EXHIBIT 99.1

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

ASSETS September 30,
- --------------------------------------------------------------------------------------------------------------------------
2004 2003
-------- --------

Current assets:
Cash and cash equivalents................................................................. $ 267 $ 838
Accounts receivable, less allowance for doubtful accounts of $781 and $931, respectively.. 11,811 10,380
Inventories............................................................................... 25,902 26,978
Other current assets...................................................................... 1,167 1,483
-------- --------
Total current assets................................................................. 39,147 39,679

Property and equipment, net.................................................................... 80,538 77,373

Other assets................................................................................... 3,114 2,403
-------- --------
Total assets......................................................................... $122,799 $119,455
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt...................................................... $ 570 $ 933
Trade accounts payable.................................................................... 13,257 11,892
Notes payable............................................................................. 2,441 2,916
Accrued expenses and other liabilities.................................................... 5,877 5,148
-------- --------
Total current liabilities............................................................ 22,145 20,889
Other long-term liabilities.................................................................... 357 509
Long-term debt, less current maturities........................................................ 43,718 33,541
-------- --------
Total liabilities.................................................................... 66,220 54,939
-------- --------
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,
16,307,338 and 16,297,338 shares issued and outstanding, respectively................... 163 163
Additional paid-in capital................................................................ 115,803 109,290
Accumulated deficit ...................................................................... (49,242) (32,505)
Accumulated other comprehensive loss...................................................... (10,145) (12,432)
-------- --------
Total shareholders' equity........................................................... 56,579 64,516
-------- --------
Total liabilities and shareholders' equity........................................... $122,799 $119,455
======== ========

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

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

Year Ended September 30,
- -----------------------------------------------------------------------------------------------------------------------
2004 2003 2002
-------- -------- -------

Net sales................................................................... $ 45,273 $ 39,405 $41,787
Cost of sales, excluding available unused capacity costs.................... 37,878 33,181 33,508
Available unused capacity costs............................................. 4,466 5,716 6,039
Application and development costs........................................... 3,070 3,453 3,750
Selling, general and administrative expenses................................ 5,344 6,498 6,569
-------- -------- -------
Operating loss from continuing operations.............................. (5,485) (9,443) (8,079)
\
Other income (expense):
Interest expense, excluding amortization of financing fees, debt
discount and beneficial conversion feature............................ (3,429) (1,875) (1,632)
Amortization of financing fees, debt discount and beneficial
conversion feature.................................................... (1,771) (84) -
Interest income......................................................... 21 57 25
Other, net.............................................................. 189 (49) 309
-------- -------- -------
Loss from continuing operations before income taxes................ (10,475) (11,394) (9,377)
Income tax expense (benefit)................................................. 434 535 (2,860)
-------- -------- -------
Net loss from continuing operations..................................... (10,909) (11,929) (6,517)
-------- -------- -------
Discontinued operations:
Operating loss, net of taxes............................................ (5,169) (3,673) (3,208)
Gain (loss) on disposal of discontinued operations...................... (659) - 1,894
-------- -------- -------
Net loss on discontinued operations, net of taxes ................. (5,828) (3,673) (1,314)
-------- -------- -------
Net loss..................................................................... $(16,737) $(15,602) $(7,831)
======== ======== =======
Net loss per share:
Basic and diluted loss per share:
Continuing operations.............................................. $ (0.67) $ (0.73) $ (0.40)
Discontinued operations............................................ (0.35) (0.23) (0.08)
-------- -------- -------
Total......................................................... $ (1.02) $ (0.96) $ (0.48)
======== ======== =======

Weighted average common shares outstanding................................... 16,372 16,307 16,289

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

Balance, September 30, 2001........ $ 79,595 $188 $128,024 $(20,364) $(19,181) $ (9,072)
Net loss........................... (7,831) - - - - (7,831) $ (7,831)
Foreign currency translation
adjustment....................... 4,111 - - 4,111 - - 4,111
--------
Comprehensive loss........ $ (3,720)
========
Treasury shares retired............ - (25) (19,156) - 19,181 -
Exercise of stock options.......... 29 - 29 - - -
-------- ---- -------- -------- -------- --------
Balance, September 30, 2002........ 75,904 163 108,897 (16,253) - (16,903)
Net loss........................... (15,602) (15,602) $(15,602)
Foreign currency translation
adjustment....................... 3,821 3,821 3,821
--------
Comprehensive loss........ $(11,481)
========
Warrants issued with sub-debt...... 372 372
Exercise of stock options.......... 21 21
-------- ---- -------- -------- -------- --------
Balance, September 30, 2003........ 64,516 163 109,290 (12,432) - (32,505)
Net loss........................... (16,737) (16,737) $(16,737)
Foreign currency translation
adjustment....................... 2,287 2,287 2,287
--------
Comprehensive loss........ $(14,450)
========
Warrants issued with sub-debt...... 6,258 6,258
Exercise of stock options
and warrants..................... 255 - 255
-------- ---- -------- -------- -------- --------
Balance, September 30, 2004........ $ 56,579 $163 $115,803 $(10,145) $ - $(49,242)
======== ==== ======== ======== ======== ========

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

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

Year Ended September 30,
- ----------------------------------------------------------------------------------------------------------------------
2004 2003 2002
-------- -------- -------

