10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED OCTOBER 31, 2006

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 0-22354

MARTEK BIOSCIENCES CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) 52-1399362
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)

6480 DOBBIN ROAD, COLUMBIA, MARYLAND 21045
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (410) 740-0081

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

TITLE OF EACH CLASS:	NAME OF EACH EXCHANGE ON WHICH REGISTERED:
Common Stock, $.10 Par Value	The NASDAQ Stock Market

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO o

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. þ Yes o No

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

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

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

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

The aggregate market value of Common Stock held by non-affiliates of the registrant as of April 28, 2006 was $805,834,927, based on the closing price of the Common Stock on the NASDAQ National Market on April 28, 2006.

The number of shares of Common Stock outstanding as of January 9, 2007 was 32,194,628.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant’s Definitive Proxy Statement for its 2007 Annual Meeting of Stockholders (which will be filed with the Commission within 120 days after the end of the Registrant’s 2006 fiscal year) are incorporated by reference into Part III of this Report.

MARTEK BIOSCIENCES CORPORATION
FORM 10-K

For The Fiscal Year Ended October 31, 2006

INDEX

PART I
Item 1.	Business	1
Item 1A.	Risk Factors	18
Item 2.	Properties	27
Item 3.	Legal Proceedings	28
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	30
Item 6.	Selected Financial Data	31
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	43
Item 8.	Financial Statements and Supplementary Data	44
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	66
Item 9A.	Controls and Procedures	66
PART III
Item 10.	Directors and Executive Officers of the Registrant	67
Item 11.	Executive Compensation	67
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	67
Item 13.	Certain Relationships and Related Transactions	67
Item 14.	Principal Accountant Fees and Services	67
PART IV
Item 15.	Exhibits and Financial Statement Schedules	68
	Signatures	70

PART I

The information in this Form 10-K for Martek Biosciences Corporation (“Martek”, “we”, or the “Company”) contains certain forward-looking statements, including statements related to markets for the Company’s products and trends in its business that involve risks and uncertainties. The Company’s actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” as well as those discussed elsewhere in this Form 10-K, including in Item 1A. Risk Factors.

ITEM 1. BUSINESS.

OVERVIEW

Martek Biosciences Corporation is a leader in the innovation and development of omega-3 DHA products that promote health and wellness through every stage of life. The Company produces life’sDHA™, a vegetarian source of the omega-3 fatty acid DHA (docosahexaenoic acid), for use in infant formula, perinatal products, foods and beverages and dietary supplements, and ARA (arachidonic acid), an omega-6 fatty acid, for use in infant formula.

NUTRITIONAL PRODUCTS

We have developed production methods and intellectual property for two important fatty acids. These fatty acids are DHA and ARA. We sell oils containing these fatty acids under the names DHASCO^®, life’sDHA™, Neuromins^® and ARASCO^®. We derive DHA from microalgae and ARA from fungi, using proprietary processes. Cell membranes throughout the body contain these fatty acids, and they are particularly concentrated in the brain, central nervous system, retina and heart. Research has shown that DHA and ARA may enhance mental and visual development in infants. In addition, research has shown that DHA may play a pivotal role in brain function throughout life and may reduce the risk of cardiovascular disease. Low levels of DHA in adults have been linked to a variety of health risks, including Alzheimer’s disease and dementia. Further research is underway to assess the role of supplementation with our DHA on mitigating a variety of health risks. We are targeting the infant formula, perinatal, food and beverage and dietary supplement markets for sales of our nutritional oils.

An adult may obtain DHA via a limited number of foods such as fish, eggs or organ meats. ARA may be obtained from foods such as red meats, fish and eggs. A pregnant mother passes DHA and ARA through the placenta to the fetus and a lactating mother passes DHA and ARA to an infant through breast milk. Several international scientific and health agencies have made recommendations for DHA and ARA consumption for infants and for DHA intake for pregnant and nursing women. While there are currently no universally recognized guidelines for daily consumption of DHA by adults, a workshop sponsored by various groups, including the International Society for the Study of Fatty Acids and Lipids, recommended that adults consume at least 220 mg of DHA daily. In addition, the Institute of Medicine in its 2005 report of Recommended Dietary Intakes has suggested that an appropriate level of DHA intake is 160 mg of DHA per day. The U.S. Department of Health and Human Services indicated that dietary consumption of DHA is well below these levels. We believe that greater recognition of this possible dietary deficiency will result in an increase in demand for DHA-supplemented products. Recommendations for ARA consumption by adults have not been put forth and may not be necessary as adequate amounts of ARA are likely consumed in the typical adult diet.

Investigators at the National Institutes of Health (“NIH”) and other research centers have observed a relationship between low levels of DHA and a variety of health risks, including increased cardiovascular problems, Alzheimer’s disease and dementia as well as other neurological and visual disorders. We sponsor and participate with others in research to determine the benefit of DHA supplementation on cardiovascular health, Alzheimer’s disease and dementia. Additionally, there are ongoing studies using Martek oils on the benefits of DHA supplementation during pregnancy and nursing to assess the outcomes on both mother and child.

In May 2001, the Food and Drug Administration (“FDA”) completed a favorable review of our generally recognized as safe (“GRAS”) notification for the use of our DHASCO^® and ARASCO^® oil blend in specified ratios in infant formulas. Since the first product introduction in February 2002, supplemented infant formulas manufactured by four of our licensees have been sold in the United States: Mead Johnson Nutritionals under the Enfamil^®LIPIL^® brand; the Ross Products Division of Abbott Laboratories under its Similac^® ADVANCE^® brand; Nestle under its Good Start^® Supreme DHA & ARA and NAN^® DHA & ARA brands; and PBM Products Inc. under the brand Bright Beginnings™ and under private label brands, including Wal-Mart Parent’s Choice™. These supplemented infant formulas include term, preterm, soy-based, specialty and toddler products. As of October 31, 2006, we estimate that formula supplemented with our oils had penetrated approximately 85% of the U.S. infant formula market.

We have entered into license agreements with 24 infant formula manufacturers, who collectively represent approximately 70% of the estimated $8.5 to $9.5 billion worldwide wholesale market for infant formula and nearly 100% of the estimated $3.0 to $3.5 billion U.S. wholesale market for infant formula, including the wholesale value of Women, Infant & Children program (“WIC”) rebates. WIC is a federal grant program administered by the states for the benefit of low-income, nutritionally at-risk women, infants and children. Currently, WIC programs in 48 states and the District of Columbia offer term infant formula supplemented with our oils and WIC programs in all 50 states and the District of Columbia have adopted certain specialty infant formula products supplemented with our oils. Our licensees include infant formula market leaders Mead Johnson Nutritionals, Nestle, Abbott Laboratories, Wyeth and Royal Numico, each of whom is selling infant formula fortified with our nutritional oils. Our licensees sell term infant formula products containing our oils collectively in over 30 countries and preterm infant formula products containing our oils collectively in over 60 countries around the world. Preterm infant formula products comprise less than 3% of the total infant formula market worldwide. In addition,

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certain licensees are selling products in the United States and abroad that contain our nutritional oils and target the markets for children ages nine months to two years as well as pregnant and nursing women.

Martek holds patents on certain separate and distinct DHA technology, which we refer to as DHA-S, that is derived from a different algal strain than our DHA authorized for addition to infant formula. We have received authorization from both the European Commission and the Australia New Zealand Food Authority for the use of DHA-S oil as a Novel Food ingredient. This Novel Food designation authorizes the use of our DHA-S as an ingredient in certain foods such as certain dairy products, including cheese and yogurt (but not milk-based drinks), spreads and dressings, breakfast cereals, food supplements and dietary foods for special medical purposes in the European Community. We have also received a favorable review by the FDA of our GRAS notification for the use of DHA-S in food and beverage applications in the U.S. and have received similar approvals in Canada.

We are currently selling DHA-S products into the dietary supplement, food and beverage and animal feed markets domestically and internationally. Furthermore, we have recently signed DHA license and supply agreements with several large food and beverage companies and anticipate product launches from certain of these companies during fiscal 2007.

CONTRACT MANUFACTURING

We provide certain contract manufacturing services at our Kingstree, South Carolina facility. The facility’s large fermentation capacity and numerous types of recovery equipment allow us to customize production processes for our customers and produce at significant volumes. Our contract manufacturing services are particularly well-suited for the contracted production of enzymes, specialty chemicals, vitamins and agricultural specialty products.

FLUORESCENT DETECTION PRODUCTS

We have also developed fluorescent detection products from algae that connect fluorescent algal proteins to antibodies. Because the compound itself cannot be seen, the connected antibodies (with their algal fluors) then attach to a compound of interest to tag or mark that compound. Compound detection is then made or not made based on whether the fluor is seen. These products have potential applications in automated biological screening to find new compounds or reduce drug discovery time. Our products bring greater speed, sensitivity and simplicity to existing tests and applications.

PRODUCTS AND PRODUCT CANDIDATES

NUTRITIONAL OILS

Infant Formula Applications

Certain microalgae and fungi produce large quantities of oils and fats containing long-chain polyunsaturated fatty acids, known as PUFAs that are important to human nutrition and health. We have identified strains of microalgae that produce oils rich in DHA and have developed the means to grow them by fermentation. In addition, we have isolated and cultured a strain of fungus that produces large amounts of ARA.

DHA is the predominant omega-3 fatty acid in the brain and retina of the eye and is a key component of heart tissue in humans and other mammals. Both DHA and ARA are important for infant brain and eye development which occurs primarily in the last trimester in-utero, and continues throughout the first few years of life. During pregnancy, DHA and ARA are actively transported from the mother to the fetus via the placenta. Following birth, the infant receives these fatty acids from either breast milk (which always contains DHA and ARA) or infant formula supplemented with DHA and ARA. All humans, including infants, can synthesize DHA from a precursor fatty acid, alpha-linolenic acid (“ALA”). However, the synthesis of DHA from ALA is inefficient and inconsistent. With DHA supplemented infant formula, formula-fed infants have blood and tissue levels of DHA that are similar to those of breastfed infants. DHA and ARA supplementation is especially important for premature infants who failed to complete the last trimester of pregnancy in utero. Studies of infant formulas containing our oils show that blood and tissue levels of DHA and ARA in formula-fed infants equal that of breastfed infants. DHA and ARA were added to U.S. infant formulas beginning in 2002, and Martek’s DHA and ARA continue to be the only DHA and ARA included in infant formula in the U.S.

Fish oils can also be used for DHA supplementation in infant formula. However, we believe that for a number of reasons our DHA oil is more desirable for infant formula applications than fish oil or other sources of DHA. Our oils are derived from a vegetarian source and are grown under tightly controlled conditions. As a result, Martek oils do not contain contaminants such as methylmercury, polychlorinated biphenyls (“PCBs”) and dioxins that may be found in fish oil. Our oils do not contain significant quantities of eicosapentaenoic acid (“EPA”), an omega-3 fatty acid found in fish which is not appropriate for consumption by infants in high levels. Both algal and fish oils are in the form of easily digestible triglycerides similar to the major form found in breast milk. Martek oils have the benefit, however, of higher oxidative stability and longer shelf life than does fish oil. A study on premature infants conducted by Dr. M. T. Clandinin and others published in April 2005 in The Journal of Pediatrics directly compared infant formula supplemented with DHA from Martek oils to a formula supplemented with DHA from fish oil . Both formulas also contained ARA. The results showed that the formula supplemented with DHA from Martek oil was superior to the formula supplemented with DHA from fish oil in supporting growth in the manner most similar to that of breastfed infants at 18 months of age.

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Although not all experts agree on the essentiality of DHA and ARA for infants, the following recent examples show the benefits of including DHA and ARA in the infant diet:

• A study conducted by Dr. N. Pastor and others published in November 2006 in Clinical Pediatrics found that infants fed a formula containing 17 mg DHA and 34 mg ARA per 100 kcal had fewer episodes of bronchiolitis and bronchitis at ages 5, 7, and 9 months compared to infants receiving control formula not containing these added long-chain polyunsaturated fatty acids.

• A study conducted by Dr. C. Agostoni and others published in March 2006 in Developmental Medicine & Child Neurology found that in children with the rare genetic disorder phenylketonuria (PKU), the addition of DHA in formula was associated with improved visual scores. This study used Martek’s oils.

• A study conducted by Dr. S. Hart and others published in August 2005 in the Journal of Pediatric Psychology revealed a positive correlation between DHA levels in breast milk and newborn neurobehavioral function. The study analyzed the DHA content of breast milk collected from 20 breastfeeding mothers nine days after delivery. At the same time, their infants were tested for neurobehavioral functioning using the Brazelton Neonatal Behavioral Assessment Scale (NBAS), a commonly used behavioral test. Analysis revealed a positive correlation between DHA levels in the mother’s breast milk and the child’s NBAS score.

• A study conducted by Dr. E. Birch and others published in April 2005 in the American Journal of Clinical Nutrition found that DHA and ARA supplementation of term infant formula during the first year of life resulted in improved visual function in 12-month old infants compared to those without supplementation. This study used Martek’s oils.

• A summary of four randomized control trials conducted by Dr. S. Morale and others published in February 2005 in Early Human Development showed a continued benefit to visual development as the result of DHA and ARA supplementation in formula-fed infants throughout the first year of life.

• A study conducted by Dr. D. Hoffman and others published in the June 2003 issue of The Journal of Pediatrics reported that infants who were breast-fed from birth to between four and six months of age and then weaned onto formula supplemented with DHA and ARA experienced significantly improved visual development at one year of age compared to infants who were breast-fed and then weaned onto formula without DHA and ARA. This study used Martek’s oils.

• A study conducted by Dr. E. Birch and others published in March 2002 in the American Journal of Clinical Nutrition found that infants who were breast-fed for six weeks and then weaned to DHA and ARA supplemented infant formula had significantly better visual acuity at 17, 26 and 52 weeks of age and significantly better stereoacuity at 17 weeks of age than infants who were weaned to non-supplemented formula. This study used Martek’s oils.

DHA and ARA have been recognized as important in the infant diet and recommended for inclusion in infant formula by several expert panels, including: the United Nations Food and Agricultural Organization and the World Health Organization (“FAO/WHO”); International Society for the Study of Fatty Acids and Lipids sponsored workshop panel; an expert panel sponsored by the Child Health Foundation; and the British Nutrition Foundation (“BNF”). Recent additions to expert groups making recommendations regarding the addition of DHA and ARA to infant formula include:

• Global Standard for the Composition of Infant Formula: Recommendations of an ESPGHAN Coordinated International Expert Group, authored by B. Koletzko and others published in Journal of Pediatric Gastroenterology and Nutrition in November 2005, and

• Feeding Preterm Infants After Hospital Discharge: A Commentary by the ESPGHAN Committee on Nutrition, authored by P. Aggett and others published in Journal of Pediatric Gastroenterology and Nutrition in May 2006.

Our infant formula licensees are now selling term infant formula products containing our oils collectively in over 30 countries and preterm infant formula products containing our oils collectively in over 60 countries around the world. Preterm infant formula products comprise less than 3% of the total infant formula market worldwide. Supplemented infant formulas manufactured by four of our licensees are currently being sold in the United States. Our sales of nutritional oils for infant formula were approximately $240.5 million, $189.1 million and $161.3 million in fiscal 2006, 2005 and 2004, respectively. Mead Johnson Nutritionals accounted for approximately 45%, 49% and 55% of our total product sales in fiscal 2006, 2005 and 2004, respectively. Abbott Laboratories accounted for approximately 16%, 17% and 16% of our total product sales in fiscal 2006, 2005 and 2004, respectively. Nestle accounted for approximately 12%, 11% and 8% of our total product sales in fiscal 2006, 2005 and 2004, respectively. Wyeth accounted for approximately 10%, 11% and 11% of our total product sales in fiscal 2006, 2005 and 2004, respectively. In addition, due to the success of fortified infant formula, several of our licensees are selling extension products containing our oils beyond infant formula that are targeted for children ages nine months to two years of age.

