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, 2009

Commission File Number 0-20600

ZOLTEK COMPANIES, INC.

(Exact name of registrant as specified in its charter)

Missouri (State or other jurisdiction of incorporation or organization)		43-1311101 (I.R.S. Employer Identification No.)
3101 McKelvey Road, St. Louis, Missouri (Address of principal executive offices)		63044 (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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 o		Accelerated Filer þ		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, 2009: approximately $187,570,000.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of November 25, 2009: 34,424,441 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 2010 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			16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			28
Item 8. Financial Statements and Supplementary Data			29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			52
Item 9A. Controls and Procedures			52
Item 9B. Other Information			52
PART III.
Item 10. Directors, Executive Officers and Corporate Governance			53
Item 11. Executive Compensation			53
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			53
Item 13. Certain Relationships and Related Transactions and Director Independence			53
Item 14. Principal Accounting Fees and Services			53
PART IV.
Item 15. Exhibits and Financial Statement Schedules			54
Signatures			56
Exhibit Index			57
Exhibit 23.1
Exhibit 23.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I

ITEM 1. BUSINESS

This Annual Report on Form 10-K for the fiscal year ended September 30, 2009 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 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, a stabilized and oxidized acrylic fiber used in flame- and heat-resistant applications which we sell under the Pyron^® trade name.

We led the development of the carbon fiber commercialization concept and we believe we are the largest manufacturer primarily focused on producing low-cost carbon fibers for commercial applications. Our mission has been to introduce and lead the commercialization of carbon fibers as a low-cost but high performance reinforcement of composites used as a primary building material in everyday products. We have spent over 15 years developing and refining our proprietary technology and manufacturing processes and capacity. Until fiscal 2004, 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, Airbus and Boeing initiated production of new generation aircraft utilizing carbon fiber composites in critical airframe structures (e.g., fuselage and wings). We believe the demand for carbon fibers for these programs 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 new demand for commercial carbon fibers. This triggered a significant divergence of demand for carbon fibers between aerospace and commercial applications.

The divergence in the aerospace and commercial applications led in fiscal 2006 and 2007 to strains in our ability to meet all the demand from our wind energy customers and we were unable to take on new customers. When we were capacity-constrained, potential customers understandably would not commit to new large-scale applications without demonstrated assurance of adequate future supplies. 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. At the same time, manufacturers of carbon fibers for aerospace applications added substantial capacity to meet demand for aircraft production.

During fiscal 2009, the commercial carbon fibers markets we serve have been negatively impacted by the recessionary economic conditions in the United States and international economies, including a sudden, but we believe only temporary, slowdown in the growth of wind turbine business. At the same time, there were unexpected delays in the introduction of new jetliners utilizing aerospace carbon fibers that resulted in a significant decrease in the aerospace market demand. This factor, as well as substantial increases in installed capacity for both aerospace and commercial carbon fibers, led to an increase in price and sales competition between aerospace and commercial carbon fiber manufacturers, particularly in certain cross-over applications (e.g., sporting goods) for which either aerospace or commercial carbon fibers may be utilized. While this situation has negatively impacted our financial results, we plan to be ready to respond to anticipated accelerating demand on a scale we experienced in the 2005 to 2006 time period. We are also maintaining our available unused capacity in a ready mode to avoid the kind of difficulties and delays in reacting to new orders that we experienced in 2005 and 2006.

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 and manufacturing and engineering investments customers must make to incorporate carbon fiber composites into their products. During 2009, we have added additional sales personnel in Asia, focusing on markets in China, India and Korea and have begun to see some success through new customers and sales in those regions. We expect our market development efforts will be successful over the long run.

In addition to the adverse impact of the global economic downturn, four other key factors led to declines in our revenues, operating earnings and margins. First, after years of growing at a 20-25% annual rate, worldwide growth in electricity generation from wind energy has slowed to an estimated 10%. Second, price decreases caused approximately 25% of our revenue decline. Decreases in raw material and energy costs were passed along to customers through prices reductions; however, market pressure from lower customer demand forced price decreases to exceed the cost savings. Third, currency fluctuations caused approximately 20% of our decline in revenue. Fourth, available unused capacity, as discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” was responsible for $7.4 million in unallocated costs (including depreciation) during the fiscal year, without contributing to revenues or gross profit. While Zoltek is confident that the additional capacity will be quickly absorbed as soon as the wind energy business returns to a more robust growth rate and new customers and applications develop, available unused capacity will continue to negatively impact gross margins and operating income. We could take steps to significantly reduce these charges in the future, but we view this as an investment in maintaining our facilities and core staff in a ready mode to minimize the cost and time to restart facilities as the market conditions change.

In order to manage our business, we track it in three separate business segments: carbon fiber segment, technical fiber segment and corporate/other segment, which consists of ancillary activities not directly related to the carbon fiber or technical fiber segments.

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 applications are the direct result of these development efforts.

During September 2009, the Company announced that it entered into a one year technology and marketing agreement with Global Blade Technology, which we expect to accelerate adoption of carbon fibers as wind turbine blade lengths continue to increase. Zoltek and GBT are joining forces to accelerate the design and manufacture of advanced wind turbine blades utilizing Zoltek carbon fibers. GBT offers design, engineering, prototype development, testing and manufacturing assistance for new and existing wind turbine and independent turbine blade manufacturers. We also believe that research and development expenditures will be the primary means by which we can facilitate new product applications.

Capacity Leadership to Keep Pace with Long-Term Demand Growth. We believe that our decision to build and maintain significant available capacity will allow us the ability to enter into additional 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 established 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

According to the Global Wind Energy Council (GWEC), the total market for wind turbines was worth around 36.5 billion Euros ($51.5 billion U.S. dollars) in 2008. GWEC predicts that in 2013, five years from now, global wind generating capacity will stand at 332 GW, up from 120 GW at the end of 2008. GWEC also predicts that during 2013, 56.3 GW of new capacity will be added to the global total, more than double the annual market in 2008. According to the GWEC, the annual growth rates during this period will average 22.4% in terms of total installed capacity, and 15.8% for the annual market. These rates are modest compared to past developments: in the past ten years, published sources have reported an average increase of 28.2% for total capacity and 28.3% for annual capacity.