Cash flows from operating activities:
Net loss.............................................................. $(16,737) $(15,602) $(7,831)
Adjustments to reconcile net loss to net cash
used by operating activities:
Loss from discontinued operations................................ 5,828 3,673 1,314
Depreciation and amortization.................................... 5,614 5,889 6,046
Amortization of financing and warrants........................... 1,772 84 -
Foreign currency transaction (gains) losses...................... 128 787 (240)
Other, net....................................................... (38) (36) (17)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable................... (4,295) 1,109 1,511
(Increase) decrease in inventories........................... (176) 783 (1,577)
(Increase) decrease in prepaid expenses and other assets..... 152 339 (1,950)
Increase (decrease) in trade accounts payable................ 2,487 (1,228) 413
Increase (decrease) in accrued expenses and other liabilities (1,590) 2,920 (742)
Increase (decrease) in other long-term liabilities........... (4) (675) 190
-------- -------- -------
Total adjustments........................................ 10,692 13,861 5,116
-------- -------- -------
Net cash used by continuing operations................................ (6,859) (1,957) (2,883)
Net cash provided (used) by discontinued operations................... (234) (2,488) 1,824
-------- -------- -------
Net cash used by operating activities...................................... (7,093) (4,445) (1,062)
-------- -------- -------
Cash flows from investing activities:
Proceeds from sale of long-term investment............................ - 641 -
Payments for purchase of property and equipment....................... (6,128) (1,483) (1,865)
Proceeds from sale of property and equipment.......................... 137 121 74
-------- -------- -------
Net cash used by continuing operations.................................. (5,991) (721) (1,791)
Net cash used by discontinued operations................................ (6) (94) (116)
-------- -------- -------
Net cash used by investing activities...................................... (5,997) (815) (1,907)
-------- -------- -------
Cash flows from financing activities:
Proceeds from exercise of common stock options and warrants........... 255 21 29
Proceeds from issuance of convertible debt and warrants............... 12,750 8,100 -
Proceeds from issuance of notes payable............................... 12,581 8,140 7,335
Proceeds from issuance of note payable to related party............... 1,400 - -
Payment of financing fees............................................. (1,249) - -
Repayment of notes payable and long-term debt......................... (11,811) (10,880) (4,265)
Repayment of note payable to related party............................ (1,400) - -
-------- -------- -------
Net cash provided by continuing operations.............................. 12,526 5,381 3,099
Net cash used by discontinued operations................................ - - (188)
-------- -------- -------
Net cash provided by financing activities.................................. 12,526 5,381 2,983
-------- -------- -------

Effect of exchange rate changes on cash.................................... (7) 32 5
-------- -------- -------
Net increase (decrease) in cash............................................ (571) 153 18
Cash and cash equivalents at beginning of period........................... 838 685 667
-------- -------- -------
Cash and cash equivalents at end of period................................. $ 267 $ 838 $ 685
======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid (refunded) during the year for:
Interest.............................................................. $ 3,436 $ 1,875 $ 2,425
Income taxes.......................................................... - - (2,844)

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

ZOLTEK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

PRINCIPLES OF CONSOLIDATION

Zoltek Companies, Inc. (the "Company") is a holding company, which
operates through wholly owned subsidiaries, Zoltek Corporation, Zoltek
Properties Inc., Zoltek Rt., and Engineering Technology Corporation ("Entec
Composite Machines"). Zoltek Corporation ("Zoltek") develops, manufactures
and markets carbon fibers, a low-cost but high performance reinforcement for
composites used as the primary building material in everyday commercial
products. Entec Composite Machines manufactures and sells filament winding
and pultrusion equipment used in the production of large volume composite
parts. Zoltek Rt. manufactures and markets acrylic and nylon fibers and
yarns for the textile industry, and carbon fiber. Other Zoltek Rt. products
include nylon granules, plastic grids and nets, and carboxymethyl cellulose.
From April 2000 to March 2002, the Company owned a 45% interest in Hardcore
Composites Operations, LLC ("Hardcore"), which designs and manufactures
composite structures for the civil infrastructure market. (See Note 3 for
further discussion.) These financial statements have been prepared in
accordance with U.S. generally accepted accounting principles. All
significant inter-company transactions and balances have been eliminated
upon consolidation.

FOREIGN CURRENCY TRANSLATION

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

USE OF ESTIMATES

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

REVENUE RECOGNITION

The Company recognizes sales on the date title to the sold product
transfers to the customer, which is the shipping date. Revenues generated by
its Entec Composite Machines subsidiary are recognized on a percentage of
completion basis based on the percentage of total project cost incurred to
date. The Company reviews its accounts receivables on a monthly basis to
identify any specific customers for collectability issues. If the Company
deems that an amount due from a customer is uncollectible, the amount is
recorded in the statement of operations.

During 2004, 2003 and 2002, approximately $7.2 million, $8.0
million and $9.8 million, respectively, of sales was earned from one
customer in the technical fibers segment.

SHIPPING AND HANDLING

All amounts billed to a customer in a transaction related to
shipping and handling are recorded as revenue and the subsequent cost to the
Company is recognized as expense in cost of sales, excluding unused
capacity.

CONCENTRATION OF CREDIT RISK

Zoltek's carbon fiber products are primarily sold to customers in
the composite industry and its technical fibers are primarily sold to
customers in the aerospace industry. Zoltek Rt.'s acrylic products are
primarily sold to customers in the textile industry. Entec Composite
Machines' products are primarily sold in the composite industry. While the
markets for the Company's products are geographically unlimited, most of
Zoltek's business is with customers located in North America and Asia and
most of Zoltek Rt.'s sales are to customers in Europe, while Entec Composite
Machines' sales are worldwide. The Company performs ongoing credit
evaluations and generally requires collateral for significant export sales
to new customers. The Company maintains reserves for potential credit losses
and such losses have been within management's expectations. As of September
30, 2004, the Company's Entec subsidiary finished a $2.0 million project
related to building a machine for a wind turbine provider to make carbon
fiber composite blades for wind turbines with an automated process close to
its fiscal year-end which had not been collected.