Applications for Pregnant and Nursing Women

DHA is transferred from the mother to the fetus during pregnancy and particularly during the last trimester. Following birth, the mother transfers DHA to her newborn through breast milk. Therefore, an adequate intake of DHA during pregnancy and nursing is thought to be important and many public health agencies such as the World Health Organization (“WHO”) and International Society for the Study of Fatty Acids and Lipids (“ISSFAL”) have made recommendations for DHA intake during the perinatal period. During the PeriLip meeting, a European Union supported Consensus Conference on “Dietary Fat Intake During the Perinatal Period” (September 2005, Germany), the following recommendation was made regarding

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DHA supplementation: “pregnant and lactating women should aim to achieve a dietary intake of n-3 LCPUFA [omega-3 long-chain polyunsaturated fatty acid] that supplies a DHA intake of at least 200 mg/day.”

Supplementation of breastfeeding mothers with DHA has shown to increase the level of DHA found in breast milk. Recent studies show benefits for breastfed infants of DHA-supplemented mothers:

• A study conducted by Dr. C. Jensen and others published in July 2005 in the American Journal of Clinical Nutrition noted that infants of mothers who supplemented with life’sDHA™ while breastfeeding had improved psychomotor skills at 2 ¹/2 years of age. The study involved 227 breastfeeding mothers who were given a 200 mg capsule of life’sDHA™ or placebo daily for 4 months beginning 5 days after delivery and revealed that children of DHA-supplemented mothers scored significantly higher on the Bayley Psychomotor Development Index (PDI), when compared to the children of the non-supplemented breastfeeding mothers. The study also confirmed that DHA supplementation while breastfeeding effectively increases DHA levels in the mother’s milk as it noted that the mothers supplemented with DHA had 75% more DHA in their breast milk than the control group and their infants had 35% higher DHA blood levels than the control group infants. This study was partially funded by Martek.

• A statistical analysis of many previously reported studies was conducted by Dr. J. Cohen and others. This analysis, published in November 2005 in the American Journal of Preventive Medicine, described a risk/ benefit associated with the prenatal intake of DHA on infant cognitive development. The analysis showed that an increase to maternal DHA intake yielded modest improvement in child IQ.

• A study conducted by Dr. I. Helland and others published in January 2003 in Pediatrics found that mothers who supplemented their diet with fatty acids rich in DHA during pregnancy and nursing gave birth to children who scored higher on standardized intelligence and achievement tests at four years of age than those whose mothers supplemented with fatty acids that do not contain DHA. According to the study, data demonstrated that children born to mothers who had taken cod liver oil, which is rich in DHA and other omega-3 fatty acids, during pregnancy and nursing scored significantly higher (approximately 4.1 points) on the Mental Processing Composite of the K-ABC test as compared to children whose mothers had received corn oil.

• A study conducted by Dr. C. Smuts and others published in March 2003 in Obstetrics and Gynecology found that expectant mothers at risk for preterm birth, who increased their dietary intake of DHA during the last trimester of pregnancy through DHA enriched eggs, increased their length of gestation by six days compared to mothers who received regular eggs during late pregnancy. These researchers also published in the July/August 2004 issue of Child Development their study results showing that infants whose mothers had high DHA levels at birth had improved attention skills at 18 months of age.

Additional research is underway to further evaluate DHA supplementation during pregnancy and nursing. We are currently providing DHA supplements to several researchers who are evaluating potential benefits of maternal DHA supplementation during pregnancy and nursing on pregnancy outcomes and infant development.

Mead Johnson Nutritionals is selling a product in the United States, Expecta™LIPIL^®, which contains our DHA oil and targets pregnant and nursing women. Sciele Pharma, Inc. is selling a prescription prenatal supplement OptiNate™ containing life’sDHA™; Mission Pharmacal is selling a prescription prenatal supplement Citracal^® Prenatal + DHA containing life’sDHA™; Vincent Foods, LLC is selling Oh Mama! nutrition bars containing life’sDHA™; and NutraBella is selling Bellybar™ nutrition bars containing life’sDHA™, all of which also target pregnant and nursing women.

Cognitive Function, Cardiovascular Health and Other Human Applications

Investigators at universities around the world and at other research centers, such as NIH, have observed a relationship between low levels of DHA and a variety of health risks, including increased cardiovascular problems, Alzheimer’s disease and dementia and various other neurological and visual disorders. We are currently trying to establish what contribution, if any, supplementation with our oils will make in addressing these problems. We, as well as others, are supporting studies to further investigate the potential benefit of DHA supplementation on cardiovascular health, and we, as well as others, including NIH, are conducting research regarding the impact of DHA supplementation on certain visual and neurological disorders.

DHA and cognitive function— Discussed below are the findings of several recently published studies that highlight the benefits of DHA on the risk of Alzheimer’s disease and age-related dementia.

• A study published by Dr. E. Schaefer and others in the Archives of Neurology in November 2006 investigated the relationship of blood DHA levels and the development of dementia in a prospective follow-up study of the participants in the Framingham Heart Study. The results of the study noted that subjects with the highest levels of plasma DHA (top 20%) had a significant reduction in the risk of developing dementia from all causes. The study was partially funded by Martek.

• A scientific review on DHA performed by Dr. J. Marszalek and Dr. H. Lodish published in June 2005 in Annual Review of Cell and Developmental Biology suggests the significant role that DHA plays in the maintenance of normal neurological function.

• The results of an in vitro study conducted by Dr. W. Lukiw and others published in October 2005 in the Journal of Clinical Investigation suggest that DHA intake could benefit people with Alzheimer’s disease by lowering the accumulation of amyloid-B peptides, which are associated with brain aging and Alzheimer’s.

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• The results of an in vitro study conducted by Dr. S. Florent and others published in November 2005 in the Journal of Neurochemistry notes that DHA enrichment likely induces changes in neuronal membrane properties that may assist in the prevention of Alzheimer’s disease and other neurodegenerative diseases.

• In September 2004, the results of an animal study conducted by the Dr. F. Calon and others and the UCLA School of Medicine and published in the journal Neuron noted the effects of Martek’s DHA on the advancement of Alzheimer’s disease in laboratory mice. The study found that a diet rich in DHA significantly lessened the memory loss and cell damage associated with Alzheimer’s disease in laboratory mice. This laboratory extended these findings during 2005 with additional data. In vitro research conducted by Dr. N. Bazan and published in 2005 in Molecular Neurobiology detected a metabolite of DHA that appears to have a protective role in neural cell survival and Alzheimer’s disease.

• In July 2003, the results of a study conducted by Dr. M.C. Morris and others published in the Archives of Neurology indicated that weekly consumption of fish and dietary intake of DHA, but not other omega-3 fatty acids, are associated with a reduced risk of Alzheimer’s disease by up to 60 percent. The study examined whether fish consumption and the associated intakes of omega-3 fatty acids would afford a protective effect against Alzheimer’s disease. A total of 815 subjects, aged 65 to 94, who were initially unaffected by Alzheimer’s disease, participated in the study and were followed for an average of 3.9 years for the development of Alzheimer’s disease. The study showed that in those individuals consuming the highest amounts of dietary DHA, the risk of developing Alzheimer’s disease was reduced by up to 60 percent. The risk of developing Alzheimer’s disease was not correlated with EPA consumption.

In 2005, the Agency for Healthcare Research and Quality (“AHRQ”) of the United States Department of Health and Human Services issued a report on the effects of omega-3 fatty acids on cognitive function with respect to persons experiencing aging, dementia and neurological diseases. They stated “Total omega3 FA [omega-3 fatty acid] consumption and consumption of DHA (but not ALA or EPA) were associated with a significant reduction in the incidence of Alzheimer’s.” Additional research is needed to evaluate the role, if any, of DHA supplementation in reducing the risk of developing these diseases.

DHA and cardiovascular health— Discussed below are the findings of several recently published studies that highlight the benefits of DHA on cardiovascular health while, in some cases, cautioning people of the potential risks associated with the intake of certain fish.

• A study published by Dr. A. Erkkilä and others in the Journal of Lipid Research in September 2006 noted an important relationship between plasma DHA levels and the reduced progression of cardiac disease. Specifically, women whose DHA levels were above the median at enrollment had slower progression of coronary artery stenosis over a three-year period. This effect was not seen with the other omega-3 fatty acids, ALA or EPA.

• A review conducted by Dr. C. Wang and others published in July 2006 in The American Journal of Clinical Nutrition stated that evidence suggests that increased consumption of long-chain omega-3 fatty acids, but not alpha-linolenic acid, reduces all cause mortality, cardiac and sudden death, and possibly stroke. life’sDHA™ is a long-chain omega-3 fatty acid.

• A Scientific Statement entitled “Diet and Lifestyle Recommendations Revision 2006” published by Dr. A. Lichtenstein and other members of the American Heart Association Nutrition Committee published in July 2006 in Circulation included a recommendation that people with documented heart disease consume approximately one gram of DHA and eicosapentaenoic acid (EPA) per week. They affirm that with appropriate medical advice, use of supplements may be substituted for fish.

• The results of a study conducted by Dr. K. Maki and others and published in the Journal of the American College of Nutrition in June 2005 demonstrated that life’sDHA™ lowered triglycerides. These subjects consumed 1.5 grams DHA per day or a placebo for six weeks. This study was sponsored by Martek.

• Dr. K. Stark and Dr. B. Holub reported in May 2004 in the American Journal of Clinical Nutrition that DHA supplementation of 32 postmenopausal women with 2.8 grams DHA from Martek’s DHA oil per day for 1 month resulted in a 20% reduction in triglycerides, a 6-10% increase in HDL cholesterol (“good” cholesterol) and a 7% reduction in heart rate relative to placebo, suggesting that DHA may favorably influence selected cardiovascular risk factors in postmenopausal women.

• In May 2002, in the publication Circulation, the American Heart Association (“AHA”) issued a Scientific Statement entitled “Fish Consumption, Fish Oil, Omega-3 Fatty Acids, and Cardiovascular Disease.” The Scientific Statement outlines the findings of a comprehensive report that examined the cardiovascular health benefit of omega-3 fatty acids, specifically DHA and EPA, from fish sources. The report concluded that consumption of such omega-3 fatty acids, either through diet or supplements, reduces the incidence of cardiovascular disease. The statement refers to studies that have indicated the following to be associated with the intake of omega-3 fatty acids:

• decreased risk of sudden death and arrhythmia;

• decreased thrombosis (blood clot);

• decreased triglyceride levels;

• decreased growth of atherosclerotic plaque;

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• improved arterial health; and

• lower blood pressure.

The Scientific Statement concluded that omega-3 fatty acids have been shown in epidemiological and clinical trials to reduce the incidence of heart disease and recommends that healthy individuals eat a variety of fish (preferably oily) at least twice a week. The statement cautioned, however, that fish intake “must be balanced with concerns about environmental pollutants” because some species of fish may contain significant levels of methylmercury, polychlorinated biphenyls (“PCBs”), dioxins, and other contaminants. Both the FDA and the Environmental Protection Agency have advised children, pregnant women, women who may become pregnant and nursing mothers to limit their intake of certain fish. In consideration of the health risks posed by such contaminants, the authors of the statement conclude by stating, “The availability of high-quality omega-3 fatty acid supplements, free of contaminants, is an important prerequisite to their extensive use.” Martek’s DHA oil is derived from a vegetarian source and is free of contaminants that may be found in fish oil.

• A study published by D. Mozaffarian in October 2006 in the Journal of the American Medical Association reviewed the health effects of fish consumption. Based on the risks of fish intake that must be considered in the context of the benefits, the author concludes that the benefits of a modest fish consumption (1-2 servings/wk) outweigh the risks in healthy adults. The author, however, cautions women of childbearing age to avoid consumption of those species currently known to contain high levels of contaminants.

In September 2004, the FDA announced that it would allow conventional foods and beverages and dietary supplements containing DHA and EPA to make a qualified health claim for reduced risk of coronary heart disease on their product packaging. A qualified health claim must be supported by credible scientific evidence. Upon review of this scientific evidence, the FDA concluded that supportive but not conclusive research shows that consumption of DHA and EPA may reduce the risk of coronary heart disease. This qualified health claim supports the benefit of Martek’s DHA-S oil, as it contains both DHA and small amounts of EPA.

While there is not yet a scientific consensus on the subject, a number of clinical studies, including several listed above, as well as others conducted by Australian and European researchers and published in Hypertension in 1999, the American Journal of Clinical Nutrition in 1997 and 2000, Diabetes Care in 2003, and the European Journal of Clinical Nutrition in 1996, have indicated that pure DHA sources, including Martek’s DHA oil, exhibit the main cardioprotective benefits traditionally ascribed to fish consumption or to the combination of DHA plus EPA. Such research has indicated that DHA, in the absence of EPA, may have the following effects on cardiovascular risk factors:

• reduces triglycerides and raises the HDL or “good” cholesterol;

• reduces blood pressure;

• reduces heart rate; and

• increases LDL and HDL cholesterol particle size.

Life’sDHA™ is sold as an ingredient to supplement manufacturers. Neuromins^® is a Martek supplement brand which contains life’sDHA™. The Neuromins^® brand is sold directly by Martek as well as distributed and sold under license by several leading supplement manufacturers and can be found nationwide. We are currently marketing food and beverage and animal feed applications to both U.S. and international companies. Several egg producers, including Gold Circle Farms^®, are producing eggs and liquid eggs using our DHA. These eggs are sold in several grocery store chains in the U.S. and Europe. In addition, a variety of both domestic and international companies have launched foods or beverages that contain life’sDHA™.

We are aggressively pursuing further penetration of our DHA oils in the food and beverage market. We are in discussions with several companies in the food and beverage market to sell products containing our DHA oils for cognitive function, cardiovascular health and other applications. In addition, we have recently signed license and supply agreements with several major consumer food products companies that establish Martek, subject to certain exceptions, as their exclusive supplier of DHA for certain minimum periods of time. We, along with our customers, are developing other DHA delivery methods, including powders and emulsions, to facilitate further entry into the food and beverage market. Management believes that over the next few years, the food and beverage and dietary supplements markets will continue to expand and could ultimately represent a larger opportunity than infant formula.

Our sales of nutritional oils for products outside of infant formula or pregnancy and nursing uses were $7.6 million, $5.4 million and $4.0 million in fiscal 2006, 2005 and 2004, respectively.

CONTRACT MANUFACTURING

We provide contract manufacturing services at our Kingstree, South Carolina production facility. We began offering these services following our September 2003 acquisition of FermPro Manufacturing, LP, which had been providing third-party manufacturing services since the mid-1960’s. During this time period, the Kingstree personnel have developed an expertise in large-scale fermentation with many different microorganisms, including algae, bacteria, fungi and yeast.

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Martek’s Kingstree plant has approximately 500,000 liters of fermentation capacity designated for use in contract manufacturing with additional fermentation capacity available as required. Kingstree also has numerous types of recovery equipment which allow us to efficiently customize production processes and state-of-the-art microbiological and analytical laboratories which provide highly automated product testing capabilities. Our facilities are especially well-suited for the contracted production of enzymes, specialty chemicals, vitamins, agricultural specialties and intermediates.

Our contract manufacturing customers have ranged from relatively small specialty chemical companies without in-house production capabilities to very large, multinational pharmaceutical companies who require or prefer a distinct site for the manufacture of a particular product line.

Our contract manufacturing revenues were $14.8 million, $14.1 million and $13.9 million for the fiscal years ended October 31, 2006, 2005 and 2004, respectively.

MARTEK DETECTION PRODUCTS

We have identified, isolated and now sell powerful fluorescent dyes from various microalgae for use in drug discovery and diagnostic life science applications. Our fluorescence technology is a sensitive and direct method for detection of a specific binding event. The main advantages of fluorescence as a method of detection is that it is direct, fast, and relatively simple in that it does not require enzymatic steps for signal amplification or prolonged development times for signal measurement. Our fluorescent detection products include various fluorescent dyes used in protein detection, flow cytometry and high throughput screening. Our sales of advanced detection system products were less than $1 million in each of the last three years.

TECHNOLOGY

Martek discovers and develops proprietary products to improve human health and wellness. We leverage our knowledge of microalgae and other microorganisms and expertise in fermentation sciences and natural product isolation to develop commercially attractive, proprietary and environmentally sustainable sources of nutrients which have proven or emerging health benefits. These processes and use of the products derived from these processes form the basis of our intellectual property estate. Product development involves four major steps: discovery, process development and product formulation, product safety and efficacy evaluation, and scale-up and commercial production.