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

As the price of oil on the world market continues to fluctuate, oil exploration companies are striking out into deepwater, developing reserves beneath the ocean floor a mile or more below the water’s surface. As a result, demand for strong yet lightweight materials able to stand up to the harsh subsea environment has spiked, with a corresponding peak of interest in composites. In a successful demonstration project with a major producer of deep sea drilling platforms, composite rods utilizing our carbon fibers in fabrication of umbilical products were found to deliver equal or superior performance at affordable cost, compared to composite rods utilizing aero-space grade carbon fibers. The composite rods are designed to demonstrate the ability 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. Additional test projects are being planned to demonstrate the effectiveness of carbon fibers in other deep sea drilling applications.

•

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.

•

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

In the fiscal years 2009, 2008 and 2007, we reported net sales of $74.2 million, $75.1 million and $49.9 million, respectively, to Vestas Wind Systems, a leading wind turbine manufacturer, which represented 53.6%, 40.4% and 33.0% of our net sales, respectively, during such periods. The related open accounts receivable balance at September 30, 2009 and 2008 were $21.1 million and $17.2 million, respectively. The Company reported net sales of $24.6 million and $25.1 million in fiscal 2008 and 2007, respectively, to Gamesa Group, another leading wind turbine manufacturer, which represented 13.3% and 16.6% of our net sales, respectively, during such fiscal years. 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. In recent years, our customers have increasingly demanded shorter order lead times and “just-in-time” delivery performance. While we have many multi-year contracts with our major customers, most of these contracts specify the customers’ requirements that will be supplied by us and the terms under which the sales will occur, not the specific quantities to be procured. As a result, twelve-month order backlog is not a meaningful indicator of future revenues for us.

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 facilities 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. We expect it will supply our North American operations with low-cost precursor and will serve as an additional site for carbon fiber production. The first phase of retrofitting the Mexican acrylic precursor plant and installation of carbon fibers lines has been completed, but the plant has delayed initiating production pending resumption of demand. The Mexico plant, which we expect will eventually be our largest facility, will substantially increase 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 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 $7.6 million, $8.1 million and $7.2 million in fiscal 2009, fiscal 2008 and fiscal 2007, respectively. For historical financial information regarding our various business segments, see Note 11 of the accompanying Notes to Consolidated Financial Statements.

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 model 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 Carbon 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 North America and Europe. 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, 2009, we employed approximately 377 persons in our North American operations and approximately 759 in our European 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 our subsidiary.

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 2009 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) successfully adapt to recessionary conditions in the global economy; (2) penetrate existing, identified and emerging markets, including entering into new supply agreements with large volume customers; (3) continue to improve efficiency at our manufacturing facilities on a timely and cost-effective basis to meet current order levels of carbon fibers; (4) successfully add new planned capacity for the production of carbon fiber and precursor raw materials and meet our obligations under long-term supply agreements; (5) maintain profitable operations; (6) increase or maintain our borrowing at acceptable costs; (7) manage changes in customers’ forecasted requirements for our products; (8) continue investing in application and market development in a range of industries; (9) manufacture low-cost carbon fibers and profitably market them despite increases in raw material and energy costs; (10) successfully operate our Mexican facility to produce acrylic fiber precursor and add carbon fiber production lines; (11) resolve the pending non-public, fact-finding investigation being conducted by the Securities and Exchange Commission; (12) successfully continue operations at our Hungarian facility if natural gas supply disruptions occur; (13) successfully prosecute patent litigation (14) successfully implement and coordinate our new alliance with Global Blade Technology; and (15) manage the risks identified under “Risk Factors” 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.

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 dependent 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 2009, our largest customer represented approximately 53.6% of our revenue and our three next largest customers accounted for 24.0% of our 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 2009 were to customers in the wind energy market. Significant changes in demand for our customers’ wind turbines, the shares of their requirements that are 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 2009, 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 $2.0 million, and $4.2 million in fiscal years 2002, 2003, 2004, 2005, 2006, and 2007, and 2009 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.

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 2009, approximately 77.3% 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.

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.

Our existing credit facilities expire on January 1, 2010 and failure to extend or replace these facilities could have a material adverse effect on us.

Our existing $10.0 million U.S. credit facility and our $9.7 million Hungarian credit facility expire on January 1, 2010. Based on our existing relationships with our lenders and our current financial condition, we believe that we will be able to extend these credit facilities beyond their current expiration dates or, if necessary, replace these facilities. The failure to extend or replace our credit facilities on favorable terms could have a material adverse effect on our business, including our operating results and financial condition.

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 three 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 17.7% 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.

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.

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			30,000			Owned
		central engineering offices
St. Charles, Missouri		Carbon and Technical fiber			107,000			Owned
		manufacturing and R&D facility
Abilene, Texas		Carbon fiber manufacturing			278,000			Owned
Salt Lake City, Utah I		Composite fabrication equipment			65,000			Owned/Mortgaged
		design and manufacturing
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. In addition, we may incur additional legal costs in connection with pursuing and defending such actions. As of September 30, 2009, the Company does not have an accrual established for legal liabilities.

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.

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, 2009.

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 served as its interim Chief Financial Officer from May 2008 to April 2009. Mr. Rumy received a B.S. degree in Chemical Engineering from the University of Minnesota in 1966.

Karen M. Bomba, age 45, has served as the Chief Operating Officer of the Company since March 2008. From 2000 to 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 46, has served as the Chief Financial Officer since April 2009. Prior to this, he served as Chief Accounting Officer of the Company from May 2008 to April 2009. 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, 64, 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.

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 34,000, including shareholders whose shares are held in “nominee” or “street” names. As of September 30, 2009, there were 454 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, 2009								September 30, 2008
		High				Low				High				Low
First Quarter		$	17.77			$	4.28			$	47.83			$	34.10
Second Quarter			9.39				5.02				42.44				20.97
Third Quarter			12.60				6.50				32.25				22.79
Fourth Quarter			11.44				7.84				24.97				15.26

As of November 27, 2009, the last reported sale price of the Company’s common stock was $9.05 per share.