In the fiscal years ended September 30, 2004 and 2003, the Company
reported sales of $7.2 million and $8.0 million, respectively, to a major
aircraft brake manufacturer which was the only customer that represented
greater than 10% of the Company's total consolidated revenues.

CASH AND CASH EQUIVALENTS

All highly liquid investments purchased with a maturity of three
months or less are considered to be cash equivalents. As of September 30,
2004, the Company had a book overdraft of $0.7 million which was
reclassified as accounts payable. The subordinated debt agreements of 2004
and 2005 require that the Company maintain cash plus borrowing capacity
under credit facilities of at least $0.5 million, which the Company was in
compliance with as of September 30, 2004.

INVENTORIES

Inventories are valued at the lower of cost, determined on the
first-in, first-out method, or market. Cost includes material, labor and
overhead. The Company recorded an inventory valuation reserve of $1.0
million in the fourth quarter of 2003 to reduce the carrying value of
inventories to a net realizable value. No material adjustments to the
reserve were required in the current year. The reserves were established
primarily due to intensified overcapacity for certain carbon fiber products.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Cost includes
expenditures necessary to make the property and equipment ready for its
intended use. Expenditures, which improve the asset or extend the useful
life, are capitalized, including interest on funds borrowed to finance the
acquisition or construction of major capital additions. No interest was
capitalized for the years ended September 30, 2004, 2003 and 2002.
Maintenance and repairs are expensed as incurred. When property is retired
or otherwise disposed of, the related cost and accumulated depreciation are
removed from the accounts and any profit or loss on disposition is credited
or charged to income.

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

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

The Company primarily uses accelerated depreciation methods for
income tax purposes. Depreciation expense was $5.6 million, $5.9 million and
$6.0 million for the fiscal years ended 2004, 2003 and 2002, respectively.

Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows is
less than the carrying amount of the asset, a loss is recognized for the
difference between the fair value and the carrying value of the asset.

In the third quarter of fiscal 2001, the Company elected to
temporarily idle a significant part of the operations located at the
Abilene, Texas facility. The Company resumed manufacturing at this facility
during fiscal 2004. Given that these assets were previously idled and did
not generate significant cash flow in 2004, the Company performed an
impairment test. The Company determined that no impairment of its carrying
value exists at September 30, 2004 based on an analysis of expected future
net cash flow to be generated from this facility over the expected remaining
useful life.

FINANCIAL INSTRUMENTS

The Company does not hold any financial instruments for trading
purposes. The carrying value of cash, accounts receivable and accounts
payable approximated their fair value at September 30, 2004 and 2003.

APPLICATION AND DEVELOPMENT EXPENSES

The Company is actively pursuing the development of a number of
applications for the use of its carbon fiber and related products. The
Company is currently party to several developmental agreements with various
prospective users of these products for the purpose of accelerating the
development of various carbon fiber applications. Additionally, the Company
is executing several internal developmental strategies to further the use of
carbon fiber and consumer and industrial products made from carbon fiber. As
a result, the Company incurs certain costs for research, development and
engineering of products and manufacturing processes. These costs are
expensed as incurred and totaled approximately $3.1 million in fiscal 2004
and $3.5 million in fiscal 2003 and $3.8 million in fiscal 2002. Application
and development expenses are presented as an operating item on the Company's
consolidated statement of operations. Given the Company's position and
strategy within the carbon fiber industry, it is expected that similar or
greater levels of application and development expenses could be incurred in
future periods.

INCOME TAXES

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

STOCK-BASED COMPENSATION

At September 30, 2004, the Company had stock-based employee
compensation plans. The Company accounts for those plans under the
recognition and measurement principles of Accounting Principles Board
Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees, and its
related interpretations. No stock-based employee compensation costs are
reflected in net loss, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on
the date of grant. The Company granted 77,500, 112,500 and 451,000 employee
stock options with an exercise price that equaled the Company's stock price
on the applicable date of grant in fiscal 2004, 2003 and 2002, respectively.
The following table illustrates the effect on net loss and loss per share if
the Company had applied the fair value recognition provisions of Statement
of Financial Accounting Standards No. 123 ("FAS 123"), Accounting for Stock
Based Compensation, to stock-based employee compensation (in thousands,
except per share):

2004 2003 2002
-------- -------- -------

Net loss:
As reported.......................................... $(16,737) $(15,602) $(7,831)
Total stock-based employee compensation
expense determined under fair value-based
method for all awards, net of tax effects.......... (255) (71) (205)
-------- -------- -------
Pro forma............................................ (16,992) (15,673) (8,036)

Basic and diluted loss per share:
As reported.......................................... (1.02) (.96) (0.48)
Pro forma............................................ (1.04) (.96) (0.49)

NET LOSS PER SHARE

Basic net loss per share includes no dilution and is calculated by
dividing net loss by the weighted average number of common shares
outstanding for each period, while diluted net income loss per share
reflects the potential dilutive effects of stock options and warrants.
Because 2004, 2003 and 2002 results reflected a net loss, both basic and
diluted earnings per share were calculated based on the same weighted
average numbers of shares for such years. If the results of the Company
reflected a net income, an additional 4.8 million shares would be included
in calculating the diluted earnings per share. The additional shares relate
to issuance of convertible debt of 4.5 million, warrants of 1.0 million of
which 0.2 million would be dilutive using the treasury stock method and
stock options of 1.0 million of which 0.1 million would be dilutive using
the treasury stock method.

RECENT ACCOUNTING PRONOUNCEMENTS

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

In October 2004, the government passed the "Homeland Investment
Act," which allows companies to repatriate cash balances from their
controlled foreign subsidiaries at a reduced tax rate and created a new
deduction for U.S. manufacturers related to qualified production activities
for income tax

purposes. The Company is still considering the implications but has not
currently decided to repatriate funds from its Hungarian subsidiary.