Discovery — Having identified an appropriate nutritional product target, Martek screens its large database of live and preserved, genetically diverse microalgal species to identify candidate microalgal producers. Martek’s culture collection consists of microalgal strains which have been isolated from nature by Martek’s scientists and those which have been obtained from both public and private culture collections. Martek’s culture collection also includes non-microalgal microbial species, which we believe may be increasingly important in the development of future products. Martek’s microorganisms have a range of physiological and biochemical characteristics which naturally produce many different lipids, carbohydrates and proteins. Promising candidates are further developed and screened for their ability to meet desired product requirements within the desired cost structure.

Process Development and Product Formulation — Commercial processes for production of candidate products are developed through application of sound scientific and engineering principles by Martek’s scientists and engineers. Martek’s processes consist of several basic steps including microbial culture inoculum germination and expansion, fermentation, and product isolation and purification. Martek’s scientists utilize a broad range of technical skills and state-of-the-art equipment of progressively larger scale to develop reproducible and economical processes. We apply standard industrial microbiological techniques to microorganisms, including classical strain development and culturing condition (growth medium composition, temperature, pH) manipulation to optimize product yield and productivity. Martek’s expertise in oil processing is broadly applicable to a number of nutrients which are lipid soluble. Finally, Martek develops suitable liquid and dry powder product forms to enable our customers to utilize our products in a broad range of desired consumer products. Martek’s has invested in extensive lab-scale and large pilot-scale fermentation and product recovery equipment to enable efficient and cost-effective product development and support on-going product cost reduction efforts.

While we do not utilize genetically-engineered microorganisms in the production of current commercial products, we may use genetic engineering technology for the production of future products at lower-cost or with improved functionality. For example, Martek successfully isolated the genes responsible for producing DHA in one commercial strain of microalgae, and is researching the use of these genes to produce low-cost seed oil DHA and LCPUFA products in transgenic terrestrial oilseed crops.

Product Safety and Efficacy Evaluation — In the course of product development, products undergo thorough safety testing and evaluation to assure our ability to reproducibly produce products which are safe and compliant with worldwide regulatory requirements. All commercial products are produced utilizing Good Manufacturing Practices (“GMP”) conditions appropriate for the intended food and beverage, supplement, or pharmaceutical market. The health benefits or efficacy of Martek’s products are tested and demonstrated utilizing appropriate preclinical animal models and human clinical studies. These studies are conducted by Martek, academic researchers and/or corporate partners affiliated with Martek. Martek is expanding its preclinical and clinical research capabilities in brain development, cognitive function and immune system health while continuing research in eye development, eye health and cardiovascular benefits. Results from these studies are used to establish and support product claims for market development.

Scale-up and Commercial Production. Successful exploitation of the unique characteristics of microalgae is in large measure dependent upon the availability of large-scale culturing technology. We have successfully scaled-up several strains of microalgae capable of producing large amounts of

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DHA heterotrophically using common organic nutrients and salts. Heterotrophic culturing of these DHA-producing microalgae at commercially viable levels enables significantly lower production costs to be achieved, which were not possible prior to our achievements.

Aspects of our technology for the heterotrophic growth of DHA-producing microalgae are the subject of many U.S. and international patents and patent applications. Martek employs a systematic process to identify, develop, prosecute and defend commercially-valuable intellectual property.

COLLABORATIVE AND LICENSING AGREEMENTS

We have entered into license agreements with 24 infant formula manufacturers, who collectively represent approximately 70% of the worldwide wholesale market for infant formula. Our licensees include infant formula market leaders Mead Johnson Nutritionals, Nestle, Abbott Laboratories, Wyeth and Royal Numico, each of whom is selling infant formula fortified with our nutritional oils. Under all of these agreements, we received up-front license fees and will receive either i) a flat rate price per kilogram upon the sale of our oils to our licensees, or ii) a transfer price on sales of our oils to our licensees plus ongoing royalties based on our licensees’ sales of infant formula products containing our oils. The most significant license agreements have remaining terms ranging from approximately 15 to 25 years, contain no future funding commitments on our part or that of our licensees, and, generally, may be terminated by our licensees upon proper notification, which , in certain cases, are short periods. In many license agreements, our licensees have the right to buy other sources of DHA and/ or ARA oils; however, if done so, the licenses must either make royalty payments to us upon the sale of the final infant formula product that contains the oils purchased from another source or pay us greater amounts, on a per unit basis, for the DHA or ARA that they purchase from us.

In May 2006, we entered into a long-term supply agreement with Mead Johnson Nutritionals, a leading worldwide infant formula producer and the largest infant formula manufacturer in the United States. Under the agreement, Martek will serve as the exclusive worldwide DHA and ARA supplier for all Mead Johnson infant formula products. The agreement provides for a ten-year term with certain rights for either party to terminate the arrangement after December 31, 2011. Martek has been supplying DHA and ARA to Mead Johnson for use in infant formula under a 25-year license agreement signed in 1992, which has been incorporated into the new agreement and remains in effect.

Under the terms of the licensing agreements, our licensees are responsible for obtaining all necessary regulatory approvals with respect to the use of these nutritional oils in infant formula products. Under each of our current license agreements, our licensees generally are obligated to indemnify us against product liability claims relating to our nutritional oils unless our nutritional oils do not meet agreed-upon specifications.

Under the terms of several of our license agreements, we are prohibited from granting a license to any party for the inclusion of our nutritional oils in infant formula with payment terms or royalty rates that are more favorable to such licensee than those provided in our agreements with our current licensees without either the prior written consent of the current licensees or prospectively offering such new favorable terms to these licensees. This restriction does not apply to any lump sum payments to us pursuant to a territorially restricted license under which the reduced payment is reasonably related to the reduced marketing opportunities available under such a restricted license.

We have provided an exclusive license to Advanced BioNutrition Corp. (“ABN”), a start-up company founded by a former officer of Martek, to sell certain ARA byproducts as aquaculture feed. This license and supply agreement has a term of three years and requires ABN to purchase all such ARA byproducts produced by us, up to a certain maximum. In addition, in August 2004, we granted ABN an exclusive license in the aquaculture field and non-exclusive license in the animal nutrition field for the sale of DHA. This agreement also has a term of three years and provides for certain minimum inventory purchases from Martek. We recognized revenues of approximately $1.0 million, $800,000 and $600,000 in fiscal 2006, 2005 and 2004, respectively, from sales of products to ABN.

In fiscal 2005 and 2006, the Company entered into several license and supply agreements permitting the use of life’sDHA™ in various foods and beverages. Among other things, these 15-year agreements establish Martek, subject to certain exceptions, as the licensees’ exclusive provider of DHA for certain minimum periods of time. There are no minimum purchase requirements or other financial commitments to Martek under these agreements.

In fiscal 2004, we entered into an agreement with DSM Food Specialties’ B.V. (“DSM”) extending the existing relationship between the two companies involving the production and supply of ARA, one of our nutritional oils that we sell to our infant formula licensees. Among other things, this agreement provides for the grant to Martek by DSM of a license related to certain technologies associated with the manufacture of ARA. This grant involved a license fee totaling $10 million, which is being amortized over the 15-year term of the agreement using the straight-line method. The agreement with DSM also provides for the granting to DSM by us of an exclusive license under certain of our patents and intellectual property rights for the production by DSM of products containing ARA that are not for human consumption, including animal feed products. In addition, we and DSM have agreed to contribute our complementary resources to cooperative marketing and joint research and development efforts to expand the applications and fields of use for ARA, with both parties sharing any economic benefits of such efforts.

In December 2003, we entered into a collaboration agreement with a Canadian biotechnology company to co-develop DHA products from plants. This arrangement included the reimbursement of expenses incurred by the co-collaborator as well as the payment by us of potential royalties and additional milestone payment amounts if certain scientific results were achieved in the future. In January 2007, an amendment to this agreement was executed. Pursuant to the amendment, the co-collaborator will continue its research and development until June 2007, with expenses to be reimbursed by us through April 2007. Furthermore, we acquired exclusive license rights to the plant-based DHA technology developed by the co-collaborator for a period of at least 16 years. As consideration for this exclusive license, we will make a license payment of $750,000, with additional payments of up to $750,000 due in certain circumstances, subject to minimum royalties of 1.5% of gross margin, as defined, if we ultimately commercialize a plant-based DHA using any technology. During the term of the license, we may be required to pay additional royalties of up to 6.0% of gross margin, as

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defined, on sales of products in the future which utilize certain licensed technologies. At the amendment date, the respective milestones provided for in the original agreement had not been achieved, and no milestone payments specified in the original agreement have been or will be made.

We have also entered into various additional collaborative research and license agreements. Under these agreements, we are required to fund research or to collaborate on the development of potential products. As of October 31, 2006, we were not committed to fund any future development activities under these arrangements. Certain of these agreements also commit us to make payments upon the occurrence of certain milestones and pay royalties upon the sale of certain products resulting from such collaborations.

PRODUCTION

We manufacture oils rich in DHA at our fermentation and oil processing facilities located in Winchester, Kentucky, and Kingstree, South Carolina. We acquired the Winchester facility in 1995 and the Kingstree facility in 2003 through the acquisition of FermPro Manufacturing, LP. In 2005, we completed the extensive expansion at our Kingstree facility for the fermentation and processing of our nutritional oils and now have two fully redundant production facilities. The oils that we produce in these facilities are certified kosher by the Orthodox Union and are certified Halal by the Islamic Food and Nutrition Council of America. In addition, both manufacturing facilities have received a rating of “superior,” the highest possible rating, by the American Institute of Baking (“AIB”). In October 2006, we restructured our plant operations following a review of the Company’s current production and cost structure. Under the restructuring, a substantial portion of production formerly taking place in Winchester was transferred to Kingstree. The restructuring is expected to reduce manufacturing costs and operating expenses, starting in the first quarter of fiscal 2007, due to improved manufacturing efficiency and a reduction in our workforce at the Winchester site. We will maintain the essential redundancy of dual-plant manufacturing capacity in order to mitigate production risk and to meet future customer demand. We believe that we can bring the Winchester assets back to full production in a matter of months as required by customer demand.

Our ARA oils are purchased from DSM as manufactured at its Capua, Italy and Belvidere, New Jersey plants. In fiscal 2006, we received approximately one-half of our ARA from each of DSM’s facilities. Because DSM is a third-party manufacturer, we have only limited control over the timing and level of its Capua and Belvidere production volumes.

In February 2006, we and DSM entered into an amendment to the original agreement (“the Amendment”). The Amendment served to provide certain clarifying and updating language to the original agreement and to establish the overall economics associated with DSM’s expansion at both its Belvidere, New Jersey and Capua, Italy production facilities. We guaranteed the recovery of certain costs incurred by DSM in connection with these expansions, up to $40 million, with such amount being reduced annually through December 31, 2008 (the “Recoupment Period”) based upon ARA purchases by us in excess of specified minimum thresholds. As of October 31, 2006, the guarantee amount has been reduced to approximately $25.0 million. The guarantee amount payable, if any, at the end of the Recoupment Period, must be paid by January 31, 2009. The amount paid, if any, will be credited against a portion of DSM invoices for purchases made after the Recoupment Period. Annual ARA unit pricing under the agreement with DSM utilizes a cost-plus approach that is based on the prior year’s actual costs incurred adjusted for current year volume and cost expectations. Calendar 2006 ARA purchases have been valued by us based on amounts and unit prices invoiced by DSM. Certain issues, however, still need to be resolved in order to finalize 2006 ARA pricing. Absent a favorable resolution to us, our recorded cost of ARA will approximate, in all material respects, the agreed-upon amounts when negotiations with DSM are complete.

We have attempted to reduce the risk inherent in having a single supplier, such as DSM, through certain elements of our supply agreement with DSM. In connection with this agreement, we have the ability to produce, either directly or through a third party, an unlimited amount of ARA. The sale of such self-produced ARA is limited annually, however, to the greater of (i) 100 tons of ARA oil or (ii) any amounts ordered by us that DSM is unable to fulfill. We have demonstrated the ability to produce limited amounts of ARA in our plants. To further improve our overall ARA supply chain, we have directly engaged a U.S.-based provider of certain post-fermentation ARA manufacturing services. Along with our ARA downstream processing capabilities at Kingstree and Winchester, this third-party facility provides us with multiple U.S. sites for the full downstream processing of ARA.

When combining our current DHA production capabilities in Winchester and Kingstree with DSM’s current ARA production capabilities in Italy and the U.S., we have production capacity for DHA and ARA products in excess of $500 million in annualized sales to the infant formula, perinatal, food and beverage and dietary supplement markets. As such, our production capabilities exceed current demand; however, we have the ability to manage production levels and, to a certain extent, control our manufacturing costs. Nonetheless, when experiencing excess capacity, we may be unable to produce the required quantities of oil cost-effectively due to the existence of significant levels of fixed production costs at our plants and the plants of our suppliers.

The commercial success of our nutritional oils will depend, in part, on our ability to manufacture these oils or have them manufactured at large scale on a continuous basis and at a commercially acceptable cost. Our success will also be somewhat dependent on our ability to align our production with customer demand. There can also be no assurance that we will be able to successfully optimize production of our nutritional oils, or continue to comply with applicable regulatory requirements, including GMP requirements. Under the terms of several of our infant formula licenses, those licensees may elect to manufacture these oils themselves. We are currently unaware of any of our licensees producing our oils or preparing to produce our oils, and estimate that it would take a licensee a minimum of one year to implement a process for making our oils.

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SOURCES OF SUPPLY

Our raw material suppliers for production of DHA oil include major chemical companies and food and beverage ingredient suppliers. We have identified and validated multiple sources for each of our major ingredients and do not anticipate that the lack of availability of raw materials will cause future production shortages.

RESEARCH AND DEVELOPMENT

The primary focus of our research and development activities has been the development and optimization of manufacturing processes for our nutritional oils and the development of more economical and stable DHA products for the food and beverage market. We perform research and development at our Columbia, Maryland and Boulder, Colorado facilities as well as at our Winchester, Kentucky production plant. Our research and development expenditures in fiscal 2006 were mainly associated with development activity at the Columbia, Maryland lab directed toward improving the quality, sensory properties and stability of our nutritional oils, optimizing production characteristics of microalgal strains, investigating the clinical health benefits of DHA and ARA fatty acids, and exploring the biochemical pathways utilized by microalgae to produce DHA. Additional research and development expenses incurred at our Winchester facility were directed towards increasing our DHA production yields, improving our ability to ferment ARA, reducing waste and continuing to improve the overall quality of our oils. Research conducted at our lab in Boulder, Colorado is focused on developing feasible approaches to the expression of nutritional fatty acids, especially DHA, in plant oilseeds in connection with a Canadian-based collaborator, investigating the feasibility of utilizing our proprietary genes to produce other bioactive compounds with application in the health and wellness fields and developing new ingredient forms and applications technology for DHA-enriched food and beverage products. We incurred total research and development expense of approximately $24.8 million, $20.5 million and $18.6 million in fiscal 2006, 2005 and 2004, respectively.

SALES AND MARKETING

Our nutritional oils are marketed and sold primarily to the infant formula, dietary supplement and food and beverage industries. Infant formula manufacturers are required to purchase a license from us in order to use our DHA and ARA oils in infant formula. To date, we have entered into license agreements with 24 infant formula manufacturers who represent approximately 70% of the world’s wholesale infant formula market. Our licensees include infant formula market leaders Mead Johnson Nutritionals, Nestle, Abbott Laboratories, Wyeth and Royal Numico, each of whom is selling infant formula fortified with our nutritional oils. Due to the success of the fortified infant formula products, several of our licensees have also begun selling extension products beyond infant formula, which contain our oils and are targeted to children ages nine months to two years of age. In addition, Mead Johnson Nutritionals is selling a product in the United States, Expecta™LIPIL^®, which contains our DHA oil and targets pregnant and nursing women. Sciele Pharma, Inc. is selling a prescription prenatal supplement OptiNate™ containing life’sDHA™; Mission Pharmacal is selling a prescription prenatal supplement Citracal^® Prenatal + DHA containing life’sDHA™; Vincent Foods, LLC is selling Oh Mama! nutrition bars containing life’sDHA™; and NutraBella is selling Bellybar™ nutrition bars containing life’sDHA™, all of which target pregnant and nursing women.