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, 2009.

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

408,337

$

23.60

2,163,501

Equity compensation plans not approved by security holders

—

—

—

Total

408,337

$

23.60

2,163,501

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

Performance Graph

The graph below shows the cumulative total return on common stock for the period from September 30, 2004 through September 30, 2009, 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, 2004 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.

		9/30/2004				9/30/2005				9/30/2006				9/30/2007				9/30/2008				9/30/2009
Zoltek Companies, Inc.			100.00				146.44				284.52				485.86				190.53				116.93
NASDAQ Industrial Index			100.00				112.55				120.53				144.51				105.61				102.35
The Russell 2000 Index			100.00				116.47				126.64				140.58				118.61				105.47

Item 6. Selected Financial Data

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

		Fiscal Year Ended September 30,
Statement of Operations Data:		2009				2008				2007				2006				2005
Net sales		$	138,756			$	185,616			$	150,880			$	92,357			$	55,377
Cost of sales, excluding available unused capacity costs			100,744				134,393				107,506				69,994				52,809
Available unused capacity costs (1)			7,352				—				—				—				2,347
Gross profit			30,660				51,223				43,374				22,363				221
Application and development costs			7,589				8,093				7,230				4,887				3,324
Litigation charge (2)			238				4,884				5,400				22,795				—
Selling, general and administrative expenses			19,438				26,332				19,865				15,243				7,847
Operating income (loss) from continuing operations			3,395				20,007				18,109				(15,675	)			(7,626	)
Other (expense) income			(5,492	)			(7,150	)			(18,095	)			(49,202	)			(29,877	)
Income tax expense			(2,105	)			(5,416	)			(1,986	)			(888	)			(708	)
Net (loss) income from continuing operations			(4,202	)			7,441				(1,972	)			(65,765	)			(38,211	)
Discontinued operations:
Operating loss, net of taxes			—				—				(545	)			(187	)			(2,182	)
Gain on disposal of discontinued operation, net of taxes			—				—				—				150				—
Net loss on discontinued operations, net of taxes			—				—				(545	)			(37	)			(2,182	)
Net income (loss)		$	(4,202	)		$	7,441			$	(2,517	)		$	(65,802	)		$	(40,393	)
Net income (loss) per share:
Basic and diluted (loss) income per share:
Continuing operations		$	(0.12	)		$	0.22			$	(0.07	)		$	(2.91	)		$	(2.12	)
Discontinued operations			0.00				0.00				(0.02	)			(0.00	)			(0.12	)
Total		$	(0.12	)		$	0.22			$	(0.09	)		$	(2.91	)		$	(2.24	)
Basic weighted average common shares outstanding			34,402				34,042				28,539				22,575				18,050
Diluted weighted average common shares outstanding			34,402				34,172				28,539				22,575				18,050

		September 30,
Balance Sheet Data:		2009				2008				2007				2006				2005
Working capital (3)		$	76,127			$	76,000			$	147,956			$	20,042			$	19,072
Total assets (3)			366,845				440,164				403,599				187,684				130,429
Current maturities of long-term debt and credit lines			16,436				12,601				13,813				1,365				374
Long-term debt, less current maturities			981				3,562				6,851				32,002				40,421
Shareholders’ equity (3)			315,465				346,666				320,767				111,661				40,645

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

EXECUTIVE OVERVIEW

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 capacity manufacturer primarily focused on producing low-cost carbon fiber for commercial applications.

KEY PERFORMANCE INDICATORS

Our management monitors and analyzes several key performance indicators within each of these segments to manage our business and evaluate our financial and operating performance, including:

Revenue. In the short-term, management closely reviews the volume of product shipments and indicated customer requirements in order to forecast revenue and cash receipts. In the longer-term, management believes that revenue growth through new product applications is the best indicator of whether we are achieving our objective of commercializing carbon fiber. We expect that new applications, including those we are attempting to facilitate, will continue to positively affect demand for our products.

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; (3) foreign currency fluctuations; (4) selling prices; and (5) global economic and capital market conditions affecting our customers. We expect that our net sales in future periods will continue to be affected by all of these factors. During fiscal 2009, we implemented selected price decreases primarily as a result of decreases in raw material costs. We periodically change our prices based on changes in our costs, as well as to reflect overall market conditions. 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.

Gross profit. Our total gross profit for fiscal 2009, 2008, and 2007 was 22.1%, 27.6%, and 28.7%, respectively. Management focuses on maintaining and improving the gross profit over the long-term while leading the commercialization of carbon fiber and controlling associated costs. As such, the Company has maintained available unused capacity to remain poised to capture opportunities in emerging markets. Gross margin was negatively impacted by 5.3% by available unused capacity costs of $7.4 million in fiscal 2009. 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.

Operating expenses. Our operating expenses are driven by headcount and related administrative costs, marketing costs, and research and development costs. We monitor headcount levels in specific geographic and operational areas. We believe that research and development expenditures will be the primary means by which we can facilitate new product applications.

Cash flow from operating activities. Cash flow from operating activities for fiscal 2009, 2008, and 2007 was $15.2 million, $20.2 million, and $6.9 million. Management believes that operating cash flow is meaningful to investors because it provides a view of Zoltek with respect to ongoing operating results.

Liquidity and cash flows. Due to the variability in revenue, our cash position varies. We closely monitor our expected cash levels, particularly as it relates to operating cash flow, days’ sales outstanding, days’ payables outstanding and inventory turnover. Management also monitors debt levels and the financing costs associated with debt. We expect to repay all our outstanding long-term debt during fiscal 2010 and to continue to finance our working capital needs with bank lines of credit.