In December 2004, the FASB issued interpretation No. 123-R
"Accounting for Stock-Based Compensation" (FIN No. 123-R), which addressed
the requirement for expensing the cost of employee services received in
exchange for an award of equity instrument. FIN No. 123-R will apply to all
equity instruments awarded, modified or repurchased after June 15, 2005. The
Company is evaluating the effect of this interpretation but believes it will
have an immaterial impact on the Company's financial statements when
implemented.

FINANCIAL PRESENTATION CHANGES

Certain prior year amounts have been reclassified to conform to the
current year presentation.

2. FINANCING AND LIQUIDITY
- ------------------------------------------------------------------------------

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

Management will seek to fund its near-term operations from
continued sale of excess inventories and continued aggressive management of
the Company's working capital, as well as sources that may include
additional borrowings and/or private equity. However, management can make no
assurance that these objectives will be sufficient to fund near-term
liquidity needs and has obtained additional financing to meet operating
requirements, as discussed in 2005 Refinancing below. As the demand for
carbon fiber continues to increase, the Company will need additional
financing to expand the capacity to meet the demand of its carbon fiber
production.

In October 2004, the Company issued convertible debentures in the
aggregate principal amount of $20.0 million to institutional private equity
investors. The convertible debentures have a stated maturity of 42 months
and bear interest at 7.5% per annum and are presently convertible into
1,666,666 shares of common stock at a conversion price of $12.00 per share.
The Company also issued to the investors six-year warrants to purchase an
aggregate of 500,000 shares of common stock of the Company at an exercise
price of $13.00 per share. The fair value of the debt discount associated
with the warrants at the time of issuance was estimated to be $2.5 million
and will be amortized as a non-cash interest expense over the term of the
convertible debt. Proceeds from issuance of these convertible debentures
were used to reduce existing Hungarian bank debt by $12.0 million and the
balance for working capital purposes which allowed the Company to refinance
the remaining Hungarian bank debt to a three-year term loan for $3.0 million
with no covenants going forward.

In December 2004, the Company's U.S. bank extended the expiration
and waived the financial covenants of the Company's revolving credit loan,
term loan and mortgage on an existing property to January 1, 2006. The
Company's U.S. bank also increased the amount available under the revolving
credit loan by $0.5 million to $5.5 million and increased the term loan by
$0.1 million to $0.8 million. The principal on the term loan will be repaid
on a quarterly basis of $0.1 million with the remainder of the principal due
on expiration. The mortgage will be repaid on a monthly basis of $15,344 of
principal and interest with the remainder of the principal due on
expiration.

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

In January 2004, the Company issued and sold convertible debentures
in the aggregate principal amount of $7.0 million to institutional private
equity and other investors (including $250,000 to each of Mr. Rumy and
Mr. McDonnell who are members of the Company's Board of Directors). The

convertible debentures have a stated maturity of 30 months and bear interest
at 6% per annum and are convertible presently into 1,295,954 shares of
common stock at a conversion price of $5.40 per share for each investor
other than Messrs. Rumy and McDonnell and $5.42 per share for each of
Messrs. Rumy and McDonnell. The Company also issued to the investors
five-year warrants to purchase an aggregate of 323,994 shares of common
stock of the Company at an exercise price of $5.40 per share for each
investor other than Messrs. Rumy and McDonnell and $5.42 per share for each
of Messrs. Rumy and McDonnell. The fair value of the debt discount
associated with the warrants and beneficial conversion feature, at the time
of issuance, of $2.0 million and is being amortized as non-cash interest
expense over the term of the convertible debentures. Proceeds from the
issuance of these convertible debentures were used for working capital
purposes.

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

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

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

In March 2004, the Company issued and sold convertible debentures
in the aggregate principal amount of $5.75 million to institutional private
equity investors and Mr. Dill ($750,000) who is member of the Company's
board of directors. The convertible debentures have a stated maturity of
30 months and bear interest at 6% per annum and are convertible presently into
895,908 shares of common stock at

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

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

The Company executed an amended credit facility agreement, dated as
of February 13, 2003, with the U.S. bank. The amended credit facility
agreement is structured as a term loan in the amount of $3.5 million (due
February 13, 2005) and a revolving credit loan in the amount of $5.0 million
(due January 31, 2004). The Company repaid $5.0 million of this loan from
the proceeds of the sale of subordinated convertible debentures as discussed
below. Borrowings under the amended facility are based on a formula of
eligible accounts receivable and inventories of the Company's U.S.-based
subsidiaries. The outstanding loans under the agreement bear interest at the
prime interest rate plus 2% per annum. The loan agreement contains quarterly
financial covenants related to borrowings, working capital, debt coverage,
current ratio and capital expenditures. Total borrowings under the revolving
credit agreement were $4.6 million and the available credit under this
agreement was $0.4 million at September 30, 2003.