Life’sDHA™ is sold as an ingredient to supplement manufacturers. Neuromins^® is a Martek supplement brand which contains life’sDHA™. The Neuromins^® brand is sold directly by Martek as well as distributed and sold under license by several leading supplement manufacturers and can be found nationwide. We are currently marketing food and beverage and animal feed applications to both U.S. and international companies. The following food and beverage products currently contain life’sDHA™ and are co-branded with the life’sDHA™ logo:

• Several egg producers, including Gold Circle Farms^®, are producing eggs and liquid eggs using life’sDHA™. These eggs are sold in several grocery store chains in the U.S. and Europe.

• Priégola is selling Simbi + Omega-3 yogurt with life’sDHA™, which is now available in major supermarket chains throughout Spain and is being marketed to children and adults for its brain health benefits.

• Odwalla, Inc. is selling Odwalla Soymilk and the Soy Smart™ Chai Soymilk drink, both of which feature life’sDHA™, in the U.S.

• Dynamic Confections recently re-formulated the Botticelli Choco-Omeg^® line of nutritional bars to include life’sDHA™. The bars are available at Canadian retailers.

• Flora, Inc. recently launched Udo’s Choice^® DHA Oil Blend, a flaxseed oil blend, containing life’sDHA™. Flora’s Udo’s Choice brand is a line of vegetarian, organic and sustainable health oils.

• Italian dairy company Latteria Merano/Milchhof Meran recently launched Mente Viva™ fortified drinkable yogurt with life’sDHA™. This product is available in supermarkets throughout Italy.

• Italian company Centrale Del Latte Di Brescia launched Sprintissimo™ fortified drinkable yogurt with life’sDHA™. This product is available in supermarkets throughout Italy.

• Life Science Nutritionals recently launched Nutri-Kids Nutrition-to-Go™ including life’sDHA™. This ready-to-drink milk product is available at select grocery and nutrition retailers in the U.S. and Canada.

• General Mills has introduced Yoplait Kids^® featuring life’sDHA™. This yogurt product will be available at U.S. retailers nationwide in mid-February 2007.

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We are aggressively pursuing further penetration of our DHA oils in the food and beverage market. We are in discussions with several companies in the nutritional and food and beverage markets to sell products containing our DHA oils for cognitive function, cardiovascular health and other applications. In addition, we have recently signed license and supply agreements with several major consumer food products companies that establish Martek, subject to certain exceptions, as their exclusive supplier of DHA for certain minimum periods of time. We, along with our customers, are developing other DHA delivery methods, including powders and emulsions, to facilitate further entry into the food and beverage market. Management believes that over the next few years, the food and beverage and dietary supplements markets will continue to expand and could ultimately represent a larger opportunity than infant formula.

Consumer marketing efforts are performed primarily by our customers although we play a supportive role. Our infant formula licensees market their DHA and ARA supplemented formulas directly to consumers and healthcare professionals. Our dietary supplement and food and beverage customers also create and implement their own advertising campaigns. We support these efforts through trade show participation and targeted direct mail campaigns as well as limited advertising and public relations campaigns.

In September 2006, we introduced a new brand name and logo and a new corporate logo and tagline. The purpose of this branding initiative is to support corporate partners in anticipation of product launches by accentuating Martek’s positive public image and increasing public awareness. Our flagship product is now called life’sDHA™ and includes the tagline “Healthy brain, eyes, heart” which is designed to be consumer friendly and to communicate the importance of DHA for health throughout life.

Our line of fluorescent detection products is designed for use in a wide range of drug discovery and research applications. These products are marketed to large pharmaceutical research institutions through distributors, such as PerkinElmer Life Sciences Products, Beckman Coulter and EMD Biosciences, who have entered into distribution agreements with us. Our distributors perform most of the marketing surrounding this product line. Recently, we have developed additional product extensions on currently distributed products. We also sell directly to the consumer through our website.

COMPETITION

The healthcare and biological sciences industries are characterized by rapidly evolving technology and intense competition. Our competitors include major pharmaceutical, chemical, specialized biotechnology and food and beverage companies, many of whom have financial, technical and marketing resources significantly greater than ours. In addition, many specialized biotechnology companies have formed collaborations with large, established companies to support research, development and commercialization of products and technologies that may be competitive with our products and technologies. Academic institutions, governmental agencies and other public and private research organizations are also conducting research and development activities that may be competitive with our products. These organizations are seeking patent protection and may commercialize products and technologies on their own or through joint ventures that are competitive with our products and technologies. The existence of products and technologies of which we are not aware, or those that may be developed in the future, may adversely affect the marketability of the products and technologies that we have developed.

Fish oil-based products currently dominate the adult DHA supplement market and certain foods containing fish oils are on the market in various parts of the world. DHA-containing fish oil for infant formula applications provides an alternative to our DHA nutritional oil and is used by certain of our licensees and other infant formula manufacturers outside the United States. In addition, in April 2006, the FDA notified the Ross Products Division of Abbott Laboratories that it had no questions at that time regarding Ross’ conclusion that DHA-rich oil from tuna and ARA-rich oil from Mortierella Alpina are safe as sources of DHA and ARA in term and post-discharge preterm infant formulas. While Ross Products has not announced any introduction of its oils into infant formula in the U.S. nor are we aware of any plans by them or any of our other licensees to do so, the GRAS notification removes a significant regulatory hurdle to the introduction of competitive products in the U.S. Fish oil is generally less costly than our DHA oil, and therefore presents a substantial competitive threat to our DHA product line. Although fish oil is generally a lower cost product relative to our DHA, it has odor, stability and taste characteristics that may limit its usefulness in food and beverage products. Several large companies, including BASF AG, DSM and Ocean Nutrition, and a number of smaller companies, manufacture microencapsulated fish oil products. Although microencapsulation of the oil resolves many of the odor, stability and taste issues found with fish oil, a microencapsulated product currently is more costly than regular fish oil. Because fish oil is generally less costly than our DHA oil and continues to improve in quality and gain general market acceptance, fish oil presents a substantial competitive threat.

Through our research efforts, we have developed and launched a new life’sDHA™ product with enhanced food and beverage formulation capabilities through better stability. We have also continued to refine our manufacturing processes in order to produce high levels of DHA and thereby reducing our DHA unit costs. These improvements and changes make our DHA more cost competitive with certain microencapsulated fish oils, on a price per DHA unit basis, but not on a total omega-3 basis.

Published reports have cited a number of fish oils as containing chemical toxins not present in our oils. In addition, we believe the combination of either fish oil or microencapsulated low- EPA fish oil with a microbial source of ARA for use in infant formula would likely infringe upon our patent position in several countries.

Reliant Pharmaceuticals is currently selling Omacor, a DHA/ EPA ethyl ester for treatment of hyperlipidemia. Omacor is a lipid-regulating agent which includes both EPA and DHA from fish oil. Reliant Pharmaceuticals has recently filed an application with the FDA for an indication that will expand the use of Omacor. Other pharmaceutical applications using omega-3 fatty acids may be expected.

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We believe that our nutritional oils have the following advantages over fish oil and other currently available sources of DHA and ARA for use in infant formula, as food and beverage ingredients, or as dietary supplements:

• our oils do not have the odor, stability, taste characteristics, or impurities that may limit the usefulness of DHA derived from unencapsulated fish oil;

• our oils can be blended in a variety of mixtures in precise ratios for specific applications, whereas the composition of fish oils may vary;

• each of our oils used in infant formula is comprised of a fatty acid blend that does not contain certain other fatty acids in significant quantities such as eicosapentaenoic acid (“EPA”), which may not be appropriate for consumption by infants.

• our oils do not contain substances found in certain fish oils such as methylmercury, polychlorinated biphenyls (“PCBs”), dioxins and other toxic contaminants;

• our oils have a higher oxidative stability and longer shelf life than fish oil and are, therefore, more amenable to the spray drying process required for powdered formula;

• our oils are not produced from animal sources and, therefore, should be more desirable for use in food and beverage products requiring vegetable-sourced DHA;

• our oils are produced from renewable, sustainable natural resources, unlike fish oil;

• our DHA and ARA-enriched oils are in an easily digestible triglyceride form similar to that found in breast milk, but different from the phospholipid form found in egg yolk lipids; and

• our oils can be produced in large quantities under controlled conditions satisfying strict regulatory scrutiny.

At this time, our oils are the only DHA and ARA oils used in infant formula in the U.S.

Suntory Limited, Cargill Inc., through a joint venture with a company in China, and other independent Chinese manufacturers are producing and distributing a fungal source of ARA. In addition, we are aware that there may be manufacturers in China attempting to produce an algal source of DHA, but we are uncertain of the overall status and commercial potential of these development efforts. Other companies, several with greater financial resources than ours, are developing plant-based DHA and other companies are developing chemically synthesized DHA.

Small amounts of DHA and ARA can be derived from egg yolk lipids, but DHA and ARA of this type are not in the same molecular form as that predominantly found in breast milk (i.e., phospholipid vs. triglyceride). DHA and ARA derived from egg yolks are currently being added to some brands of infant formula marketed by Royal Numico and several smaller companies. We believe that the processes to produce DHA and ARA from egg lipids are more costly than the processes that we use for producing DHA and ARA from microbial sources. Furthermore, the addition of DHA and ARA from egg yolks at levels equivalent to those found in human breast milk may result in dietary levels of lecithin and cholesterol in excess of those found in human breast milk.

In December 2005, Lonza Group LTD, a Swiss chemical and biotechnology group, acquired from Nutrinova Specialties & Food Ingredients GmbH, a wholly-owned subsidiary of Celanese Corporation, Nutrinova’s business having as its product a DHA-rich microalgal oil. Since the acquisition, Lonza has actively marketed its DHA oil to the food and beverage and dietary supplement markets in the United States, Europe and China. Both Nutrinova and Lonza are defendants in patent infringement actions involving our DHA patents that we have brought in both the United States and Germany. In October 2006, the infringement action in the United States was tried, and a verdict favorable to Martek was returned. The jury found that Lonza infringed all the asserted claims of three Martek patents and that these patents were valid. It also found that Lonza acted willfully in its infringement of one of these patents. The judge will now determine if any of the jury’s decisions were inappropriate as a matter of law, whether Martek is entitled to a permanent injunction against Lonza, and, if so, whether the permanent injunction should be stayed pending the outcome of any appeal. These lawsuits are further described in Item 3 of Part I of this Form 10-K, “Legal Proceedings.”

There may be other competitive sources of DHA and ARA of which we are not aware. The fact that many of the companies mentioned above are larger, more experienced and better capitalized than Martek raises the significant risk that these companies may be able to use their resources to develop less costly sources of DHA and ARA than our current technology permits.

Our competitive position will also depend on our ability to attract and retain qualified scientific and other personnel, develop effective proprietary products, implement production and marketing plans, obtain patent protection and secure adequate capital resources.

PATENTS, LICENSES AND PROPRIETARY TECHNOLOGY

We have received numerous patents protecting our nutritional products technology, including the fermentation methods of producing our DHA and ARA oils, as well as the blending and use of DHA and/ or ARA oils in infant formula. In 1994, we received a U.S. patent covering certain blends of a microbial oil enriched with DHA and a microbial oil enriched with ARA, as well as the use of such blends in infant formulas. In 1995, we received a U.S. patent covering a process for making an edible oil containing DHA and the edible oil made by such process as well as a U.S. patent covering an infant formula comprising a specified edible oil containing DHA. In 1996, we received two additional U.S. patents covering our nutritional oils

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technology. The first patent protects pharmaceutical compositions and dietary supplements comprising a single cell oil in concentrations of at least 20% DHA in a triglyceride form made using our method of producing DHA oil. The second patent clarifies that our patent coverage includes the blending, in infant formula and dietary supplements, of microbially derived ARA oil with low EPA fish oils. Fish oil is a potential competitive source of DHA to Martek’s algal-derived DHA oil. This patent makes it more difficult for low EPA fish oils to be combined with microbial sources of ARA oils in the U.S. without violating our patents. A U.S. patent was granted in 1997, which protects the production, use and sale of oils rich in ARA (30% or greater concentration). In 1998, a U.S. patent was issued protecting our DHA-rich algal biomass. DHA-rich algal biomass is the raw product of the DHA fermentation process and represents an inexpensive source of DHA that may potentially be a low cost product itself. We also have been awarded a number of foreign patents covering various aspects of our nutritional oils, including European patents covering our DHA and ARA-rich oils, as well as the blending of these oils for use in infant formula.

We also own patents and applications that cover algae fermentation processes, lipid extraction/purification, genomic-based approaches to lipid production, arachidonic acid production and use, animal feeding protocols, and food and beverage applications for PUFAs, as a result of the OmegaTech purchase in 2002. From 1992 to 2006, eight U.S. patents were issued to us covering the use of algae in the production of omega-3 PUFAs (e.g. DHA-S), and the use of such PUFAs in such products as human foods and beverages, animal feed, aquaculture and the resulting fortified meat, seafood, milk and eggs. Additional patent applications directed to this technology are still pending. From 1994 to 2006, eleven U.S. patents were issued covering the fermentation of microorganisms in low chloride fermentation medium. Small microorganisms, the use of such microorganisms in aquaculture, and the resulting products are also claimed. Additional patent applications covering this technology are still pending. From 1996 to 2004, six U.S. patents were issued covering the use and production of ARA using a variety of fungi. Additional patent applications covering this technology are still pending. Other U.S. patents have been issued and a number of patents are pending worldwide.

We are the exclusive licensee of two U.S. patents and numerous foreign patents and applications covering production, sale and use of our SensiLight™ fluorescent pigments.

Our success is dependent in part on our ability to obtain and maintain patent protection for our products, maintain trade secret protection and operate without infringing the proprietary rights of others. Our policy is to aggressively protect our proprietary technology through patents, where appropriate, and in other cases, through trade secrets. Additionally, in certain cases, we rely on the licenses of patents and technology of third parties. We hold approximately 69 U.S. patents, covering various aspects of our technology, which will expire on various dates between 2007 and 2023. Our core infant formula-related U.S. patents expire between 2011 and 2014. We have filed, and intend to file, applications for additional patents covering both our products and processes as appropriate. Currently, we have over 600 issued patents and pending applications worldwide. There can be no assurance that:

• any patent applications filed by, assigned to or licensed to us will be granted;

• we will develop additional products that are patentable;

• any patents issued to or licensed by us will provide us with any competitive advantages or adequate protection for inventions;

• any patents issued to or licensed by us will not be challenged, invalidated or circumvented by others; or

• issued patents, or patents that may be issued, will provide protection against competitive products or otherwise be commercially valuable.

Furthermore, patent law relating to the scope of claims in the fields of healthcare and biosciences is still evolving, and our patent rights are subject to this uncertainty. Our patent rights on our products therefore might conflict with the patent rights of others, whether existing now or in the future. Alternatively, the products of others could infringe our patent rights. The defense and prosecution of patent claims are both costly and time consuming, even if the outcome is ultimately in our favor. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease selling the affected products.

It is our corporate policy to vigorously protect our substantial investment in the research and development of our products and to continue to enforce our patent and other intellectual property rights against third parties who engage in the unauthorized manufacture, sale, or use of our technology.

We currently have several challenges to our European patents covering our DHA oils, ARA oils and DHA and ARA blended oils and these challenges as well as our lawsuit against others for infringement of our patents are described in Item 3 of Part I of this Form 10-K, “Legal Proceedings.” Total patent litigation costs were approximately $7.4 million in fiscal 2006, of which approximately $6.7 million related to our successful patent infringement litigation against Lonza and Nutrinova.

We expect that, in the future, as our nutritional oils continue to be commercialized, opposition to our intellectual property by our competitors will continue and most likely increase. We believe that additional challenges to our suite of U.S. patents may arise in the future. We will likely incur substantial costs in the future protecting and defending our patent and other intellectual property rights.

If we fail to maintain patent protection for our nutritional oils or our patents expire, it would have a material adverse effect on our ability to gain a competitive advantage for these oils and may have a material adverse effect on our results of operations, particularly future sales of our nutritional oils and future license fees related to sales of infant formula containing these oils. In particular, if we fail to maintain patent protection, it would permit our competitors to produce products that would be directly competitive with our nutritional oils using similar or identical processes, and it is possible that our current infant formula manufacturers under license or those which may be under license in the future may choose formula ingredients from these competitors if they choose to include the ingredients in their formulas at all.