BUSINESS TRENDS

At the end of fiscal 2008, we completed our expansion plans and essentially doubled our production capacity over the immediately preceding two fiscal years. Our capacity increase was completed just as world trade dropped and the global economy began to experience deep recession. During fiscal 2009, we have seen a sudden, but we believe only temporary, slowdown in the growth of wind turbine business. This occurred at the same time as a significant decrease in the aerospace market due unexpected delays in the introduction of new jetliners utilizing aerospace carbon fibers. Inasmuch as producers of carbon fibers for commercial and aerospace applications had greatly increased their installed capacity over the past few years, we have seen intensified competition between aerospace and commercial carbon fiber manufacturers in cross-over applications (e.g., sporting goods) for which either aerospace or commercial carbon fibers may be utilized.

In this business environment, management continued to focus its efforts on building on the long-term vision of Zoltek as the leader in commercialization of carbon fibers as a low-cost but high performance reinforcement for composites. Management primarily emphasized the following areas:

•

Increased Sales Efforts in Selected International Markets. We have identified international markets with high growth potential for our existing and emerging commercial applications. Accordingly, we have added sales personnel and increased our marketing efforts in India, China and Korea, which have shown growth for wind energy and other applications.

•

Business Development in Emerging Applications. We have identified emerging applications for our products with high growth potential across a variety of industries and regions. In addition to producing carbon fibers for the existing prepreg technology used by many of our large wind turbine customers, we have recently begun shipments of carbon fibers qualified for use in the infusion process utilized by other wind turbine blade manufacturers. We also are seeking to qualify our products for use in aerospace secondary structures such as floor, luggage bins and seats, and anticipate increased sales in this market as the production of new jetliners increases. Additionally, we are gearing up for the anticipated next phase of wider use of carbon fibers in automotive applications.

•

Operating Cash Flows and Cash Management. Despite a 25% decrease in sales, we had positive operating cash flows of $15.2 million in fiscal 2009, compared to $20.2 million during fiscal 2008. Increased inventory levels used $4.3 million in fiscal 2009. The Company seeks to reduce inventory levels going forward. In order to accomplish this goal the Company is focused on increasing sales and reducing production levels to better match current sales rates. During fiscal 2009, we established collection targets and payment schedules for all customers and suppliers to improve better control our days’ sales outstanding and days’ payables outstanding. The Company paid down $10.6 million of its convertible debt and $22.2 million of capital expenditures and construction payables related primarily to the expansion of precursor and carbon fiber lines in Mexico. Even with these cash outlays which are not expected to recur in fiscal 2010, the Company’s cash balance only declined by $8.3 million. We feel that we are in a position to pay down our remaining debt with operating cash flows and revolving credit borrowings and increase our cash balance during fiscal 2010.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED SEPTEMBER 30, 2009 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 2008

The Company’s sales decreased 25.2%, or $46.9 million, to $138.8 million in fiscal 2009 from $185.6 million in fiscal 2008. The decline in revenue was primarily due to declined sales volume, pricing declines resulting from significant cost reduction in raw materials and energy and currency fluctuation, and the weakness of the Euro versus the U.S. dollar during fiscal 2009. During fiscal 2009, there was approximately a 14.5% decrease in volume of product shipments as compared to 2008, which accounted for approximately $20.9 million of the revenue decrease. Certain price reductions resulted from passing on raw material cost savings to customers, which caused a $11.6 million decrease in sales over fiscal 2009. The majority of our European sales are denominated in Euros, which weakened significantly versus the U.S. dollar during most of the 2009 fiscal year, causing approximately $8.9 million of the decrease in sales. Carbon fiber sales decreased 26.1%, or $40.7 million, to $115.3 million during fiscal 2009 from $156.0 million during fiscal 2008. Technical fiber sales decreased 19.0%, or $4.9 million, to $21.0 million during fiscal 2009 from $25.9 million during fiscal 2008. Technical fiber sales decreased in fiscal 2009 primarily due to lower shipments to aircraft brake customers. Sales of other products and services consisting primarily of energy utility services provided to the local community by our Hungarian subsidiary decreased $1.3 million to $2.4 million during fiscal 2009 from $3.7 million during fiscal 2008.

The Company’s cost of sales decreased by 19.6%, or $26.3 million, to $108.1 million during fiscal 2009 from $134.4 million during fiscal 2008. Carbon fiber cost of sales decreased by 19.9%, or $22.0 million, to $88.7 million during fiscal 2009 from $110.7 million for fiscal 2008. The decrease in carbon fiber cost of sales reflected decreased sales of 26.2% discussed above. Technical fiber cost of sales decreased $3.0 million, or 14.8%, to $17.4 million for fiscal 2009 from $20.4 million for fiscal 2008 primarily as a result of the decreased sales noted above. Included in the Company’s cost of sales was available unused capacity costs of $7.4 million. These costs are comprised of fixed production costs allocated to manufacturing lines which were producing below normal levels and amounted to $6.4 million for the carbon fiber segment and $1.0 million for the technical fiber segment during fiscal 2009. The Company believes maintaining this available unused capacity has been necessary to encourage development of significant large-scale applications and maintain a level of readiness as we anticipate a return to more robust market conditions. The cost of sales of other products decreased for fiscal 2009 to $2.1 million compared to fiscal 2008 of $3.3 million.

The Company’s gross profit decreased by 40.1%, or $20.6 million, to $30.6 million during fiscal 2009 from $51.2 million in fiscal 2008. Carbon fiber gross profit percentage decreased to 23.1% for fiscal 2009 compared to 29.1% for fiscal 2008. Carbon fiber gross profit decreased from $45.3 million to $26.7 million during these respective periods. The decreases in carbon fiber gross profit and gross profit percentage resulted primarily due to available unused capacity costs expensed during the fiscal year. Technical fiber gross profit decreased from $5.5 million, or 21.4% of sales, for fiscal 2008 to $3.6 million, or 17.3% of sales, during fiscal 2009. The decrease in technical fiber gross profit and gross profit percentage resulted primarily from available unused capacity costs expensed during the fiscal year and decreased shipments to the primary aircraft brake customers. The gross profit of the other products increased for fiscal 2009 to $0.4 million compared to a gross profit for fiscal 2008 of $0.3 million.