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

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

In the fourth quarter of fiscal 2004, the Company formally adopted
a plan to discontinue and exit two divisions of its Zoltek Rt. operations
which manufacture acrylic and nylon fibers and yarns. These divisions are
not part of the long-term strategy of the Company and were not expected to
be profitable in the foreseeable future due to the continued pricing
pressure from competitive manufacturers. In the fourth quarter of fiscal
2004, the Company recorded an impairment loss on discontinued operations of
$0.2 million related to severance. These divisions had been included in the
Specialty Products segment (see Note 11). Certain information with respect
to the discontinued operations of the acrylic and nylon fibers divisions for
the years ended September 30, 2004, 2003 and 2002 is summarized as follows
(amounts in thousands):

2004 2003 2002
------- ------- -------

Net sales.......................................... $16,345 $24,134 $26,649
Cost of sales...................................... 17,831 24,447 25,412
------- ------- -------
Gross profit.................................. (1,486) (313) 1,237
Selling, general and administrative expenses....... (3,869) (2,918) 3,286
------- ------- -------
Loss from operations.......................... (5,355) (3,231) (2,049)
Other income (expense)............................. 186 (442) (129)
------- ------- -------
Net loss from operations...................... (5,169) (3,673) (2,178)
Loss on disposal of discontinued operations........ (209) - -
------- ------- -------
Loss on discontinued operations.................... $(5,378) $(3,673) $(2,178)
======= ======= =======

In the fourth quarter of fiscal 2001, the Company formally adopted
a plan to dispose of its 45% interest in Hardcore Composites, which designs
and manufactures composite structures for the civil infrastructure market.
The Company acquired its interest in Hardcore Composites in the third
quarter of fiscal 2000. From the date of acquisition until disposition, the
financial statements of Hardcore Composites were consolidated with the
Company due to the ability to directly control the operations. In the fourth
quarter of fiscal 2001, the Company recorded an impairment loss on
discontinued operations of $5.1 million to reduce the carrying value of
Hardcore Composites' long-lived assets to their estimated fair value less
estimated selling costs. Hardcore was included in the Carbon Fibers segment
(see Note 11).

On March 1, 2002, the Company completed the sale of its interest in
Hardcore Composites to the 55% majority owner. At that date, Hardcore
Composites had net liabilities of approximately $1,319,000 which were 100%
consolidated by the Company. As part of the sale, Hardcore Composites
assumed these net liabilities, which resulted in the Company recognizing a
$1,319,000 gain on the sale of discontinued operations in the quarter ended
March 31, 2002. Additionally, in consideration for this sale, Hardcore
Composites issued a series of unsecured promissory notes to the Company. In
light of then existing financial condition of Hardcore Composites, the
Company recorded a full valuation allowance against the promissory notes in
its accounting for the sale transaction.

In fiscal 2002, as a part of the sale of the Company's interest in
Hardcore Composites, Hardcore Composites and the Company also settled a
$1,000,000 note and certain other obligations payable to the former owner,
with the Company making a $475,000 payment and Hardcore Composites
contributing an additional amount. This note comprised part of the purchase
price of the acquisition in the third quarter of fiscal 2000 and was
guaranteed by the Company. However, the Company continues to guaranty
Hardcore Composite's lease obligations of approximately $30,000 per month to
the former owner. The obligation relates to a lease of the Hardcore
Composites manufacturing facility, which expires March 31, 2008. In fiscal
2002, the Company reversed the $525,000 remaining accrual for the note
payable to the former owner, as its obligation has been satisfied.

In October 2003, the Company was named as a defendant in a civil
action filed in the Court of Common Pleas for Cuyahoga County, Ohio by the
former owner of Hardcore Composites Operations, LLC ("Hardcore") alleging
breach by Hardcore and the Company of their respective obligations under a
sublease, the Company's guaranty of the sublease, and prior settlement
agreement among the parties. The former owner's action claims damages in the
amount of $0.3 million for breaches by the Company of its obligations under
the guaranty and the settlement agreement and, in addition, demands $0.5
million in damages from Hardcore and the Company, jointly and severally,
under the terms of the settlement agreement. During the third quarter of
fiscal 2004, Hardcore filed a petition under Chapter 11 of the U.S.
Bankruptcy Code. In October 2004, the Court of Common Pleas for Cuyahoga
County, Ohio ruled in favor of the former owner of Hardcore Composites in
the amount of $1.1 million. The Company recorded an additional accrual of
$0.5 million, which was recorded in discontinued operations to fully accrue
the liability under the judgment. The Company is vigorously defending this
matter, has filed counterclaims and filed an appeal. Management believes
that the ultimate resolution of this litigation will not have further
material adverse effect on the Company's results of operations or financial
condition. For additional information, see Notes 3 and 8 to the Company's
Consolidated Financial Statements.

Certain information with respect to the discontinued operations of
Hardcore for the years ended September 30, 2004 and 2002 is summarized as
follows (amounts in thousands):

2004 2002
----- -------

Net sales................................................. $ - $ 408
Cost of sales............................................. - 886
----- -------
Gross profit.............................................. - (478)
Selling, general and administrative expenses.............. - 535
----- -------
Loss from operations...................................... - (1,013)
Other expenses............................................ - (17)
----- -------
Net loss from operations.................................. - (1,030)
Loss on disposal of discontinued operations............... (450) 1,894
----- -------
Loss on discontinued operations, net of taxes............. $(450) $ 864
===== =======

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

Inventories consist of the following (amounts in thousands):

September 30,
2004 2003
------- -------

Raw materials............................................ $ 5,462 $ 4,859
Work-in-process.......................................... 1,177 1,132
Finished goods........................................... 18,317 19,057
Supplies, spares and other............................... 946 1,930
------- -------
$25,902 $26,978
======= =======

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

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

September 30,
2004 2003
-------- --------

Land.............................................................. $ 1,732 $ 1,665
Buildings and improvements........................................ 32,696 30,061
Machinery and equipment........................................... 82,406 77,999
Furniture, fixtures and software.................................. 5,563 5,477
Construction in progress.......................................... 7,049 4,014
-------- --------
129,446 119,216
Less: accumulated depreciation................................... (48,908) (41,843)
-------- --------
$ 80,538 $ 77,373
======== ========

During 2004, the Company was not operating its Abilene, Texas
facility at full capacity. As a result, the Company has elected to
categorize certain costs related to these idle assets as unused capacity
costs. Such costs totaled $4.5 million, $5.7 million and $6.0 million for
fiscal 2004, 2003 and 2002, respectively, and include depreciation and other
overhead expenses associated with unused capacity. The unused capacity costs
are presented as an operating item on the Company's consolidated statement
of operations. As discussed above, the Company has resumed certain levels of
manufacturing at this facility during fiscal 2004. With the reactivation of
the Abilene plant, unused capacity costs are expected to diminish and,
ultimately, be fully absorbed in ongoing production once all the carbon
fiber lines start operating in fiscal 2005.