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We also rely on trade secrets and proprietary know-how, which we seek to protect in part by confidentiality agreements with our collaborators, employees and consultants. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any such breach or that our trade secrets will not otherwise become known or be independently developed by competitors.

GOVERNMENT REGULATION AND PRODUCT TESTING

Our products and our manufacturing and research activities are subject to varying degrees of regulation by state and federal regulatory authorities in the United States, including the FDA pursuant to the Federal Food, Drug and Cosmetic Act (the “FDC Act”). The products developed by us are subject to potential regulation by the FDA as food and beverage ingredients, dietary supplements, drugs and/or medical devices. The regulatory status of any product is largely determined by its intended use.

Drugs and medical devices generally may not be marketed without first obtaining FDA authorization to do so. New infant formulas also are subject to premarket notification requirements. Although there are no premarket authorization requirements for whole foods per se, there are premarket approval requirements for food and beverage additives. Specifically exempt from the food additive definition and, therefore, the premarket approval requirements, are generally recognized as safe food and beverage ingredients. Dietary supplements for the most part are not subject to premarket authorization requirements, although there is a premarket notification requirement for certain new dietary ingredients that were not marketed as dietary supplements prior to October 1994. The FDA has established detailed GMP, labeling and other requirements for drugs, medical devices, infant formulas, foods and beverages and dietary supplements. The requirements for drugs, medical devices and infant formulas generally are much more stringent than the requirements for foods and beverages and dietary supplements.

Our infant formula licensees are responsible for obtaining the requisite regulatory clearances to market their products containing our oils. Sales of our products outside the United States are subject to foreign regulatory requirements that may vary widely from country to country.

In May 2001, the FDA completed a favorable review of our generally recognized as safe (“GRAS”) notification for the use of our DHASCO^® and ARASCO^® oil blend in specified ratios in infant formulas. Since the first product introduction in February 2002, supplemented infant formulas manufactured by four of our licensees, Mead Johnson Nutritionals, the Ross Products Division of Abbott Laboratories, Nestle and PBM Products Inc., have been sold in the United States. These supplemented infant formulas include term, preterm, soy-based, specialty and toddler products.

The FDA regulates the use and marketing of dietary supplements under the provisions of the Dietary Supplement Health and Education Act of 1994 (“DSHEA”). We are currently selling several lines of DHA dietary supplements. In addition, we are researching and developing new applications for our DHA and ARA oils. We believe that our DHA and ARA are not new dietary ingredients and, as such, are not subject to premarket notification requirements when marketed for use as dietary supplements. There can be no assurance that the FDA would agree that a premarket notification is not required or that we will be able to comply with the requirements of DSHEA or any regulations that the FDA may promulgate thereunder.

In June 2002, the Australia New Zealand Food Authority authorized the use of DHA-S oil for use as a Novel Food ingredient in Australia and New Zealand. In June 2003, the European Commission authorized the use of our DHA-S oil as a Novel Food ingredient in certain foods in the European Community. This Novel Food designation authorizes the use of our DHA-S as an ingredient in certain foods such as certain dairy products, including cheese and yogurt (but not milk-based drinks), spreads and dressings, breakfast cereals, food supplements and dietary foods for special medical purposes in the European Community. In February 2004, the FDA completed a favorable review of our GRAS notification for the use of DHA-S in food and beverage applications. In October 2006, Health Canada approved per serving levels of Martek’s DHA of not less than eight mg and not more than 100 mg of DHA when used as a food ingredient.

Our fluorescent detection and other products derived from microalgae are subject to potential regulation by FDA as either medical devices or as a combination medical device/drug product to the extent that they are used in the diagnosis, mitigation, treatment, cure or prevention of diseases. Such classification would subject the products to premarket clearances and/or regulatory approvals. There can be no assurances that we or our licensees or collaborators would be able to develop the extensive safety and efficacy data needed to support such FDA premarket authorizations or that the FDA ultimately would authorize the marketing of such products on a timely basis, if at all.

For potential pharmaceutical uses of products derived from microalgae, there can be no assurance that required clinical testing will be completed successfully within any specified time period, if at all, with respect to our products. Additionally, there is no assurance that we or our licensees or collaborators will be able to develop the extensive data needed to establish the safety and efficacy of these products for approval for drug uses, or that such drug products will not be subject to regulation as biological products or as controlled substances, which would affect marketing and other requirements.

Some of our products are in research or development phases. We cannot predict all of the regulatory requirements or issues that may apply to or arise in connection with our products. Changes in existing laws, regulations or policies and the adoption of new laws, regulations or policies could prevent us or our licensees or collaborators from complying with such requirements.

Due to the cost and time commitment associated with the FDA regulatory process, we will decide on a product-by-product basis whether to handle relevant clearance and other requirements independently or to assign such responsibilities to our licensees or future collaborative partners. There can be no assurance that we or our licensees or collaborators will be able to obtain such regulatory clearances, if required, on a timely basis or at all. Delays in receipt of, or failure to receive, such clearances, the loss of previously received approvals or clearances, or failure to comply with existing or future regulatory requirements would have a material adverse effect on our business, financial condition and results of operations.

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In connection with the manufacture of certain of our products, we are required to adhere to applicable current GMP regulations as required by the FDA. GMP regulations specify component and product testing standards, quality control and quality assurance requirements, and records and other documentation controls. The GMP requirements for foods and beverages, infant formulas, drugs and medical devices vary widely. As the manufacturer of DHA and ARA that are marketed as dietary supplements and used as food and beverage ingredients in infant formulas sold in the United States, we are subject to GMP and various other requirements applicable to food and beverage ingredients and dietary supplements. There can be no assurance that we will be able to continue to manufacture our nutritional oils in accordance with relevant food and beverage ingredient and dietary supplement requirements for commercial use. Ongoing compliance with GMP and other applicable regulatory requirements is monitored through periodic inspections by state and federal agencies, including the FDA and comparable agencies in other countries. A determination that we are in violation of such GMP and other regulations could lead to the imposition of civil penalties, including fines, product recalls or product seizures, and, in the most egregious cases, criminal sanctions.

As large scale manufacturing facilities, our plants in Winchester, Kentucky and Kingstree, South Carolina are required to abide by applicable federal and state environmental and safety laws, including regulations established by the Environmental Protection Agency (“U.S. EPA”) and the Occupational Safety and Health Administration (“OSHA”). In addition, our solvent extraction processes include the use of hexane, which is extremely flammable and subject to emission requirements. Ongoing compliance with environmental and safety laws is monitored by periodic inspections by the U.S. EPA and OSHA. If we fail to abide by these laws we could receive fines, or if the violations were serious enough, our operations could be shut down until the problems are fixed. Such penalties could have a material adverse effect on our ability to manufacture our nutritional oils, and our financial results could be negatively impacted. While the costs of our compliance with environmental laws and regulations cannot be predicted with certainty, such costs are not expected to have a material adverse effect on our earnings or financial or competitive position. See Item 3 of Part I of this Form 10-K, “Legal Proceedings,” for further discussion.

The Federal Trade Commission (“FTC”) regulates certain aspects of the advertising and marketing of our products. Under the Federal Trade Commission Act, a company must be able to substantiate both the express and implied claims that are conveyed by an advertisement. It is not uncommon for the FTC to conduct an investigation of the claims that are made about products in new and emerging areas of science that involve a potentially vulnerable population such as infants.

EMPLOYEES

As of October 31, 2006, we had 506 full-time employees, one of whom is an M.D. and 37 of whom have Ph.D.s. Approximately 119 employees are engaged in research and development activities, 245 are engaged in production or production development related activities and 142 are in administrative, business development and sales and marketing positions. We consider relations with our employees to be good. None of our employees is covered by a collective bargaining agreement.

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EXECUTIVE OFFICERS OF THE REGISTRANT

     Our executive officers are as follows:

Name	Age		Position
Steve Dubin		53	Chief Executive Officer and Director
David M. Abramson		53	President
Peter L. Buzy		47	Chief Financial Officer, Treasurer and Executive Vice President for Finance and Administration
Barney B. Easterling		61	Senior Vice President, Manufacturing
David M. Feitel		43	Senior Vice President and General Counsel
James H. Flatt, Ph.D.		47	Senior Vice President, Research
Peter A. Nitze		48	Chief Operating Officer and Executive Vice President

Mr. Dubin became Chief Executive Officer of Martek on June 30, 2006 after serving since September 2003 as President of Martek. Mr. Dubin joined Martek in 1992 and has served in various management positions, including CFO, Treasurer, Secretary, General Counsel and Senior Vice President of Business Development. In 2000, he moved to a part-time position of Senior Advisor — Business Development, a role he filled until his election to President of Martek in September 2003. He also spent time during 2000 through 2003 co-founding and co-managing a Maryland-based, angel-investing club that funds early-stage, high-potential businesses. He was also “Of Counsel” to the law firm Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. during part of 2001 and 2002. Prior to 1992, Mr. Dubin worked in the financing and management of early-stage businesses and, over a period of 12 years, served in various positions at Suburban Bank, now part of Bank of America, including Vice President and Treasurer of their venture capital subsidiary, Suburban Capital Corporation. Mr. Dubin received a B.S in accounting from the University of Maryland and a Juris Doctor degree from the George Washington University. Mr. Dubin is a Certified Public Accountant and a member of the Maryland Bar. Mr. Dubin has been a director of Martek since July 2006. His term expires in 2009.

Mr. Abramson joined Martek in 2003 as head of Corporate Development and was elected President in September 2006. Prior to joining Martek, he was the Executive Vice President and General Counsel for U.S. Foodservice from 1996 to 2003. In this position, Mr. Abramson oversaw the legal and regulatory affairs of U.S. Foodservice, a large foodservice distributor in the United States, and advised on business development opportunities for this company. U.S. Foodservice became a subsidiary of Royal Ahold in 2000. In addition, Mr. Abramson was also the Executive Vice President for Legal Affairs at Ahold, U.S.A. from 2000 to 2003. Mr. Abramson also served on the Board of Directors of U.S. Foodservice from 1994 to 2003. Prior to joining U.S. Foodservice, from 1983 until 1996, Mr. Abramson was a partner at Levan, Schimel, Belman & Abramson, P.A., now a part of Miles & Stockbridge P.C. Mr. Abramson graduated from George Washington University in 1975, where he obtained a Bachelors of Business Administration in accounting. He received his Juris Doctor degree, with honors, from the University of Maryland School of Law in 1978. Mr. Abramson is a member of the Maryland Bar.

Mr. Buzy joined Martek in 1998 as Chief Financial Officer. Prior to joining Martek, Mr. Buzy spent 13 years with the accounting firm of Ernst & Young LLP, most recently as an audit partner in the Northern Virginia High Technology/Life Sciences Practice. Mr. Buzy is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants. He received his B.S. in accounting from Salisbury University.

Mr. Easterling joined Martek in 2003 in connection with Martek’s acquisition of FermPro Manufacturing, LP (“FermPro”). With the acquisition, he was named Vice President of Manufacturing of Martek, and in March 2004, he was elected to the position of Senior Vice President of Manufacturing. From 1994 to 2003, Mr. Easterling served as President and CEO of FermPro, a provider of contract fermentation services with a workforce of over 100 personnel. From 1980 to 1994, Mr. Easterling served in various management capacities for Gist-Brocades. He received a B.S. in premedicine from Clemson University.

Mr. Feitel joined Martek in 2004 as Associate General Counsel and was elected to the position of Senior Vice President and General Counsel in December 2006. From 2003 until joining Martek, he practiced law at Miles & Stockbridge P.C., where he had started his legal career in 1988. From 2000 to 2003, Mr. Feitel was the Vice President and General Counsel of BCE Emergis, an eCommerce service provider and a subsidiary of Bell Canada. Prior to BCE Emergis, Mr. Feitel worked for the Discovery Group, a Columbus, Ohio-based venture capital company, from 1997 through 2000. Mr. Feitel received his undergraduate degree from Duke University and his Juris Doctor from the Duke University School of Law in 1988.

Dr. Flatt joined Martek in 2002 as Senior Vice President, Research and Development. Prior to joining Martek, Dr. Flatt was the Vice President of Research and Development for OmegaTech, Inc., a DHA producer in Boulder, Colorado that was acquired by Martek in April 2002. In his position with OmegaTech, Dr. Flatt managed all corporate research and development, including discovery, ingredient technology, food and analytical sciences and process development. Prior to joining OmegaTech in 2000, Dr. Flatt held a position at Procter & Gamble and was Vice President of Fermentation and Process Research for the Kelco division of Merck, where he led the development and commercialization of several major new products and processing technologies. Dr. Flatt is the author of six patents and numerous professional papers. He received his B.S. in chemical engineering from the Massachusetts Institute of Technology, his M.S. in chemical engineering from the University of California — Berkeley, and his Ph.D. in chemical and biochemical engineering from the University of Wisconsin — Madison.

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Mr. Nitze joined Martek in 2005 as Chief Operating Officer. Prior to joining Martek, Mr. Nitze served as Vice President of Operations at DRS Technologies, with responsibility for the alignment and deployment of the company’s manufacturing and supply chain resources. Before joining DRS Technologies, Mr. Nitze served as the Chief Operating Officer of Regulatory DataCorp, a New York City firm that provides risk management services to financial services institutions, from July 2002 to April 2004. Prior to joining Regulatory DataCorp, Mr. Nitze was the business leader of the Optoelectronics venture at Honeywell International from February 2000 to November 2001, where he had previously served as the head of global operations for the Amorphous Metals division. Mr. Nitze began his career at General Electric Co. in finance and subsequently held a variety of positions in engineering, marketing, supply chain and operations management. Mr. Nitze has over 20 years of operations and general management experience with small, medium and large companies. He holds two M.S. degrees in engineering from Stanford University and a B.A. degree from Harvard University.

COMPANY

Martek was incorporated in Delaware in 1985. Martek’s principal executive offices are located at 6480 Dobbin Road, Columbia, Maryland 21045. Our telephone number is (410) 740-0081 and our website address is http://www.martek.com. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports available on our website free of charge as soon as practicable after we file with the SEC.

Financial information prepared in accordance with U.S. generally accepted accounting principles, including information about revenues from customers, measures of profit and loss, total assets, financial information regarding geographic areas and export sales, can be found in our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

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ITEM 1A. RISK FACTORS.

Investing in our securities involves a high degree of risk. Before making an investment decision, you should carefully consider the risk factors set forth herein, as well as other information we include in this report and the additional information in the other reports we file with the Securities and Exchange Commission (the “SEC” or the “Commission”). If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our securities could decline and you could lose all or part of your investment.

A substantial portion of our nutritional oil products sales is made to four of our existing customers under agreements with no minimum purchase requirements. If demand by these customers for our nutritional oil products decreases, our revenues may materially decline.

We rely on a substantial portion of our product sales to four of our existing customers. Approximately 83% of our product sales revenue during the year ended October 31, 2006 was generated by sales of DHA and ARA to four customers: Mead Johnson Nutritionals, Abbott Laboratories, Nestle and Wyeth. We cannot guarantee that these customers will continue to demand our nutritional products at current or predictable levels. None of our license agreements requires our licensees to purchase any minimum amount of products from us now or in the future, and certain of our license agreements can be terminated within short periods and also allow our licensees to manufacture our products themselves or purchase nutritional oils from other sources. We have limited visibility into our customers’ future actual level of demand, notwithstanding our view of consumer demand. If demand by any of our significant customers for our nutritional products decreases, we may experience a material decline in our revenues. Furthermore, if purchasing patterns by our significant customers continue to be uneven or inconsistent, we will likely experience significant fluctuations in our quarter-to-quarter revenues. In addition, if these customers attempt to utilize their purchasing power in order to receive price reductions on our products, we may be unable to maintain prices of our oils at current levels, which could materially affect future revenues and product margins.

We are aware of several products that are currently available, and products under development, that may present a serious competitive threat to our products. If we are unable to maintain a competitive differentiation from these products, our revenues may be adversely affected.

