive (determined without regard to the tax consequences), which cash payments shall made in accordance with the Company’s normal payroll procedures.

In all cases, a termination of employment shall only occur upon separation from service from Company and all of its affiliates, as defined in Treasury regulations under Section 409A of the Code (generally, separation from the 50% controlled group that includes Company, including a decrease in the performance of services to no more than 20% of the average for the preceding 36-month period, and disregarding leaves of absence up to six months where there is a reasonable expectation Executive will return).

Notwithstanding anything to the contrary in this Agreement, if Executive is a “Specified Employee” on the date of termination, Executive may not receive a payment of “nonqualified deferred compensation” for which the “payment event” is “separation from service,” as defined in Code Section 409A and the regulations thereunder, until at least 6 months after a date of termination. Any payment of nonqualified deferred compensation otherwise due in such 6 month period shall be suspended and shall be paid immediately following the end of such 6 month period. A “Specified Employee” means a specified employee as defined in Treas. Reg. §1.409A-1(i) (generally, officers earning more than $145,000 per year, as indexed for inflation, who are among the 50 highest paid employees).

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IX. Files and Records

9.1 Company Property. All files, records, documents, reports and other written instruments concerning finances or customers of Company, including, without limitation, clients and customers consulted, interviewed or served by Executive during the term of this Agreement shall belong to and remain the property of Company.

X. Limitation on Competition

10.1 Non-Competition Agreement. As long as Executive is an employee of Company pursuant to the terms of this Agreement, and during the two year period following the termination of this Agreement by Company for Cause or voluntarily by Executive without Good Reason, Executive shall not, as an owner, employee, consultant or otherwise, individually or collectively, acquire an interest in (other than Executive’s ownership of not more than 2.0% of the outstanding equity securities of a publicly-traded company), become an employee of or consultant to a person or entity engaged in a business which is directly competitive with Company. This section only applies to persons or entities which are in direct competition with Company or are seeking business, which will be in direct competition with Company.

10.2 Non-solicitation Agreement. As long as Executive is an employee of Company pursuant to the terms of this Agreement, and during the two-year period following the termination of this Agreement by Company for Cause or voluntarily by Executive without Good Reason, Executive will not take any action or perform any services which call upon, compete for, solicit, divert, or take away any of the customers of Company.

10.3 Termination of Provisions. Notwithstanding the provisions hereof regarding termination of this Agreement, the provisions of this Section shall remain in full force and effect provided for hereunder.

XI. Arbitration Procedure

11.1 Submittal of Claim. The parties hereto agree that any controversy or claim arising out of or relating to the termination of Executive’s employment must be submitted for final and binding resolution by a jointly selected private and impartial arbitrator.

11.2 Binding Arbitration. Either party may submit an unresolved dispute for resolution by final binding arbitration under this Procedure. The arbitration will be conducted under the National Rules for the Resolution of Employment Disputes of the American Arbitration Association (“AAA”), as amended, which are incorporated by reference into this Procedure, except as described below.

a. Any conflict between the rules and procedures set forth in the AAA rules and those set forth in this Agreement shall be resolved in favor of those in this Agreement.

b. The burden of proof at arbitration shall at all times be on the party seeking relief.

c. In reaching a decision, the arbitrator shall apply the governing substantive law applicable to the claims, causes of action, and defenses asserted by the parties. The arbitrator shall have the power to award all remedies that could be awarded by a court or administrative agency in accordance with the governing and applicable substantive law.

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A copy of the complete AAA rules may be obtained at www.adr.org.