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

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

2004 2003 2002
---- ---- -------

From continuing operations:
Current:
Federal..................................... $ - $ - $(2,731)
State....................................... - - (113)
Non-U.S. local.............................. 434 171 358
---- ---- -------
434 171 (2,486)
---- ---- -------
Deferred:
Federal..................................... - 203 9
State....................................... - 17 (9)
Non-U.S..................................... - 144 (374)
---- ---- -------
- 364 (374)
---- ---- -------
Total continuing operations............ $434 $535 $(2,860)
==== ==== =======
From discontinued operations:
Deferred:
Federal..................................... $ - $ - $ -
State....................................... - - -
---- ---- -------
Total discontinued operations............ - - -
---- ---- -------
Total .......................................... $434 $535 $(2,860)
==== ==== =======

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

2004 2003
-------- --------

Tax effect of regular net operating losses (expiring 2020-2022)......... $(18,085) $(14,082)
Valuation allowance on net operating losses............................. 13,854 10,690
Tax effect of capital loss.............................................. (526) (582)
Valuation allowance on capital loss..................................... 526 582
Depreciation............................................................ 4,407 4,048
Employee related costs.................................................. (88) (85)
Inventory reserve....................................................... - (464)
Bad debt accrual........................................................ (59) (65)
Deferred state income taxes............................................. - -
Other................................................................... (29) (42)
Non-U.S. operations deferred tax, net................................... - -
-------- --------
Total net deferred tax asset................................... $ - $ -
======== ========

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

2004 2003 2002
------ ------- -------

At statutory rate:
Income taxes on loss from continuing operations.......... $(3,561) $(3,874) $(3,188)
Increases (decreases):
Lower effective tax rate on non-U.S. operations.......... 1,054 768 333
Change in valuation allowance on net operating loss...... 2,471 3,501 (1,174)
Change in valuation allowance on capital loss............ - - -
Reduction of NOL due to 5 year carry back................ - - (1,871)
Refund related to 5 year carry back of NOL............... - - 2,731
Local taxes, non-U.S..................................... 434 171 358
State taxes, net of federal benefit...................... - 16 (9)
Refund write-off......................................... - - -
Other.................................................... 37 (48) (40)
------- ------- -------
$ 434 $ 535 $(2,860)
======= ======= =======

The consolidated loss from continuing operations before income
taxes by domestic and foreign sources for the years ended September 30,
2004, 2003 and 2002 was as follows (amounts in thousands):

2004 2003 2002
-------- -------- -------

Domestic.......................................................... $ (9,748) $(10,267) $(9,475)
Foreign........................................................... (727) (1,127) 98
-------- -------- -------
Loss from continuing operations before income taxes............... $(10,475) $(11,394) $(9,377)
======== ======== =======

Undistributed earnings of Zoltek Rt. of $957,000, $3,568,000 and
$8,368,000 at September 30, 2004, 2003 and 2002, respectively, are
considered to be permanently reinvested and, accordingly, no provision for
income taxes has been recorded. The undistributed earnings creates a
deferred tax liability as of September 30, 2004 of $836,000.

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

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

The Company's financing of its U.S. operations is separate from
that of its Hungarian operations. Availability of credit is based on the
collateral value at each operation. No covenants exist related to the credit
facility from its U.S. bank, which matures on January 1.

US Operations - The Company's current credit facility with its U.S.
bank is described above under "--2005 Refinancing" and "--2003 Refinancing."
Total borrowings under the U.S. credit facility, including the revolving
line of credit and term loan, were $5.7 million at September 30, 2004.

Hungarian Operations - The Company's Hungarian subsidiary has a
credit facility with a Hungarian bank. Total borrowings under this credit
facility were $11.4 million at September 30, 2004. Due to the fiscal 2005
refinancing (see "--Refinancing" in Note 2), the credit facility has been
reduced to a $3.0 million term loan with interest payments over the next
three years and repayment of principal at the maturity date.

In March 2003, the Company's Hungarian subsidiary entered into a
credit agreement with another Hungarian bank for $2.2 million of which $2.2
million was outstanding as of September 30, 2004. This facility was paid off
as part of the 2005 refinancing.

Total borrowings of the Hungarian subsidiary were $13.6 million at
September 30, 2004, of which $13.6 million has been classified as long-term
debt due to the 2005 refinancing in which $12.0 million was repaid and the
remaining borrowings extended to 2008. Borrowings under the Hungarian bank
credit facilities cannot be used in Zoltek's U.S. operations.