Our continued success and growth depends upon achieving and maintaining a superior competitive position in the infant formula, supplement and food and beverage product markets. Many potential competitors, which include companies such as BASF AG, Ocean Nutrition, DSM, Cargill Inc., Suntory Limited, Celanese Corporation, Archer Daniels Midland Company, Lonza Group LTD and Nagase & Co. Ltd., have substantially greater research and development capabilities, marketing, financial and managerial resources and experience in the industry. Some of these competitors are currently offering competing sources of DHA and ARA for use in the food and beverage and dietary supplement markets and for use in infant formula. If a competitor develops a better or less expensive product or technology, our competitors’ products gain widespread acceptance, our patents expire, or we lose our patents, the sales of our products may be materially adversely affected and our technologies rendered obsolete.

We are aware that other sources of DHA and ARA are or may be available, any of which could represent a competitive threat that could seriously harm our product sales. Specifically:

• The Ross Products Division of Abbott Laboratories, a significant Martek licensee and customer, filed a generally recognized as safe notification on January 2, 2002 seeking Food and Drug Administration (“FDA”) concurrence that its tuna oil source of DHA and its fungal source of ARA, as manufactured by Suntory, are generally recognized as safe when used as ingredients in infant formula. In April 2006, the FDA notified Ross Products that it had no questions at that time regarding Ross’ conclusion that DHA-rich oil from tuna and ARA-rich oil from Mortierella Alpina are safe as sources of DHA and ARA in term and post-discharge preterm infant formulas. While Ross Products has not announced any introduction of its oils into infant formula in the U.S. nor are we aware of any plans by them or any of our other licensees to do so, the GRAS notification removes a significant regulatory hurdle to the introduction of competitive products in the U.S. If Ross Products introduces such competitive products, we cannot be certain that the economic protection that we believe we have via existing patents, royalty requirements of license agreements and market factors will protect us from the financial impact of such product introductions.

• Reliant Pharmaceuticals is currently selling Omacor, a DHA/ EPA ethyl ester for treatment of hyperlipidemia. Omacor is a lipid-regulating agent which includes both EPA and DHA from fish oil. Reliant Pharmaceuticals has recently filed an application with the FDA for an indication that will expand the use of Omacor. Other pharmaceutical applications using omega-3 fatty acids may be expected.

• Suntory Limited, Cargill Inc., through a joint venture with a company in China, and other independent Chinese manufacturers are producing and distributing a fungal source of ARA. In addition, we are aware that there may be manufacturers in China attempting to produce an algal source of DHA, but we are uncertain of the overall status and commercial potential of these development efforts.

• Some infant formulas now on the market outside the United States, including those marketed by certain of Martek’s licensees, use DHA derived from other sources, such as fish oil or eggs.

• In December 2005, Lonza Group LTD, a Swiss chemical and biotechnology group, acquired from Nutrinova Specialties & Food Ingredients GmbH, a wholly-owned subsidiary of Celanese Corporation, Nutrinova’s business having as its product a DHA-rich microalgal oil. Since the acquisition, Lonza has actively marketed its DHA oil to the food and beverage and dietary supplement markets in the United States, Europe and China. Both Nutrinova and Lonza are defendants in patent infringement actions involving our DHA patents that we have brought in both the United States and Germany. In October 2006, the infringement action in the United States was tried, and a verdict favorable to Martek was returned. The jury found that Lonza infringed all the asserted claims of three Martek patents and that these patents were valid. It also found that Lonza acted willfully in its infringement of one of these patents. The judge will now determine if any of the jury’s decisions were inappropriate as a matter of law, whether Martek is entitled to a permanent injunction against Lonza, and, if so, whether the permanent injunction should be stayed pending the outcome of any appeal. These lawsuits are further described in Item 3 of Part I of this Form 10-K, “Legal Proceedings.”

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• Other companies, several with greater financial resources than ours, are developing plant-based DHA and other companies are developing chemically synthesized DHA.

• Several large companies, including BASF AG, DSM and Ocean Nutrition, and a number of smaller companies, manufacture microencapsulated fish oil products. Although microencapsulation of the oil resolves many of the odor, stability and taste issues found with fish oil, a microencapsulated product currently is more costly than regular fish oil. Fish oil-based products (i) are used as a DHA source by some infant formula companies, (ii) currently dominate the adult DHA supplement market and (iii) are included in certain foods on the market in various parts of the world. Because fish oil is generally less costly than our DHA oil and continues to improve in quality and gain general market acceptance, fish oil presents a substantial competitive threat.

If we are unable to obtain or maintain patent protection or if our patents do not provide protection against competitive products, our results of operations may be adversely affected.

Our success is dependent in part on our ability to obtain and maintain patent protection for our products, maintain trade secret protection and operate without infringing the proprietary rights of others. Our policy is to aggressively protect our proprietary technology through patents, where appropriate, and in other cases, through trade secrets. Additionally, in certain cases, we rely on the licenses of patents and technology of third parties. We hold approximately 69 U.S. patents, covering various aspects of our technology, which will expire on various dates between 2007 and 2023. Our core infant formula-related U.S. patents expire between 2011 and 2014. We have filed, and intend to file, applications for additional patents covering both our products and processes as appropriate. Currently, we have over 600 issued patents and pending applications worldwide.

There can be no assurance that (i) any patents issued to or licensed by us will provide us with any competitive advantages or adequate protection for inventions; (ii) any patents issued to or licensed by us will not be challenged, invalidated or circumvented by others; or (iii) issued patents, or patents that may be issued, will provide protection against competitive products or otherwise be commercially valuable. Furthermore, patent law relating to the scope of claims in the fields of healthcare and biosciences is still evolving, and our patent rights are subject to this uncertainty. European and United States patent authorities have not adopted a consistent policy regarding the breadth of claims allowed for health and bioscience patents. Our patent rights on our products therefore might conflict with the patent rights of others, whether existing now or in the future.

In certain competitive geographic markets, we do not have patent protection and may be unable to obtain it. In other competitive markets, we may be unable to maintain the patent protection for our nutritional oils currently afforded to us. A lack of patent protection would have a material adverse effect on our ability to gain a competitive advantage for these oils and may have a material adverse effect on our results of operations, particularly future sales of our nutritional oils. In particular, a lack of patent protection would permit our competitors to manufacture products that would be directly competitive with our nutritional oils using similar or identical processes, and it is possible that our current infant formula or food and beverage licensees or those which may be under license in the future may choose ingredients from these competitors if they choose to include the ingredients at all.

A number of our competitors have challenged our patents, particularly in Europe:

• Aventis S.A. and Nagase & Co. Ltd. are challenging our European patent covering our DHA-containing oils. At a hearing in October 2000, the Opposition Division of the European Patent Office (“EPO”) revoked our patent on the grounds that it was not novel. We immediately appealed this ruling, and in July 2002 we received a positive ruling from an Appeal Board of the EPO, setting aside the prior decision to revoke this patent. The patent was returned to the Opposition Division for a determination as to whether it has met the legal requirement of “inventive step”. A hearing in August 2005 resulted in a ruling by the Opposition Division that this requirement had been met and the validity of the patent was upheld. Aventis appealed the decision to the Appeal Board of the EPO. Martek filed its answer to Aventis’ grounds for appeal in July 2006. The appeal process is not expected to be completed before the second half of 2007. Claim one of this patent is the basis of the patent infringement suit against Nutrinova and Lonza in Germany, discussed below.

• With respect to our ARA patent issued by the EPO, BASF AG, Friesland Brands B.V., and Suntory Limited filed their grounds for opposing this patent with the Opposition Division of the EPO. At a hearing at the Opposition Division in April 2005, the Opposition Division of the EPO upheld the patent in a form containing modified claims that are narrower than the claims originally granted. In an effort to broaden the claims of the patent, we appealed the decision. Suntory and BASF have also appealed. Friesland Brands B.V. has withdrawn from the opposition. The patent in the form containing the claims that were originally granted will remain in full force and effect throughout the appeal process. The appeal process is not expected to be completed until late 2007 or early 2008. Further, in order to broaden the scope of protection, Martek has pending patent applications and intends to pursue new patent applications which would be based on the existing patent. These pending and new applications, if granted, would provide important additional protection. If the patent in the narrower form approved by the Opposition Division is ultimately upheld and certain pending and new related patent applications are not granted with the desired claim scope, it is likely that Martek’s European intellectual property position with respect to ARA would not afford much competitive protection.

• With respect to our blended oil (blend of DHA and ARA oils for use in various applications, including infant formula) patent issued by the EPO, BASF AG and Suntory Limited filed their grounds for opposing this patent with the Opposition Division of the EPO. In November 2004, the Opposition Division of the EPO revoked Martek’s European blended oil patent as a result of these challenges. We immediately filed an appeal of this decision; as a consequence, the blended oil patent has been reinstated and will remain in full force and effect during the appeal. Both Suntory and BASF filed responses to our appeal. Further written submissions were filed by Martek in January 2007. A hearing before the Appeal Board of the EPO has been scheduled for February 2007. In the event that the Appeal Board rules against Martek and revokes the patent, that decision would be final. There would be no further recourse for Martek.

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• Prior to our purchase of OmegaTech, Aventis Research and Technologies GmbH & Co. KG, and Nagase Limited challenged OmegaTech’s European patent covering its DHA-containing oils. At a hearing in December 2000, the Opposition Division of the EPO upheld some of the claims and revoked other claims. OmegaTech immediately appealed this ruling, as did Aventis. At an appeal hearing in May 2005, we received a favorable decision from the Appeal Board of the EPO, which overturned the decision of the Opposition Division and returned the case to the Opposition Division for review on the merits of the patent claims. Any decision made by the Opposition Division can be appealed. Assuming an appeal, the review process is not expected to be completed until 2009, during which time the patent will remain in full force and effect.

• An EPO Opposition Division hearing was held on November 15, 2005, with respect to a European DHA patent acquired by Martek as part of the OmegaTech purchase. The patent was upheld in modified form. This patent is directed to processes for fermenting Thraustochytrium and Schizochytrium under low chloride conditions and the resulting products. Nutrinova Nutrition Specialities & Food Ingredients GmbH is the only opponent, and has appealed. The appeal process is not expected to be completed before late 2007.

• In September 2003, we filed a patent infringement lawsuit in the U.S. District Court in Delaware against Nutrinova Inc., Nutrinova Nutrition Specialties & Food Ingredients GmbH, Celanese Ventures GmbH, and Celanese AG. Celanese Ventures GmbH and Celanese AG were dropped from the lawsuit. In October 2006, after an almost two week trial in Wilmington, Delaware, the jury returned a favorable verdict to Martek, deciding that all three of the asserted Martek DHA patents were valid and infringed, and that one was willfully infringed. The judge will now determine if any of the jury’s decisions were inappropriate as a matter of law, whether Martek is entitled to a permanent injunction against Lonza, and, if so, whether the permanent injunction should be stayed pending the outcome of any appeal.

• We also filed a patent infringement suit involving Nutrinova Nutrition Specialties & Food Ingredients GmbH and Celanese Ventures GmbH in Germany in January 2004. The complaint alleges infringement of our European patent relating to DHA-containing oils. A hearing in this case was held in a district court in Dusseldorf in April 2005 and the court delayed its decision pending input from a court-appointed technical expert. The court’s decision is expected at some point in 2007. Lonza has also been added to this lawsuit.

• With respect to our ARA patent in South Korea, Suntory has filed an opposition. A hearing on the matter was held in late January 2006 and the Korean Intellectual Property Office Examiners have ruled against Martek. Martek has appealed. The appeal brief is due in February 2007. The patent will remain in full force and effect during the pendency of the appeal.

• Suntory has also initiated an invalidation case against our blended oil patent in South Korea. Our response to Suntory was filed in February 2005, Suntory responded in March 2006 and Martek filed further submissions in May 2006. A hearing was held in July 2006. A preliminary ruling was issued in October 2006, rejecting the fish oil plus microbial ARA claims, but finding the fish oil plus microbial ARA and DHA claims to be acceptable. The next ruling is expected in early 2007. The patent will remain in full force and effect during the pendency of the appeal process.

• There are additional intellectual property oppositions pending against Martek that are not considered material.

If any of the challenges described above or any other challenges to our patents that we do not currently consider material or that may arise in the future are successful, our competitors may be able to produce similar products and, as a result, we may experience decreases in the future sales of our nutritional oils. Specifically, the revocation of our European DHA patent, ARA patent or blended oils patent could result in a decrease in revenues under our license agreements. In addition, if our products are found to infringe on the intellectual property rights of others, we may have to pay substantial damages. Furthermore, it is our accounting policy to capitalize legal and related costs incurred in connection with patent applications and the defense of our patents. As of October 31, 2006, the net book value of our patent assets totaled $17.4 million, which includes approximately $9.2 million of costs incurred by us in defending our patents in the Nutrinova/ Lonza matter discussed above, which will be amortized over a period of approximately 7 years. If, in the future, it is determined to be unlikely that our patents will be successfully defended in connection with the challenges described above or if it is concluded that certain of our patents will no longer provide an economic benefit to the Company, a write-off of the costs ascribed to the particular patent or patents would be required. The effect of such write-off could be material to our results of operations.

We expect that in the future, as our nutritional oils continue to be commercialized, opposition to our intellectual property by our competitors will continue and most likely increase. We may incur substantial costs in the future protecting and defending our patents and cannot be sure that we will be able to successfully defend our patents or that our competitors will not be able to “design around” our intellectual property.

If clinical trials do not continue to yield positive results on the benefits of DHA on cognitive function, cardiovascular health or other health applications, our future revenues may be limited in the food and beverage and the dietary supplement markets.

During the years ended October 31, 2006 and 2005, approximately 3% of our product sales revenues came from sales of our nutritional oils for uses outside of the infant formula and pregnancy and nursing markets. Investigators at universities and at other research centers, such as NIH, have observed a relationship between low levels of DHA and a variety of health risks. We are currently trying to establish what contribution, if any, supplementation with our oils will make in addressing these problems. Although clinical data are not required to market food and beverage ingredients or dietary supplements outside of the infant formula market, we believe that further clinical studies may be needed to validate the benefits of DHA supplementation in order to gain widespread entry into these markets. If clinical trials do not continue to yield positive results on the benefits of DHA or if these benefits are not considered significant by our targeted consumers, our future revenues in these markets may be limited.

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If our oils are unable to be used in organic food and beverage products, the opportunity for sales of our oils into the food and beverage market will be limited to non-organic products.

The Organic Foods Production Act of 1990 required the U.S. Department of Agriculture (“USDA”) to develop national standards for organically produced agricultural products to assure consumers that agricultural products marketed as organic meet consistent, uniform standards. Accordingly, the USDA has put in place a set of national standards (the “National Organic Program” or “NOP”) that food labeled “organic” must meet, whether it is grown in the United States or imported from other countries. Under the NOP regulations, only a USDA-accredited certifying agent may make the determination that a food product may be labeled as organic. Martek is not a USDA-accredited certifying agent.

Some of our customers have obtained organic certification from USDA-accredited certifying agents and have received authorization to use the USDA’s organic seal on certain products which contain our oils. In some instances such products have been further reviewed and the authorization to use Martek’s oils has been explicitly ratified by the USDA. Because the NOP regulations are subject to change and interpretation, there can be no guarantee that our oils will be acceptable for use in all organic products. Organic food sales accounted for only 2.5% of the total U.S. food sales in 2005; however, we believe that interest from food manufacturers in producing and selling organic products is expanding. If our oils are ineligible for inclusion in some products that bear the USDA organic seal, our sales opportunity in the food and beverage market may be adversely impacted.

Because food and beverage pricing is very competitive, the premium that our oils adds to the cost of the food or beverage may never allow it to be priced at levels that will allow acceptance by consumers.

Food and beverage pricing is very competitive and the market is very sensitive to product price changes. Because the inclusion of our oils may add to the retail cost of these products, there is the risk that our potential customers in this market may not be able to sell supplemented products at prices that will allow them to gain market acceptance while, at the same time, remaining profitable. This may lead to price pressure on us. If we have to reduce our prices, we may not be able to sell our oils to the food and beverage market at a price that would enable us to sell them profitably.

If we are unable to gain broad approvals for the incorporation of our oils into foods and beverages worldwide, our future revenues in the food and beverage market may be limited.