11.3 Time Limits and Procedures. The aggrieved party must give written notice of any claim to the other party within 3 months of the date the aggrieved first knew or should have known of the facts giving rise to the claim; otherwise, the claim shall be void and deemed waived. The written notice shall describe the nature of all claims asserted and the facts upon which those claims are based and shall be mailed to the other party by certified or registered mail, return receipt requested.

a. Any arbitration conducted under this Agreement shall take place in St. Louis, Missouri, unless an alternative location is chosen by the mutual agreement of the parties. The arbitrator shall render a decision and award within 30 days after the close of the arbitration hearing or at any later time on which the parties may agree. The award shall be in writing and signed and dated by the arbitrator and shall contain express findings of fact and the basis for the award.

b. The parties agree to share equally the AAA’s administrative fees and the arbitrator’s fees and expenses. All other costs and expenses associated with the arbitration, including, without limitation, each party’s respective attorneys’ fees, shall be borne by the party incurring the expense.

c. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. The award may be vacated or modified only on the grounds specified in the Federal Arbitration Act or other applicable law.

11.4 Effect of Signature/Waiver of Right to Proceed in Court. Both parties understand that by agreeing to the terms in this procedure, both are giving up any constitutional or statutory right they may possess to have covered claims decided in a court of law before a judge or a jury.

XII. Definitions

The following terms, for purposes of this Agreement have these meanings:

12.1 “Base Salary” means the regular, annual compensation of Executive, at the time specified in this Agreement, as determined under Section 4.1.

12.2 “Board” means the Board of Directors of Company.

12.3 “Cause” means:

a. Executive’s embezzlement or misappropriation of money or other property of Company or conviction of a felony.

b. Executive’s willful refusal to execute his duties under this Agreement.

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c. Executive’s breach of the terms of this Agreement.

d. Executive’s willful negligence in the performance or non-performance of Executive’s duties under this Agreement.

e. Executive’s violation of Company’s ethics rules.

f. Executive’s violation or non-compliance with the public company rules and regulations.

None of the acts set forth above shall constitute Cause unless Executive has first received written notice containing a reasonably detailed description of such occurrence and is given a period of 30 business days from receipt of such notice to cure such occurrence and an opportunity, and together with his counsel or other representatives, to be heard with respect to such matter before the Board.

12.4 “Change of Control” means a change in the ownership or effective control of Company or a change in the ownership of a substantial portion of the assets of Company within the meaning of Section 1.409A-3(i)(5) of Proposed Treasury Regulations or successor Treasury Regulations.

12.5 “Code” means the Internal Revenue Code of 1986, as amended.

12.6 “Disability” means, in the determination of an independent, licensed physician mutually selected by the Board and Executive, the inability, because of the physical or mental illness or incapacity of Executive, to perform his duties under this Agreement for a period of three consecutive calendar months or for a period of four calendar months in any twelve consecutive month period.

12.7 “Good Reason” means, without Executive’s express written consent:

a. The failure to pay or a reduction by Company of Executive’s Base Salary.

b. Any refusal by Company to provide Executive the benefits set forth in this Agreement.

c. The assignment to Executive of duties inconsistent with those described in Article III, which assignment is not cured by Company within 30 business days after written notifications thereby by Executive.

d. A change in Executive’s title of Chief Accounting Officer.

e. A breach of this Agreement by Company which is not cured by Company within a period of 30 business days after receipt of written notice by Executive of such breach.

f. The failure of a successor business to Company to accept the terms of this Agreement.

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12.8 “Long-Term Incentive Plan” means the long-term incentive plan, as described in Section 4.2.

12.9 “Procedure” means the arbitration procedure, as described in Section XI.

XIII. General Provisions

13.1 Waiver. The waiver by either party of a breach or violation of any provision of this Agreement shall not operate as or be construed to be a waiver of any subsequent breach hereof.

13.2 Severability. Should any one or more sections of this Agreement be found to be invalid, illegal, or unenforceable in any respect, the validity, legality and enforceability of the remaining sections contained herein shall not in any way be affected or impaired thereby. In addition, if any section hereof is found to be partially enforceable, then it shall be enforced to that extent.

13.3 Notices. Any and all notices required or permitted to be given under this Agreement shall be sufficient if furnished in writing and personally delivered or sent by registered or certified mail to the last known residence address of Executive or to Company, or such other place as it may subsequently designated in writing.