Application and market development costs were $7.6 million in fiscal 2009 and $8.1 million in fiscal 2008. These costs included product and market development efforts, product trials and product development personnel costs. Targeted emerging applications include automobile components, offshore oil and gas drilling, fire/heat barrier and alternate energy technologies. These costs include expenses associated with application development of the towpreg product at the Company’s prepreg facility in Utah.

A litigation charge of $0.2 million was recorded in fiscal 2009 related to the affirmance of the judgment in the SP case compared to a charge of $4.9 million during fiscal 2008 (see Note 8 of the Notes to Consolidated Financial Statements).

Selling, general and administrative increased by $1.2 million, to $19.4 million in fiscal 2009 from $18.2 million in fiscal 2008. The Company recorded $3.0 million for the cost of employee and director services received in exchange for equity instruments under FASB ASC 715 (formerly referenced as Statement of Financial Accounting Standards (SFAS) 123-R “Share-Based Payments”) during fiscal 2009 and $2.3 million in fiscal 2008. The increase was due to the true up of the employee forfeiture rate as the retention rate for top management improved significantly from historical averages. Administrative costs in Mexico increased by approximately $1.0 million as the plant built up staffing to prepare for operations. The Company spent $0.4 million in fiscal 2008 related to a previously disclosed accounting investigation. There was a $0.1 decrease in expenses related to a supersedeas bond related to our SP case judgment (see Note 8).

Operating loss was $3.4 million for fiscal 2009 compared to income of $20.0 million in fiscal 2008. Carbon fiber operations reported operating income of $14.2 million for fiscal 2009 compared to income of $34.0 million in fiscal 2008. The decrease in operating income in the carbon fiber operation in fiscal 2009 related to the decrease in production and sales, as well as the other factors mentioned above. Operating income from technical fibers decreased $0.7 million, from $3.0 million for fiscal 2008 to $2.3 million for fiscal 2009, as sales decreased $4.9 million due to decreased orders from aircraft brake customers. Corporate headquarters/other reported an operating loss of $13.1 million for fiscal 2009 compared to a loss of $17.0 million during fiscal 2008. The decrease in operating loss was due primarily to the decrease in legal and litigation expenses due to the resolution of the Scott-Macon and SP cases during 2009.

Interest expense was $1.4 million for fiscal 2009, compared to $1.9 million in fiscal 2008. The decrease in interest expense resulted from the repayment of $10.5 million and conversion of $0.3 million of convertible debt to during fiscal 2009.

Amortization of financing fees, which are non-cash expenses, was approximately $5.4 million during fiscal 2009 compared to $6.7 million during fiscal 2008. (See “—Liquidity and Capital Resources—Financing”).

Interest income was $0.4 million for fiscal 2009 compared to $2.9 million for fiscal 2008. The decrease was a result of lower cash balance on hand.

Gain on foreign currency transactions improved to $2.2 million for fiscal 2009 compared to a loss of $0.4 million for fiscal 2008. During fiscal 2009, the Hungarian Forint (“HUF”) weakened in value against the Euro and the U.S. dollar, causing a loss on the Company’s accounts receivable, but was offset by a gain on a large U.S. dollar denominated intercompany payable. The translation of the Hungarian subsidiary’s financial statements from its functional currency (HUF) to U.S. dollars is not included in determining net income for the period but is recorded in accumulated other comprehensive income (loss) in equity.

Other expense, net, was $1.2 million in fiscal 2009 compared to $1.1 million for fiscal 2008. Other expense, net for fiscal 2009 consists primarily of loss from the sale of miscellaneous equipment and from miscellaneous penalties and fees in Hungary.

Income tax expense was $2.1 million for fiscal 2009 compared to $5.4 million for fiscal 2008 due primarily to decreased sales and taxable income generated in Hungary. 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. In fiscal 2009, this special Hungarian tax did not apply to the Company. The Company accrued approximately $0.2 million in alternative minimum and local income taxes in the U.S. and Mexico.

The foregoing resulted in loss from continuing operations of $4.2 million for fiscal 2009 compared to a net income of $7.4 million for fiscal 2008. Similarly, the Company reported net loss from continuing operations per share of $0.12 on a basic and diluted basis for fiscal 2009 and net income from continuing operations per share of $0.22 on a basic and diluted basis for fiscal 2008. The weighted average basic common shares outstanding were 34.4 million and 34.0 million for fiscal 2009 and 2008, respectively.

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.

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 in 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 FASB ASC 715 (formerly referenced as 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 FASB ASC 715.

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 HUF. 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 (HUF) 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.

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.

LIQUIDITY AND CAPITAL RESOURCES

The Company believes its cash currently on hand, cash flow from operations and available credit facilities should be sufficient to fund its identified liquidity needs over the next twelve months.

CASH FLOWS

Cash Provided By Operating Activities

Operating activities provided $15.2 million of cash for fiscal 2009. Cash flows were positively affected by operating income before depreciation of $19.7 million. Cash flows were negatively affected during fiscal 2009 by the payment of $5.6 million, net of accrued interest, to resolve litigation involving an investment banker (see Note 7 of the Notes to Consolidated Financial Statements). In February 2009, the Company used $23.5 million of restricted cash to resolve litigation involving SP Systems. Restricted cash has been shown as a use of cash in investing activity during fiscal 2008, 2007 and 2006, so its usage in 2009 had no impact on unrestricted cash balances. Increased inventory levels used $4.3 million of cash in the current fiscal year. The Company will seek to reduce inventory levels going forward. Collections from accounts receivables resulting in a net increase in cash flow of $8.5 million.

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

Cash Used In and Provided By Investing Activities

Net cash used in investing activities for fiscal 2009 was $20.5 million, which consisted of capital expenditures to expand production lines of the Company’s precursor facilities and carbon fiber operations to meet the anticipated long-term demand for carbon fiber products. This included $1.6 million of funds received from the Hungarian government as a conditional grant to reimburse capital expenditures and related outlays (see Note 2 of the Notes to Consolidated Financial Statements).

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 2 of the Notes to Consolidated Financial Statements).