In June 2002, the Australia New Zealand Food Authority authorized the use of DHA-S oil for use as a Novel Food ingredient in Australia and New Zealand. In June 2003, the European Commission authorized the use of our DHA-S oil as a Novel Food ingredient in certain foods in the European Community. This Novel Food designation authorizes the use of our DHA-S as an ingredient in certain foods such as certain dairy products, including cheese and yogurt (but not milk-based drinks), spreads and dressings, breakfast cereals, food supplements and dietary foods for special medical purposes in the European Community. In February 2004, the FDA completed a favorable review of our GRAS notification for the use of DHA-S in food and beverage applications. In October 2006, Health Canada approved per serving levels of Martek’s DHA of not less than eight mg and not more than 100 mg of DHA when used as a food ingredient.

With respect to our European Novel Food approval, we have been working to extend approval into additional food categories but thus far, we have been unsuccessful. We will continue efforts to extend food categories to which DHA-S oil can be added in Europe, but our ability to succeed in this regard is uncertain. Additionally, in 2006, we initiated efforts to register our oils in China for use in foods and beverages. The Ministry of Health in China reviewed our application and responded by requiring that additional work be performed by us prior to final review and approval. In other parts of the world, laws and regulations with respect to the addition of our oils into foods and beverages are diverse and our ability to gain the necessary regulatory approvals is unclear. If we are unable to gain broad approvals for the incorporation of our oils into foods and beverages worldwide, our future revenues in the food and beverage market may be limited.

If it is determined that large amounts of eicosapentaenoic acid (“EPA”) must accompany DHA in order to achieve optimal health benefits, we may never be able to gain large- scale entry into the food and beverage market.

The rationale for supplementing foods and beverages with DHA is to, in part, improve overall cardiovascular system and/or central nervous system development and health. In September of 2004, the FDA authorized a qualified health claim that may be utilized for food and beverage products containing both DHA and EPA relating to the reduction of risk of coronary heart disease. No minimum amounts for either DHA or EPA were established as prerequisites for the claim. Our DHA-S oil includes limited amounts of EPA and therefore products containing the DHA-S oil qualify for use of the qualified health claim. Studies have been completed in the past to investigate the independent effects of DHA and EPA on health and additional studies may be ongoing or conducted in the future. If the consensus of results from these studies establishes that relatively large amounts of EPA are required to be supplemented with DHA in order to achieve the optimal health benefit, then our penetration of the food and beverage market may be limited.

Our oils are very sensitive to oxidation and may not be very compatible with many liquid or dry foods that are currently on the market. If economical methods are not developed to successfully incorporate our oils into various food and beverage applications, we may never be able to gain large-scale entry into the food and beverage market.

Although we believe that the food and beverage market could be a large market for DHA fortification with our DHA-S oil, the potential in this market could be limited if methods are not developed that allow incorporation of the oil into various foods and beverages with acceptable flavor, odor and texture for the duration of the shelf life of the food and beverage products. While DHA-enriched food and beverage products with acceptable flavor and stability have been developed, risks exist for other finished food and beverage products, such as cereals, milk and certain types of nutritional bars for which DHA fortification has not yet been successfully established. Even if we can successfully incorporate our oils into foods and beverages, manufacturers of these products will have to develop methods to demonstrate feasibility in their production processes. The timing and extent of our

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sales into the food and beverage market, therefore, are dependent not only on market demand, but also on customer formulation and production issues over which we have little or no control.

We have a single third-party supplier of our ARA with whom we have a contractual relationship. If this supplier of our ARA is unable to supply us with our required amounts of ARA or if an over-capacity situation by our supplier leads to higher cost ARA, our results of operations and/or financial position may be adversely affected.

We have entered into an agreement with a third-party manufacturer, DSM, to supply us with ARA. Because DSM is a third-party manufacturer, we have only limited control over the timing and level of its Capua and Belvidere production volumes. If DSM fails to supply us with required amounts of ARA under our agreement, we would not be able to meet our customers’ demands unless we were able to utilize alternative sources of supply. In this regard, we would have to either manufacture the ARA at one or both of our plants, which may be more costly and would also reduce our DHA oil production capacity, or enter into other third-party manufacturer supply agreements, which we may not be able to do in a timely manner. Furthermore, due to certain contractual provisions, if our demand for ARA falls short of DSM’s supply capability, this excess capacity by our supplier will result in higher unit-based ARA costs to us. If we are unable to purchase or produce sufficient and/or cost-effective quantities of ARA, our future results of operations and/or financial position may be adversely affected.

As we and our major suppliers increase production of our nutritional oils, we may experience certain risks associated with the start-up/ ramp-up of commercial manufacturing that could have a material adverse effect on our business, financial condition, and/ or results of operations.

In 2005, we completed our extensive expansion in Kingstree for the fermentation and processing of our nutritional oils and DSM completed its ARA production expansion in Belvidere, New Jersey and Capua, Italy. When combining our current DHA production capabilities in Winchester and Kingstree with DSM’s current ARA production capabilities in Italy and the U.S., we currently have production capacity for all DHA and ARA products in excess of $500 million in annualized sales of our oils to the infant formula, dietary supplement and food and beverage markets. Our and DSM’s ability to maintain commercial production at these higher levels has not been successfully tested. Further, we may have periods of overcapacity because of potential excess supply versus customer demand.

As we and our major suppliers increase our production, we may encounter many risks associated with our commercial manufacturing such as:

• we may experience problems processing, handling and shipping the higher quantities of oil produced from our expanded facilities;

• the costs of expanding, operating and maintaining our production facilities may exceed our expectations;

• product defects may result;

• lower than anticipated fermentation success rates may result;

• lower downstream processing yields may result;

• environmental and safety problems may result from our production process; and

• regulatory issues relating to the scale-up and operation regarding our production processes may arise.

If we were to experience any one or more of these problems, there could be a material adverse effect on our business, financial condition, and/ or results of operations.

We have significantly increased our manufacturing capacity and have incurred substantial costs in doing so. If we are unable to increase our revenues from our nutritional oils produced at these facilities, we may continue to experience excess production capacity and we may be unable to recover these plant expansion costs, which could result in a write-down of certain production assets.

In connection with our efforts to alleviate supply constraints with our infant formula licensees and to prepare for other applications of our products, we expanded our internal production capacity and incurred significant expansion costs in doing so. Furthermore, in October 2006, the Company completed a restructuring of its plant operations which transferred to our Kingstree plant a substantial portion of production formerly taking place in Winchester. As of October 31, 2006, the Company had $90.7 million of production assets that are being held for future use. Our ability to recover the costs of these and certain other assets will depend on increased revenue from our nutritional oils produced at our facilities. There are no assurances that we will be able to achieve this goal. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” if it is estimated that we will not be able to ultimately recover the carrying amounts of the production assets, we would be required to record an asset impairment write-down. The effect of such write-down could be material. In addition, when experiencing excess capacity, we may be unable to produce the required quantities of oil cost-effectively, which could have a material adverse effect on our product margins and overall profitability.

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Failure to effectively manage our growth could disrupt our operations and prevent us from generating the revenues and gross profit margins we expect.

In response to current and expected demand for our nutritional oils, we have expanded our production capabilities. To manage our growth successfully we must implement, constantly improve and effectively utilize our operational and financial systems while expanding our production capacity and workforce. We must also maintain and strengthen the breadth and depth of our current strategic relationships while developing new relationships. Our existing or planned operational and financial systems may not be sufficient to support our growth; we may not successfully control production costs and maintain current and anticipated gross profit levels; and our management may not be able to effectively identify, manage and exploit existing and emerging market opportunities. If we do not adequately manage our growth, our business and future revenues will suffer.

Experts differ in their opinions on the importance of DHA and/or ARA in infant formula and the levels of DHA and/or ARA required to achieve health benefits for babies. Some experts feel that they are not necessary ingredients for infant development. If clinical trials do not continue to yield positive results, certain favorable regulatory guidelines are not enacted or current favorable regulatory guidelines are amended, our future revenues in the infant formula market may be limited.

Our continued success in the infant formula industry depends on sustained acceptance of our nutritional oils as necessary or beneficial additives to infant formulas. Notwithstanding existing clinical results that have demonstrated the beneficial effects of adding our nutritional oils to infant formula, some experts in the field of infant nutrition do not believe that our nutritional oils are necessary or that they provide any long-term beneficial effects. There have also been clinical studies where no beneficial effects have been found, possibly due to dose, duration or other factors. Experts generally recommend that mothers breastfeed rather than use infant formulas whether or not they contain our nutritional oils. Some experts also believe that infant formulas without our oils or with greatly reduced levels are sufficient as infants can convert precursor fats into DHA and ARA as needed. In addition, some physicians are unimpressed by studies showing that infant formulas fortified with our oils improve infants’ cognitive ability at early ages, suggesting that these results may not carry over to improved results later in life. Due to these differences in opinion, if clinical studies do not continue to yield positive results, our future revenues in the infant formula market may be limited.

Furthermore, a failure by one or more regulatory authorities to enact or maintain guidelines for minimum levels of DHA and/or ARA for supplementation of infant formula products could result in lower-potency formula products in specific affected countries which could reduce the market opportunity for DHA and ARA ingredients. Any regulatory guidelines for infant formula which permit inclusion of DHA and ARA ingredients containing higher levels of EPA than covered in Martek’s patents could also reduce the market opportunity for Martek’s DHA and ARA ingredients in affected countries.

Food Standards Australia New Zealand (“FSANZ”) has received an application from the Infant Formula Manufacturers Association of Australia and the New Zealand Infant Formula Marketer’s Association seeking to amend the regulations for infant and follow-on formula. The application requests removal of the requirement for formula to contain long-chain omega-6 fatty acids and omega-3 fatty acids in a ratio of approximately two to one when these products are added to formula. On May 31, 2006, FSANZ asked for comments on the application from outside groups to be submitted by August 11, 2006. FSANZ has stated that there are two options available for this application. One, maintain the status quo or, two, amend the regulation by removing the requirement for infant formula to contain omega-6 and omega-3 long-chain fatty acids in a ratio of approximately two to one, when long-chain fatty acids are added to these products. We submitted a statement supporting the status quo. The agency has taken no further action at this time.

Our opportunity in the U.S. infant formula market may be limited by the renewal rate of supplemented formulas into the Women, Infants and Children program or if the eligibility requirements for participating in the program are made more restrictive.

We estimate that of the total current annual U.S. market opportunity for sales of supplemented infant formula, approximately half represents Women, Infant and Children (“WIC”)-funded sales. WIC is a federal grant program that is state-administered for the benefit of low-income nutritionally at-risk women, infants and children. Most WIC state agencies provide only one brand of infant formula to its participants, depending on which company has the rebate contract in a particular state. Currently, WIC programs in 48 states and the District of Columbia offer term infant formula supplemented with our oils and WIC programs in all 50 states and the District of Columbia have adopted certain specialty infant formula products supplemented with our oils. If supplemented formulas are removed from WIC programs that previously adopted them, eligibility requirements for participating in WIC become more restrictive, or if any of our licensees fail to renew, in a timely fashion, their contract awards from WIC agencies for the adoption of a supplemented infant formula, then our future revenues from supplemented infant formula sales in the U.S. would be limited.

Our business would be harmed if we fail to comply with applicable good manufacturing practices as required by the FDA.

In connection with the manufacture of certain of our products, we are required to adhere to applicable current “good manufacturing practice” (“GMP”) requirements as required by the FDA. GMP regulations specify component and product testing standards, control quality assurance requirements and records and other documentation controls. As the manufacturer of DHA and ARA that are marketed as dietary supplements and used as ingredients in infant formulas sold in the United States and in food and beverages, we are subject to GMP and various other requirements applicable to such products. There can be no assurance that we will be able to continue to manufacture our nutritional oils in accordance with relevant dietary supplement and infant formula requirements for commercial use. Ongoing compliance with GMP and other applicable regulatory requirements is monitored through periodic inspections by state and federal agencies, including the FDA and comparable agencies in other countries. A determination that we are in violation of such GMP and other regulations could lead to an interruption of our production output and the imposition of civil penalties, including fines, product recalls or product seizures, and, in the most egregious cases, criminal sanctions.

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Our manufacturing process involves the handling of hazardous materials and emission of regulated waste. If we fail to properly handle these hazardous materials and/ or waste emissions, substantial costs and harm to our business could result.

In connection with our research and manufacturing activities, we utilize some hazardous materials and emit regulated waste. We are subject to federal, state and local laws and regulations governing the use, storage, handling, discharge and management of hazardous materials and waste products. The cost of compliance with these laws and regulations could be significant, and our ability to comply is somewhat dependent upon raw materials produced by others, over whom we have little or no control. Moreover, we could be subject to loss of our permits, government fines or penalties and/or other adverse governmental or private party action if such hazardous materials or waste products are used, stored, handled, emitted or otherwise managed in violation of law or any permit. In addition, we could be subject to liability if hazardous materials or waste are released into the environment. A substantial fine, penalty or judgment, the payment of significant environmental remediation costs or property or personal injury damages, or the loss of a permit or other authorization to operate or engage in our ordinary course of business could result in material, unanticipated expenses and the possible inability to satisfy customer demand for our nutritional oils.

We learned in March 2004 that the federal Environmental Protection Agency (“EPA”), utilizing personnel from its Criminal Investigation Division, had asked questions of current and former Martek employees relating to a March 12, 2003 explosion that occurred at a public wastewater treatment plant in Winchester, Kentucky and relating to n-hexane. Current and former employees have testified before a federal grand jury. We further learned in April 2005 that the EPA has interviewed two additional employees of Martek and has requested information from the Winchester Municipal Utilities Commission on a number of matters including the March 12, 2003 explosion.

Our corporate compliance program cannot guarantee that we are in compliance with all potentially applicable federal and state regulations.

Our business is subject to extensive federal and state regulation. Current products and products in development cannot be sold if we or our customers do not obtain or maintain regulatory approvals. While we have developed and instituted a corporate compliance program, we cannot assure you that we or our employees are or will be in compliance with all potentially applicable federal and state regulations. If we fail to comply with any of these regulations a range of actions could result, materially affecting our business and financial condition , including, but not limited to, the failure to approve a product candidate, restrictions on our products or manufacturing processes, including withdrawal of our products from the market, significant fines, or other sanctions.

Our business exposes us to potential product liability claims and recalls, which could adversely impact our financial condition or performance.

Our development, manufacture and marketing of products involve an inherent risk of exposure to product liability claims, product recalls, product seizures and related adverse publicity. In addition, as only a small amount of our oils resides in our customers’ end product, a recall of our oils could impact a much larger recall of our customers’ end products. Insurance coverage is expensive and difficult to obtain, and we may be unable to obtain coverage in the future on acceptable terms, if at all. Although we currently maintain product liability and recall insurance for our products in the amounts we believe to be commercially reasonable, we cannot be certain that the coverage limits of our insurance policies or those of our strategic partners will be adequate. If we are unable to obtain sufficient insurance at an acceptable cost, a product liability claim or recall could adversely impact our financial condition. Furthermore, if a product liability claim is made against us or if there is a product recall, whether fully covered by insurance or not, our future sales could be adversely impacted due to, among other things, an inability to effectively market our products.

We may need additional capital in the future to continue our research and development efforts, to conduct product testing, including preclinical and clinical trials, and to market our products. We may also need additional capital to expand our production capacity if market demand for our products continues to grow.

As of October 31, 2006, we had approximately $26.8 million in cash, cash equivalents and short-term investments as well as $99 million of our revolving credit facility available to meet future capital requirements. We may require additional capital to fund, among other things, our research and development, product testing, and marketing activities. Our ability to meet future demand may require even further expansion of our production capability for our nutritional oils, which would also require additional capital. The timing and extent of our additional cash needs will primarily depend on: (a) the timing and extent of future launches of infant formula products containing our oils by our licensees; (b) the timing and extent of introductions of DHA into foods and beverages and/or dietary supplements for children and adults; and (c) our ability to generate profits from the sales of our nutritional products.