13.4 Governing Law. This Agreement shall be interpreted, construed and governed according to the laws of the State of Missouri.

13.5 Venue. In the event of litigation arising out of or in connection with this Agreement, the parties hereto agree to submit to the jurisdiction of Federal and state courts located in the State of Missouri.

13.6 Section Headings. The section headings contained in this Agreement are for convenience only and shall in no manner be construed to limit or define the terms of this Agreement.

13.7 Counterparts. This Agreement shall be executed in two or more counterparts, each of which shall be deemed an original and together they shall constitute one and the same Agreement, with at least one counterpart being delivered to each party hereto.

13.8 Assignability. Company shall have the right to assign this Agreement to a third party which purchases substantially all of the then assets of the business formerly operated by Company. The Agreement may not be assigned by Executive.

13.9 Successors and Assigns Bound. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns.

13.10 Entire Agreement. This is the entire and only Agreement between the parties respecting the subject matter hereof. This Agreement may be modified only by a written instrument executed by all parties hereto.

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13.11 Indemnification. In the event Executive is made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was performing services under this Agreement, then Company shall indemnify Executive against all expenses (including attorneys’ fees and disbursements), judgments, fines and amounts paid in settlement, as actually and reasonably incurred by Executive in connection therewith to the fullest extent provided by Missouri law unless it is finally judicially determined that such expenses, judgments, fines and amounts paid in settlement arose primarily out of the gross negligence or willful misconduct of Executive.

13.12 Remedies. In addition to whatever other remedies the non-breaching party and/or its successors or assigns may have at law or in equity, each party specifically covenants and agrees that, in the event of default under or breach of this Agreement, the non-breaching party and/or its successors and assigns shall be entitled to apply to any court of competent jurisdiction to enjoin any breach, threatened or actual, by the breaching party, and/or to sue to obtain damages for default under or any breach of this Agreement. In the event of default under or breach of this Agreement by Executive, Executive hereby agrees to pay all costs of enforcement and collection of any and all remedies and damages under this Agreement incurred, including reasonable attorneys’ fees as determined by a court of competent jurisdiction.

*    *    *    *    *

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IN WITNESS WHEREOF, Company has caused this Agreement to be executed by its duly authorized officers, and Executive has executed this Agreement as of the date first written above.

ZOLTEK COMPANIES, INC.
By	/s/ Zsolt Rumy
	Zsolt Rumy
	Chairman, CEO and President
/s/ Andrew W. Whipple
Andrew W. Whipple

9

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our reports dated December 1, 2008, with respect to the consolidated financial statements, Schedule II, and internal control over financial reporting included in the Annual Report of Zoltek Companies, Inc. on Form 10-K for the year ended September 30, 2008. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Zoltek Companies, Inc. on Forms S-8 (File No.’s 333-145113 and 333-145114, effective August 3, 2007 and File No.’s 333-149356 and 333-149357, effective February 22, 2008 and File No’s 33-06565 and 33-83160).

/s/ GRANT THORNTON LLP

Chicago, Illinois

December 1, 2008

EX-23.2

Exhibit 23.2

Consent of Independent Registered Public Accounting Firm

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-149366, 333-149357, 33-06565, 33-83160, 333-145113, and 333-145114) of Zoltek Companies, Inc. of our report dated December 27, 2006 relating to the consolidated financial statements and financial statement schedule for the year ended September 30, 2006 of Zoltek Companies, Inc., which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
December 1, 2008

EX-31

Exhibit 31

CERTIFICATION

I, Zsolt Rumy, certify that:

1. I have reviewed this annual report on Form 10-K of Zoltek Companies, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 1, 2008 By: /s/ Zsolt Rumy   Zsolt Rumy
Chief Executive Officer and Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Zoltek Companies, Inc. (the “Company”) on Form 10-K for the period ending September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Zsolt Rumy, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: December 1, 2008	By:	/s/ Zsolt Rumy Zsolt Rumy
		Chief Executive Officer and Chief Financial Officer