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

September 30,
2004 2003
------- -------

Note payable with interest at 9%, payable in monthly installments of
principal and interest of $15,392 to maturity in January 2006....................... $ 1,419 $ 1,507

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

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

Non-interest bearing note payable (discounted at 8%) to the City of Abilene, Texas
to be repaid from real estate and personal property tax abatements ................. 1,781 1,706

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

Revolving credit agreement, maturing in January 2006, bearing interest at prime
plus 2.0% (prime rate at September 30, 2003 was 4.00%) ............................. 5,000 4,670

Term loan, $0.4 million payable in 2005, balance payable in January
2006, bearing interest at prime plus 2.0% (prime rate at September 30, 2004
was 4.5%)........................................................................... 700 3,300

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

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

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

Facilities with Hungarian banks (interest rate of 5.5% to 10.6%)........................ 13,568 12,566
------- ------
Total debt.......................................................................... 49,318 34,474
Less: Beneficial conversion feature and debt discount associated
with warrants..................................................................... (5,030) -
Less: amounts payable within one year............................................... (570) (933)
------- -------
Total long-term debt ................................................................... $43,718 $33,541
======= =======

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

Year ending
September 30, Total
------------- -----
2005...................................... $ 570
2006...................................... 14,405
2007...................................... 11,825
2008...................................... 9,656
2009...................................... 13,493
Thereafter................................ -
-------
$49,318
=======

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

LEASES

Land at the carbon fibers manufacturing facility in Missouri is
leased under an operating lease that expires in December 2065, with a
renewal option for 24 years expiring in December 2089. The lease requires
annual rental payments of $57,991 through October 2010, no further rental
payments are required through initial term of lease. Rental expense related
to this lease was $57,991 for the years ended September 30, 2004, 2003 and
2002.

LEGAL

will not have further material adverse effect on the Company's results of
operations or financial condition. For additional information, see Notes 3
and 8 to the Company's Consolidated Financial Statements.

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

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

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

ENVIRONMENTAL

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

SOURCES OF SUPPLY

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

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

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

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

The Company maintains a 401(k) Profit Sharing Plan for the benefit
of employees who have completed six months of service and attained 21 years
of age. No contributions were made by the Company for the years ended
September 30, 2004, 2003, and 2002.

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

In 1992, the Company adopted a Long-term Incentive Plan that
authorizes the Compensation Committee of the Board of Directors (the
"Committee") to grant key employees and officers of the Company incentive or
nonqualified stock options, stock appreciation rights, performance shares,
restricted shares and performance units. The Committee determines the prices
and terms at which awards may be granted along with the duration of the
restriction periods and performance targets. Currently, 1,500,000 shares of
common stock may be issued pursuant to awards under the plan of which
987,500 are currently outstanding. Outstanding stock options expire 10 years
from the date of grant or upon termination of employment. Options granted in
1998 and prior vest 100% five years from date of grant. Options granted in
1999 and thereafter primarily vest 100% three years from date of grant. All
options were issued at an option price equal to the market price on the date
of grant.

In 1992, the Company adopted a Directors Stock Option Plan under
which options to purchase 7,500 shares of common stock at the then fair
market value are currently issued to each non-employee director annually. In
addition, newly elected non-employee directors receive options to purchase
7,500 shares of common stock, at the then fair market value. The options
expire from 2004 through 2013, respectively.

The pro forma information required by SFAS 123 regarding net income
and earnings per share has been presented in Note 1 as if the Company had
accounted for its stock option plans under the fair value method. The fair
value of each option grant is estimated on the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:

Assumptions: 2004 2003 2002
----------- ------- ------- -------

Expected life of options................................. 6 years 6 years 6 years
Risk-free interest rate.................................. 4.25% 4.25% 6.15%
Volatility of stock...................................... 77% 96% 98%
Expected dividend yield.................................. -- -- --

The fair value of the options granted during 2004, 2003 and 2002
was $159,961, $119,513 and $349,000, respectively.

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

Wtd. Avg. Wtd. Avg. Wtd. Avg.
Options Exercise Price Exercisable Exercise Price
--------- -------------- ----------- --------------

Balance, September 30, 2001 1,056,000 $10.75 531,000 $10.81
Granted............................. 451,000 2.10
Exercised........................... (12,000) 2.38
Cancelled........................... (408,000) 11.31
---------
Balance, September 30, 2002 1,087,000 7.05 561,833 10.35
Granted............................. 112,500 2.70
Exercised........................... (10,000) 2.07
Cancelled........................... (187,500) 4.76
---------
Balance, September 30, 2003............. 1,002,000 7.04 744,083 8.67
Granted............................. 77,500 6.36
Exercised........................... (63,000) 3.27
Cancelled........................... (29,000) 5.44
--------- ------
Balance, September 30, 2004............. 987,500 $ 7.22 722,250 $ 8.91

The following table summarizes information for options currently
outstanding and exercisable at September 30, 2004:

Options Outstanding Options Exercisable
---------------------------------- ---------------------------
Range of Wtd. Avg. Wtd. Avg. Wtd. Avg.
Prices Number Remaining Life Exercise Price Number Exercise Price
------------ ------- -------------- -------------- ------- --------------

$ 1.33-2.50 409,500 8 years $ 2.13 184,250 $ 2.21
3.25-5.67 127,500 6 years 4.85 87,500 4.48
6.25-6.88 188,000 1 years 6.38 188,000 6.38
7.69-9.25 112,500 7 years 8.21 112,500 8.21
10.00-39.00 150,000 4 years 23.44 150,000 23.44
------- -------
$ 1.33-39.00 987,500 6 years $ 7.22 722,250 $ 8.91
======= =======

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

The Company's strategic business units are based on product lines
and have been grouped into three reportable segments: Carbon Fibers,
Technical Fibers and Specialty Products. In the fourth quarter of fiscal
2004, the Company discontinued two divisions within its specialty fibers
segment. Segment information for 2003 and 2002 has been reclassified to
reflect such change (see Note 3).