Cash Used and Provided By Financing Activities

Net cash used for financing activities was $3.0 million in fiscal 2009 as the Company repaid convertible debt of $10.6 million, which was offset by increasing borrowings on our lines of credit by $7.6 million.

Net cash used by financing activities was $2.3 million in fiscal 2008, as the Company repaid $1.5 million of its Hungarian term loan, and repaid $2.3 million of its U.S. term loans, while the exercise of stock options and warrants provided $1.5 million.

HUNGARIAN GRANT

The Hungarian government has pledged a grant of 2.9 billion HUF (approximately $15.7 million as of September 30, 2009) to Zoltek’s Hungarian subsidiary that will provide a portion of 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 HUF 0.3 billion, HUF 0.7 billion and HUF 1.6 billion in grant funding during fiscal 2009, 2008 and 2007, respectively. These funds have been recorded as a liability on the Company’s consolidated 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 obtain revenue targets ; fails to employ an average annual staff of 1,200 employees; fails to utilize regional suppliers for at least 45% of its purchases; fails to obtain consent from the Hungarian government prior to selling assets created with grant funds; fails to use grant funds in accordance with the grant agreement; fails to provide appropriate security for the grant; makes or made an untrue statement or supplies or supplied false data in the grant agreement, grant application or during the time of the grant; defaults on its obligations by more than 30 days; withdraws any consents it gave in the grant agreement; or causes a partial or complete failure or hindrance of the project that is the subject of the grant. These targets must be achieved during a five-year measurement period from October 2011 to October 2016. Currently, although there can be no assurance, the Company anticipates it will comply with the requirements of the grant agreement.

FINANCING ACTIVITY

Public offering

In fiscal 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.

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.

On February 9, 2009, the Company paid the judgment using $23.5 million of restricted cash, which terminated the letter of credit and related bond.

Revolving Credit Facility

In February 2009, the Company extended its existing U.S. line of credit until January 1, 2010. The extension of this credit facility increases the amount available under the previously existing revolving credit facility from $6.7 million to $10.0 million. The revolving credit facility has a total commitment of the lesser of (1) $10.0 million or (2) an eligible borrowing base equal to a percentage of eligible accounts receivable plus a percentage of eligible inventories, which as of September 30, 2009 equaled $9.1 million. Total borrowings under the facility were $8.3 million as of September 30, 2009.

In November 2009, the Company’s Hungarian subsidiary increased its amount available under its credit facility with a Hungarian bank from $5.0 million to $9.7 million, the term of which expires December 31, 2009. Total borrowings under this credit facility were $3.9 million at September 30, 2009, with $5.8 million of remaining availability. The credit facility is a term loan with quarterly interest payments.

The Company intends to extend its existing lines of credit before expiration on January 1, 2010. Based on the history of relationships with its banks and its current financial position, the Company expects it will be able to successfully extend its lines of credit.

Convertible Debt

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. These financings are collateralized by the carbon fiber assets of the Company’s Hungarian subsidiary.

As of September 30, 2009, Zoltek had $4.2 million of convertible debt outstanding, which the Company anticipates repaying with cash on hand by April 2010. The following tables summarize the activity regarding our convertible debt conversions during the fiscal years ended 2009, 2008 and 2007.

		2009												2008												2007
		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			$	—				—			$	3.50			$	—				771,431			$	3.50			$	2,700,009
December 2005			—				12.50				—				—				12.50				—				1,444,489				12.50				18,056,112
February 2006			—				13.07				—				—				13.07				—				760,622				13.07				9,941,330
May 2006			—				25.51				—				203,679				25.51				5,195,856				141,120				25.51				3,599,971
July 2006			16,264				15.40				250,466				117,840				25.51				3,006,092				—				25.51				—
October 2006			—				25.51				—				115,578				25.51				2,948,383				—				25.51				—
			16,264							$	250,466				437,097							$	11,150,331				3,117,662							$	34,297,422

		As of September 30, 2009												As of September 30, 2008
		Number												Number
		of shares				Conversion				Principal				of shares				Conversion				Principal
		outstanding				price				outstanding				outstanding				price				outstanding
May 2006			70,560				25.51				1,799,986				352,803				25.51				9,000,005
July 2006			19,640				25.51				501,016				58,800				25.51				1,499,988
October 2006			76,381				25.51				1,948,479				178,342				25.51				4,549,504
			166,581							$	4,249,481				589,945							$	15,049,497

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		Libor plus 4		%		Libor plus 4		%		Libor plus 4		%
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

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.

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.

See the table below for impact of amortization of financing fees and debt discount on the financial results for the fiscal years 2009, 2008 and 2007 (amounts in thousands).

		Fiscal Year Ended September 30, 2009
						Conversion
		Warrants				Features				Total
May 2006 issuance		$	1,549			$	2,285			$	3,834
July 2006 issuance			242				296				538
October 2006 issuance			317				364				681
		$	2,108			$	2,945				5,053
Deferred financing costs											311
Total										$	5,364

		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

		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

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

		September 30, 2009
						Conversion
		Warrants				Feature				Total
May 2006 issuance		$	18				26			$	44
July 2006 issuance			15				17				32
October 2006 issuance			54				62				116
		$	87			$	105				192
Debt acquisition cost and financing fees											97
Total										$	289

		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

EARNINGS PER SHARE

In accordance with FASB ASC 260 (formerly referenced as 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, 2009, 2008 and 2007 which are not included in the determination of diluted loss per share for the fiscal year ended September 30, 2009, 2008 and 2007 because the shares are anti-dilutive. Had these securities been dilutive, an additional 0.3 million, 0.7 million and 1.4 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, 2009, 2008 and 2007 respectively:

		Fiscal Year Ended September 30,
		2009				2008				2007
Numerators:
Net income (loss)		$	(4,202	)		$	7,441			$	(2,517	)
Denominators:
Average shares outstanding — basic			34,402				34,042				28,539
Impact of convertible debt, warrants and stock options			—				130				—
Average shares outstanding — diluted			34,402				34,172				28,539
Income (loss) per share — basic:
Continuing operations		$	(0.12	)		$	0.22			$	(0.07	)
Discontinued operations			0.00				0.00				(0.02	)
Basic income (loss) per share		$	(0.12	)		$	0.22			$	(0.09	)
Income (loss) per share — diluted:
Continuing operations		$	(0.12	)		$	0.22			$	(0.07	)
Discontinued operations			0.00				0.00				(0.02	)
Diluted income (loss) per share		$	(0.12	)		$	0.22			$	(0.09	)

FUTURE CONTRACTUAL OBLIGATIONS

In the table below, we set forth our enforceable and legally binding obligations as of September 30, 2009. Some of the amounts 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 Note 7 of the Notes to Consolidated Financial Statements for discussion of the Company’s debt agreements.