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

Management evaluates the performance of its operating segments on
the basis of operating income (loss) contribution to the Company. The
following table presents financial information on the Company's operating
segments as of and for the fiscal years ended September 30, 2004, 2003 and
2002 (amounts in thousands):

Year Ended September 30, 2004
-----------------------------
Corporate
Carbon Technical Specialty Headquarters
Fibers Fibers Products and Eliminations Total
------ ------ -------- ---------------- -----

Net sales - external.................................. $18,431 $14,831 $12,011 $ - $45,273
Net sales - intersegment.............................. 2,479 1,642 - (4,121) -
------- ------- ------- ------- -------
Total net sales.................................... 20,910 16,473 12,011 (4,121) 45,273
Cost of sales, excluding available unused capacity
expenses............................................ 19,117 14,091 9,794 (5,124) 37,878
Available unused capacity expenses.................... 4,466 - - - 4,466
Operating income (loss)............................... (6,823) 1,192 1,529 (1,383) (5,485)
Depreciation and amortization expense................. 3,969 1,091 463 91 5,614
Capital expenditures.................................. 5,515 389 231 (8) 6,128

Year Ended September 30, 2003
-----------------------------
Corporate
Carbon Technical Specialty Headquarters
Fibers Fibers Products and Eliminations Total
------ ------ -------- ---------------- -----

Net sales - external.................................. $13,179 $14,098 $12,128 $ - $39,405
Net sales - intersegment.............................. 5,675 - - (5,675) -
------- ------- -------- ------- -------
Total net sales.................................... 18,854 14,098 12,128 (5,675) 39,405
Cost of sales, excluding available unused capacity
expenses............................................ 17,367 12,689 9,141 (6,016) 33,181
Available unused capacity expenses.................... 5,716 - - - 5,716
Operating income (loss)............................... (8,644) 93 1,617 (2,511) (9,443)
Depreciation and amortization expense................. 4,013 1,004 731 225 5,973
Capital expenditures.................................. 515 512 456 - 1,483

Year Ended September 30, 2002
-----------------------------
Corporate
Carbon Technical Specialty Headquarters
Fibers Fibers Products and Eliminations Total
------ ------ -------- ---------------- -----

Net sales - external................................... $10,676 $19,772 $11,339 $ - $41,787
Net sales - intersegment............................... 4,419 - - (4,419) -
------- ------- ------- ------- -------
Total net sales..................................... 15,095 19,772 11,339 (4,419) 41,787
Cost of sales, excluding available unused capacity
costs................................................ 13,971 14,070 9,325 (3,858) 33,508
Available unused capacity.............................. 6,039 - - - 6,039
Operating income (loss)................................ (9,526) 3,584 907 (3,044) (8,079)
Depreciation and amortization expense.................. 3,978 1,182 572 314 6,046
Capital expenditures................................... 2,013 (624) 435 31 1,865

Total Assets
------------
Corporate
Carbon Technical Specialty Headquarters
Fibers Fibers Products and Eliminations Total
------ ------ -------- ---------------- -----

September 30, 2004..................................... $63,430 $19,901 $36,429 $ 3,039 $122,799
September 30, 2003..................................... 66,226 22,611 32,569 (1,951) 119,455
September 30, 2002..................................... 74,046 25,465 25,024 (3,113) 121,422

Sales and long-lived assets, by geographic area, consist of the
following as of and for each of the three fiscal years in the period ended
September 30, 2004, 2003 and 2002 (amounts in thousands):

2004 2003 2002
--------------------------- ---------------------------- ---------------------------
Net Net Net
Long Lived Long Lived Long Lived
Net Sales (a) Assets (b) Net Sales (a) Assets (b) Net Sales (a) Assets (b)
------------- ---------- ------------- ---------- ------------- ----------

United States............ $22,731 $46,582 $20,892 $45,936 $24,243 $50,366
Western Europe........... 10,583 - 2,861 - 2,994 -
Eastern Europe........... 9,400 33,956 13,585 31,436 11,020 28,660
Asia..................... 2,361 - - - - -
Other areas.............. 198 - 2,067 - 3,530 -
------- ------- ------- ------- ------- -------
Total................. $45,273 $80,538 $39,405 $77,373 $41,787 $79,026
======= ======= ======= ======= ======= =======

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

12. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
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(Amounts in thousands, except per share data)

Fiscal year 2004 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
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Net sales.......................................... $ 8,152 $11,537 $13,285 $12,299
Loss from continuing operations.................... (3,246) (2,531) (2,375) (2,757)
Loss from discontinued operations.................. (446) (1,313) (1,163) (2,906)
Net loss........................................... $(3,692) $(3,844) $(3,538) $(5,663)

Net loss per share:
Basic and diluted net loss per share
Continuing operations............................ $ (.20) $ (.15) $ (.14) $ (.17)
Discontinued operations.......................... (.03) (.08) (.08) (.17)
------- ------- ------- -------
Total....................................... $ (.23) $ (.23) $ (.22) $ (.34)
======= ======= ======= =======

Fiscal year 2003 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
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Net sales.......................................... $ 9,440 $ 9,573 $10,338 $10,054
Loss from continuing operations.................... (2,522) (3,397) (2,580) (3,430)
Loss from discontinued operations.................. (657) (898) (1,210) (908)
Net loss........................................... $(3,179) $(4,295) $(3,790) $(4,338)

Net loss per share:
Basic and diluted net loss per share
Continuing operations............................ $ (.16) $ (.20) $ (.15) $ (.21)
Discontinued operations.......................... (.04) (.06) (.08) (.06)
------- ------- ------- -------
Total....................................... $ (.20) $ (.26) $ (.23) $ (.27)
======= ======= ======= =======

In the fourth quarter of 2004, the Company recorded a $0.2 million
charge associated with discontinued operations and a $0.5 million accrual
for a legal judgment (see Note 3). In the fourth quarter of 2003, the
Company recorded a $1.0 million charge related to the valuation of
inventory.