		Payments Due by Period
						Less than								3-5				Over
		Total				1 year				1-3 years				years				5 years
Convertible debentures (a)		$	4,249			$	4,249			$	—			$	—			$	—
Credit lines		$	12,277				12,277				—				—				—
Other debt			1,083				102				981				—				—
Total obligations			17,609				16,628				981				—				—
Operating lease obligations (b)			2,812				1,076				1,681				55				—
Capital leases obligations			182				153				29				—				—
Total debt and leases			20,603				17,857				2,691				55				—
Contractual interest payments (c)			114				94				20				—				—
Purchase obligations (d)			2,089				2,089				—				—				—
Total contractual obligations		$	22,806			$	20,040			$	2,711			$	55			$	—

SUPPLY CONTRACTS

We are party to long-term supply contacts with our wind energy customers Vestas Wind Systems and Gamesa Group. In the fiscal years 2009, we reported net sales of $74.2 million to Vestas Wind Systems, and $13.8 million to Gamesa Group, which represent 53.6% and 9.9% of our net sales, respectively, during such year.

Our supply agreement with Vestas Wind Systems was executed in May 2007 and obligates us to supply carbon fibers under a five year delivery schedule, and a rolling three year schedule as long as the supply agreement is in place. Under the agreement, Vestas provides us with annual forecasts of its supply requirements, and we receive binding orders for shipments on approximately a monthly basis. We are not guaranteed specific levels of sales under the agreement, and we are subject to liquidated damages if we are unable to perform our obligations under the agreement. In general, the agreement may be terminated (1) mutual agreement of the parties, (2) by either party with at least 36 months written notice, (3) by either party as a result of a material breach of the agreement that is not remedied within 30 days of receipt of notice of such breach, and (4) by either party in the event of the bankruptcy, insolvency, or change of control of the other party .

Our supply agreement with Gamesa Group was executed in July 2007 and is effective through December 31, 2012, subject to automatic renewal for successive one-year terms upon at least two years’ advance notice by “Gamesa” to Zoltek. The agreement obligates Zoltek to supply carbon fibers during the term of the contract provides based upon annual anticipated base volumes amounts, which are converted into binding orders for shipments on approximately a quarterly basis. We are not guaranteed specific levels of sales under the agreement, and we are subject to liquidated damages if we are unable to perform our obligations under the agreement. In general, the agreement may be terminated (1) mutual agreement of the parties, (2) by either party with at least 36 months written notice, (3) by either party as a result of a material breach of the agreement that is not remedied within 45 days of receipt of notice of such breach, and (4) by either party in the event of the bankruptcy, insolvency, or change of control of the other party.

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. We anticipate that 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 2009, $1.3 million for 2008 and $0.4 million for 2007.

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.

The Company historically has not experienced material problems related to the pricing or functionality of carbon fibers inventory. Our Panex^® carbon fibers represent the majority of our inventory balance and are available in continuous tow, fabric, prepreg, chopped, and milled forms. Generally, technical obsolescence and spoilage have not historically been a concern because nonqualifying produced items can be reclaimed for processing for sale in secondary markets.

Available unused capacity costs for fiscal 2009 are comprised of fixed production cost allocated to manufacturing lines which were producing below normal levels during the year. The Company reviews monthly production levels of all manufacturing lines for all products. Any lines which produced at a rate below a historical range of normal capacity were identified and the fixed costs associated with those lines were calculated. The unallocated costs were recognized as an expense in the period in which they were incurred.

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. Zoltek management is responsible for routinely assessing whether impairment indicators are present. The Company expects that the components of each operating segment will exhibit similar financial performance over the long-term and, therefore, groups assets accordingly for analyzing whether an impairment exists. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset group, a loss is recognized for the difference between the fair value and the carrying value of the asset group. In determining expected future undiscounted cash flows attributable to the 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 group 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.

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 FASB ASC 715 (formerly referenced as FAS 123(R) “Share-Based Payment”), using the modified prospective method. FASB ASC 715 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 FASB ASC 715 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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate 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 $16.4 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, 2009 would have changed by approximately $0.3 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, 2009, the Company did not have any interest rate swap agreements outstanding.

Foreign Currency Risk

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. Zoltek Zrt. has a functional currency of the HUF. As a result, the Company is exposed to foreign currency risks related to this investment. The functional currency of Zoltek de Mexico has changed as of November 1, 2008 from the Mexican Peso to the U.S. dollar. The Company does not currently employ a foreign currency hedging strategy related to the sales from Hungary or Mexico. Neither Hungary nor Mexico is considered to be a highly inflationary or deflationary economy.

As of September 30, 2009, the Company had a long-term loan to its Zoltek Zrt. subsidiary of $108.0 million denominated in U.S. dollars. 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, 2009 and 2008 amounted to $10.8 million and $10.8 million, respectively. The Company does not expect repayment of the loan in the foreseeable 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, 2009, the Company had a long-term loan to its Zoltek de Mexico subsidiary. There is no potential loss in value of the Company’s net foreign currency investment in Zoltek de Mexico million resulting from an adverse change in quoted foreign currency exchange rate of the Mexican Peso against the U.S. dollar at September 30, 2009 because Zoltek de Mexico’s functional currency is the U.S. dollar. The Company does not expect repayment of the loan in the foreseeable future. As such, the Company considers this loan as a permanent investment.

Commodity Price Risk

We are exposed to commodity price risk arising from changes in the market price of certain raw materials, such as acrylonitrile, and utilities. Due to competition and market conditions, volatile price increases cannot always be passed on to our customers. Management assesses commodity price trends on a regular basis and adjusts purchasing accordingly. The Company does not currently utilize derivative instruments to hedge purchases of commodities.

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, 2009.

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, Ernst & Young LLP has direct access to the Audit Committee.

The Reports of Ernst & Young LLP and Grant Thornton 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
November 30, 2009

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Zoltek Companies, Inc.

We have audited the accompanying consolidated balance sheet of Zoltek Companies, Inc. as of September 30, 2009 and the related consolidated statement of operations, shareholders’ equity, and cash flows for the year ended September 30, 2009. 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. at September 30, 2009 and the consolidated results of their operations and their cash flows for the year in the period ended September 30, 2009, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Zoltek Companies Inc.’s internal control over financial reporting as of September 30, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 30, 2009 expressed an unqualified opinion.

/s/ ERNST & YOUNG LLP

St. Louis, Missouri
November 30, 2009

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Zoltek Companies, Inc.

We have audited Zoltek Companies, Inc.’s internal control over financial reporting as of September 30, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Zoltek’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. Our responsibility is to express an opinion on the company’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. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2009, based on the COSO criteria.

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. as of September 30, 2009 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year ended September 30, 2009 of Zoltek Companies Inc. and our report dated November 30, 2009 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

St. Louis, Missouri
November 30, 2009

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Zoltek Companies, Inc.

We have audited the accompanying consolidated balance sheet of Zoltek Companies, Inc. (a Missouri corporation) and its subsidiaries (the “Company”) as of September 30, 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the two years in the period ended September 30, 2008. Our audits of the basic financial statements included the financial statement schedule listed in the Index appearing under item 15(a) for each of the two years in the period ended September 30, 2008. 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 schedule 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 its subsidiaries as of September 30, 2008, and the results of their operations and their cash flows for each of the two years in the period ended September 30, 2008, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule for each of the two years in the period ended September 30, 2008, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ GRANT THORNTON LLP

Chicago, Illinois
December 1, 2008

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

		September 30,
		2009				2008
Assets
Current assets:
Cash and cash equivalents		$	20,943			$	29,224
Restricted cash			—				23,500
Accounts receivable, less allowance for doubtful accounts of $2,356 and $1,754, respectively			30,507				42,690
Inventories, net			48,058				45,659
Other current assets			10,100				9,432
Total current assets			109,608				150,505
Property and equipment, net			256,910				288,894
Other assets			327				765
Total assets		$	366,845			$	440,164
Liabilities and shareholders’ equity
Current liabilities:
Legal liabilities		$	—			$	29,083
Credit lines			12,277				5,175
Current maturities of long-term debt			4,159				7,426
Trade accounts payable			9,408				15,093
Accrued expenses and other liabilities			6,845				9,278
Construction payables			792				8,450
Total current liabilities			33,481				74,505
Long-term debt, less current maturities			981				3,562
Hungarian grant, long-term			10,228				10,882
Deferred tax liabilities			6,690				4,521
Other long-term liabilities			—				28
Total liabilities			51,380				93,498
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, 34,424,441 and 34,389,428 shares issued and outstanding in 2009 and 2008, respectively			344				344
Additional paid-in capital			494,311				491,175
Accumulated other comprehensive (loss) income			(18,405	)			11,730
Accumulated deficit			(160,785	)			(156,583	)
Total shareholders’ equity			315,465				346,666
Total liabilities and shareholders’ equity		$	366,845			$	440,164

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

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

		Fiscal Year Ended September 30,
		2009				2008				2007
Net sales		$	138,756			$	185,616			$	150,880
Cost of sales, excluding available unused capacity costs			100,744				134,393				107,506
Available unused capacity costs			7,352				—				—
Gross profit			30,660				51,223				43,374
Application and development costs			7,589				8,093				7,230
Litigation charge (see Note 8)			238				4,884				5,400
Selling, general and administrative expenses			19,438				18,239				12,635
Operating income			3,395				20,007				18,109
Other income (expense):
Interest income			350				2,904				1,829
Gain (loss) on foreign currency transactions			2,161				(385	)			(707	)
Other, net			(1,228	)			(1,125	)			(424	)
Interest expense, excluding amortization of financing fees, debt discount and beneficial conversion feature			(1,411	)			(1,862	)			(2,346	)
Warrant issue expense			—				—				(6,362	)
Amortization of financing fees and debt discount			(5,364	)			(6,682	)			(9,771	)
Loss on value of warrants and beneficial conversion feature			—				—				(314	)
Income (loss) from continuing operations before income taxes			(2,097	)			12,857				14
Income tax expense			2,105				5,416				1,986
Net income (loss)			(4,202	)			7,441				(1,972	)
Discontinued operations:
Operating loss, net of taxes			—				—				(545	)
Net income (loss)		$	(4,202	)		$	7,441			$	(2,517	)
Basic and diluted income (loss) per share		$	(0.12	)		$	0.22			$	(0.09	)
Weighted average common shares outstanding — basic			34,402,046				34,042,792				28,538,501
Weighted average common shares outstanding — diluted			34,402,046				34,171,629				28,538,501

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

ZOLTEK COMPANIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in thousands)

		Total Share-								Additional				Accumulated Other
		holders’				Common				Paid-In				Comprehensive				Accumulated
		Equity				Stock				Capital				Income (Loss)				Deficit
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	)
Net loss			(4,202	)															(4,202	)
Foreign currency translation adjustment			(30,135	)											(30,135	)
Comprehensive loss		$	(34,337	)
Convertible debt converted			251								251
Cash settlement of restricted shares			(75	)							(75	)
Restricted stock expense			521								521
Stock option awards			2,439				—				2,439
Balance, September 30, 2009		$	315,465			$	344			$	494,311			$	(18,405	)		$	(160,785	)