To continue to fund our growth, we will pursue various sources of funding, which may include debt financing, equity issuances, asset-based borrowing, lease financing, and collaborative arrangements with partners. In September 2005, we amended and expanded our secured revolving credit facility to $135 million and extended the term until September 2010. This debt financing arrangement requires us to comply with financial covenants, which we may not be able to meet if demand for our products was to significantly decline, if there was a significant change in our financial position or if our cash needs are greater than we currently anticipate. Additionally, funding from other sources may not be available, or may not be available on terms that would be commercially acceptable or permit us to continue the planned commercialization of our products or expansion of our production capacity. In August 2004, our shelf registration statement was declared effective by the SEC. The shelf registration statement enables us to issue debt securities, preferred stock, common stock and warrants in the aggregate amount of up to $200 million, of which approximately $110 million is currently available for future issuance. Future equity issuances may be dilutive to our existing shareholders. If we obtain funds through collaborative or strategic partners, these partners may require us to give them technology or product rights, including patent rights, that could ultimately diminish our value. If we cannot secure adequate funding, we may need to scale back our research, development, manufacturing, and commercialization programs, which may have a material adverse effect on our future business.

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The market price of our common stock may experience a high level of volatility due to factors such as the volatility in the market for biotechnology stocks generally, and the short-term effect of a number of possible events.

We are a public growth company in the biosciences sector. As frequently occurs among these companies, the market price for our common stock may experience a high level of volatility. During the fifty-two week period ending October 31, 2006, our common stock traded between $37.22 and $20.15 per share. During the fifty-two week period ending October 31, 2005, our common stock traded between $70.50 and $28.20 per share. The following are examples of items that may significantly impact the market price for our common stock:

• announcements of technical innovations, new commercial products and product launches by us or our competitors;

• announcements of use of competitors’ DHA and/or ARA products by our customers;

• arrangements or strategic partnerships by us or our competitors;

• announcements of license agreements, acquisitions or strategic alliances;

• announcements of sales by us or our competitors;

• patent or other intellectual property achievements or adverse developments;

• quarterly fluctuations in our revenues and results of operations;

• failure to enter into favorable third-party manufacturing agreements;

• regulatory decisions (approvals or disapprovals) or changes concerning our products and our competitors’ products;

• events related to threatened, new or existing litigation, or the results thereof;

• changes in our estimates of financial performance or changes in recommendations by securities analysts; and

• general market conditions for growth companies and bioscience companies.

Because we may experience a high level of volatility in our common stock, you should not invest in our stock unless you are prepared to absorb a significant loss of your capital. At any given time, you may not be able to sell your shares at a price that you think is acceptable.

The market liquidity for our stock is relatively low. As of October 31, 2006, we had 32,156,162 shares of common stock outstanding. The average daily trading volume in our common stock during the fifty-two week period ending October 31, 2006 was approximately 800,000 shares. Although a more active trading market may develop in the future, the limited market liquidity for our stock may affect your ability to sell at a price that is satisfactory to you.

If significant shares eligible for future sales are sold, the result may depress our stock price by increasing the supply of our shares in the market at a time when demand may be limited.

As of October 31, 2006, we had 32,156,162 shares of common stock outstanding and stock options outstanding to purchase an aggregate of approximately 3.7 million shares of common stock. Of these options, approximately 3.4 million were exercisable at January 9, 2007, and approximately 900,000 had exercise prices that were below the market price on this date. Furthermore, we have filed a universal shelf registration statement with the SEC, which was declared effective in August 2004, pursuant to which we may issue debt securities, preferred stock, common stock and warrants to purchase debt securities, preferred stock or common stock in an aggregate amount of up to $200 million, of which approximately $110 million is currently available for future issuance. To the extent that these options for our common stock are exercised or we issue additional shares to raise capital, the increase in the number of our outstanding shares of common stock may adversely affect the price for our common stock. This could hurt our ability to raise capital through the sale of equity securities. If we continue to require additional outside sources of capital to finance, among other things, our research and development, product testing and the manufacturing and marketing of our products, we may need to raise additional capital through the sale of equity securities.

We have agreed to issue and register for resale up to 1,931,853 additional shares, to former OmegaTech stockholders and option holders pursuant to our Agreement and Plan of Merger with OmegaTech, if certain regulatory and financial milestones were achieved by October 31, 2004. The representative for these interest holders has asserted that shares related to two of these milestones should be issued, an assertion with which we do not agree. While we have not resolved this matter, a substantial number of these additional shares would be issued and become eligible for resale if it were determined that these two milestones were achieved. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market or the perception that these sales could occur, which could limit your ability to sell at a price satisfactory to you.

Changes in foreign currency exchange rates or interest rates could result in losses.

Our total purchase price of ARA from DSM’s Capua, Italy plant and a portion of the purchase price of ARA from DSM’s Belvidere, New Jersey plant are denominated in euros. Fluctuations in the euro-U.S. dollar exchange rate can adversely impact our cost of ARA oil and our gross margins. To reduce the risk of unpredictable changes in these costs, we may, from time to time, enter into forward foreign exchange contracts. However, due to the

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variability of timing and amount of payments under these contracts, the forward foreign exchange contracts may not mitigate the potential adverse impact on our financial results and in fact may themselves cause financial harm. We have entered into foreign currency forward contracts with outstanding notional values aggregating approximately 9.8 million euros at October 31, 2006. The terms of these contracts are from 30 to 120 days.

We are a defendant in a putative class action lawsuit which, if determined adversely, could have a material adverse affect on us.

We, our Chairman and former Chief Executive Officer and our Chief Financial Officer were named as defendants in putative class action lawsuits filed in the United States District Court for the District of Maryland. The District Court consolidated these lawsuits into one action. The consolidated complaint generally seeks recovery of unspecified damages for persons who purchased our shares during the period from December 9, 2004 through April 27, 2005. The complaint asserts claims under federal securities laws alleging that we and the individually named defendants made materially false and misleading public statements and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, concerning our business and prospects.

We are vigorously defending against the plaintiffs’ claims. At this stage, management is unable to predict the outcome or its ultimate effect, if any, on our financial condition. We expect that the costs and expenses related to this litigation could be significant. Although we have director and officer liability insurance policies (which, subject to the terms and conditions thereof, also provide “entity coverage” for us for this litigation) in place, we are responsible for certain costs and expenses relating to the lawsuits. Also, a judgment in or settlement of this action could exceed our insurance coverage. If we are not successful in defending this action, our business and financial condition could be adversely affected. In addition, whether or not we are successful, the defense of this action will divert the attention of our management and other resources that would otherwise be engaged in running our business.

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ITEM 2. PROPERTIES.

We lease an aggregate of approximately 64,000 square feet of laboratory, technical and administrative space in Columbia, Maryland. Our leases expire in January 2011.

We also lease an aggregate of approximately 19,000 square feet of laboratory, technical and administrative space in Boulder, Colorado. The lease expires in May 2008.

We own a fermentation and oil processing facility in Winchester, Kentucky where we can produce our nutritional oils. The facility is located on 35 acres and occupies approximately 130,000 square feet holding multiple fermentation vessels totaling 1.2 million liters of capacity.

We also own a fermentation and oil processing facility in Kingstree, South Carolina where we produce our nutritional oils and provide contract manufacturing services. The facility is located on more than 500 acres and occupies approximately 419,000 square feet currently holding multiple fermentation vessels totaling 2.8 million liters of capacity. Approximately 80% of the fermentation capacity is intended for the production of DHA and ARA with the remainder used for contract manufacturing.

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ITEM 3. LEGAL PROCEEDINGS.

Aventis S.A. and Nagase & Co. Ltd. are challenging our European patent covering our DHA-containing oils. At a hearing in October 2000, the Opposition Division of the European Patent Office (“EPO”) revoked our patent on the grounds that it was not novel. We immediately appealed this ruling, and in July 2002 we received a positive ruling from an Appeal Board of the EPO, setting aside the prior decision to revoke this patent. The patent was returned to the Opposition Division for a determination as to whether it has met the legal requirement of “inventive step”. A hearing in August 2005 resulted in a ruling by the Opposition Division that this requirement had been met and the validity of the patent was upheld. Aventis appealed the decision to the Appeal Board of the EPO. Martek filed its answer to Aventis’ grounds for appeal in July 2006. The appeal process is not expected to be completed before the second half of 2007. Claim one of this patent is the basis of the patent infringement suit against Nutrinova and Lonza in Germany, discussed below.

With respect to our ARA patent issued by the EPO, BASF AG, Friesland Brands B.V., and Suntory Limited filed their grounds for opposing this patent with the Opposition Division of the EPO. At a hearing at the Opposition Division in April 2005, the Opposition Division of the EPO upheld the patent in a form containing modified claims that are narrower than the claims originally granted. In an effort to broaden the claims of the patent, we appealed the decision. Suntory and BASF have also appealed. Friesland Brands B.V. has withdrawn from the opposition. The patent in the form containing the claims that were originally granted will remain in full force and effect throughout the appeal process. The appeal process is not expected to be completed until late 2007 or early 2008.

With respect to our blended oil (blend of DHA and ARA oils for use in various applications, including infant formula) patent issued by the EPO, BASF AG and Suntory Limited filed their grounds for opposing this patent with the Opposition Division of the EPO. In November 2004, the Opposition Division of the EPO revoked Martek’s European blended oil patent as a result of these challenges. We immediately filed an appeal of this decision; as a consequence, the blended oil patent has been reinstated and will remain in full force and effect during the appeal. Both Suntory and BASF filed responses to our appeal. Further written submissions were filed by Martek in January 2007. A hearing before the Appeal Board of the EPO has been scheduled for February 2007. In the event that the Appeal Board rules against Martek and revokes the patent, that decision would be final. There would be no further recourse for Martek.

Prior to our purchase of OmegaTech, Aventis Research and Technologies GmbH & Co. KG, and Nagase Limited challenged OmegaTech’s European patent covering its DHA-containing oils. At a hearing in December 2000, the Opposition Division of the EPO upheld some of the claims and revoked other claims. OmegaTech immediately appealed this ruling, as did Aventis. At an appeal hearing in May 2005, we received a favorable decision from the Appeal Board of the EPO, which overturned the decision of the Opposition Division and returned the case to the Opposition Division for review on the merits of the patent claims. Any decision made by the Opposition Division can be appealed. Assuming an appeal, the review process is not expected to be completed until 2009, during which time the patent will remain in full force and effect.

An EPO Opposition Division hearing was held on November 15, 2005, with respect to a European DHA patent acquired by Martek as part of the OmegaTech purchase. The patent was upheld in modified form. This patent is directed to processes for fermenting Thraustochytrium and Schizochytrium under low chloride conditions and the resulting products. Nutrinova Nutrition Specialities & Food Ingredients GmbH is the only opponent, and has appealed. The appeal process is not expected to be completed before late 2007.

We learned in March 2004 that the federal Environmental Protection Agency (“EPA”), utilizing personnel from its Criminal Investigation Division, had asked questions of current and former Martek employees relating to the March 12, 2003 explosion at the Winchester wastewater treatment plant and relating to n-hexane. Current and former employees have testified before a federal grand jury. We further learned in April 2005 that the EPA has interviewed two additional employees of Martek and has requested information from the WMU on a number of matters including the March 12, 2003 explosion. While we cannot be certain of the outcome of the EPA investigation, we believe that the outcome of the investigation will not have a material impact on our financial condition or results of operations.

In September 2003, we filed a patent infringement lawsuit in the U.S. District Court in Delaware against Nutrinova Inc., Nutrinova Nutrition Specialties & Food Ingredients GmbH, Celanese Ventures GmbH, and Celanese AG. Celanese Ventures GmbH and Celanese AG were dropped from the lawsuit. In October 2006, after an almost two week trial in Wilmington, Delaware, the jury returned a favorable verdict to Martek, deciding that all three of the asserted Martek DHA patents were valid and infringed, and that one was willfully infringed. The judge will now determine if any of the jury’s decisions were inappropriate as a matter of law, whether Martek is entitled to a permanent injunction against Lonza, and, if so, whether the permanent injunction should be stayed pending the outcome of any appeal.

We also filed a patent infringement suit involving Nutrinova Nutrition Specialties & Food Ingredients GmbH and Celanese Ventures GmbH in Germany in January 2004. The complaint alleges infringement of our European patent relating to DHA-containing oils. A hearing in this case was held in a district court in Dusseldorf in April 2005 and the court delayed its decision pending input from a court-appointed technical expert. The court’s decision is expected at some point in 2007. Lonza has also been added to this lawsuit.

With respect to our ARA patent in South Korea, Suntory has filed an opposition. A hearing on the matter was held in late January 2006 and the Korean Intellectual Property Office Examiners have ruled against Martek. Martek has appealed. The appeal brief is due in February 2007. The patent will remain in full force and effect during the pendency of the appeal.

Suntory has also initiated an invalidation case against our blended oil patent in South Korea. Our response to Suntory was filed in February 2005, Suntory responded in March 2006 and Martek filed further submissions in May 2006. A hearing was held in July 2006. A preliminary ruling was issued in October 2006, rejecting the fish oil plus microbial ARA claims, but finding the fish oil plus microbial ARA and DHA claims to be acceptable. The next ruling is expected in early 2007. The patent will remain in full force and effect during the pendency of the appeal process.

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On October 18, 2004, we filed a Declaratory Judgment Complaint in the United States District Court for the District of Maryland against Robert Zuccaro, as stockholders’ representative of the former security holders of OmegaTech, Inc. The complaint was brought to seek to resolve Mr. Zuccaro’s claim that the former OmegaTech security holders are owed 666,119 additional Martek shares under the Agreement and Plan of Merger by which we acquired OmegaTech because a milestone under that agreement was allegedly met. That milestone was to be triggered if a report issued by the Institute of Medicine of the National Academy of Science regarding the nutritional properties of DHA met criteria specified in the merger agreement. We asked the Court to declare that the report does not fulfill the requirements of the milestone and that we are not required to distribute any shares to the former security holders of OmegaTech. We filed a motion for summary judgment on March 10, 2006. The District Court granted our motion for summary judgment and dismissed the case on April 25, 2006 having found that the milestone has not been satisfied. On May 10, 2006, Mr. Zuccaro filed a notice of appeal and the appeal is now pending before the United States Court of Appeals for the Fourth Circuit. The matter has been fully briefed and we anticipate that the case will be argued in mid-2007.

On May 4, 2005, a putative class action lawsuit was filed in the United States District Court for the District of Maryland, against us and certain of our officers. Since then, several other putative class action lawsuits making similar allegations were filed against us and certain of our officers in the United States District Court of Maryland. The Court entered orders consolidating these cases, appointing lead plaintiffs and approving lead plaintiffs’ counsel and liaison counsel. On November 18, 2005, a consolidated amended class action complaint was filed in the United States District Court for the District of Maryland in In re Martek Biosciences Corp. Securities Litigation, Civil Action No. MJG 05-1224. While the Court has not made a determination of whether a putative class can be certified, the consolidated complaint claims to be filed on behalf of the purchasers of the Company’s common stock during a purported class period beginning December 9, 2004 and ending April 28, 2005. At this time, plaintiffs have not specified the amount of damages they are seeking in the actions. The consolidated complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5, promulgated thereunder, and violations of Section 11 and 15 of the Securities Act of 1933, as amended. The consolidated complaint alleges generally that we and the individual defendants made false or misleading public statements and failed to disclose material facts regarding our business and prospects in public statements we made or failed to make during the period and, in the case of the Securities Act of 1933 claims, in our January 2005 prospectus. We filed a motion to dismiss the consolidated complaint on February 3, 2006, and a hearing before the Court on this motion was held on May 22, 2006. On June 14, 2006, the Court denied our motion to dismiss and on July 25, 2006, the Court entered a scheduling order for further proceedings in the case. Subsequently, the parties stipulated to the dismissal of the claims arising under the Securities Act of 1933, leaving only the alleged violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 in the action. On September 20, 2006, the Court approved the dismissal of the 1933 Act claims. Additionally, on September 21, 2006, the Court approved the parties’ stipulation certifying a class to prosecute claims under the Securities Exchange Act of 1934. Subject to certain exceptions, the stipulated class generally consists of all persons who either (a) purchased Martek common stock during the period December 9, 2004 through April 28, 2005 (the “Class Period”), inclusive or (b) otherwise acquired, without purchasing, Martek common stock during the Class Period from a person or entity who purchased those particular shares of Martek stock during the Class Period.

In addition, from time to time, Martek is a party to additional litigation or administrative proceedings relating to claims arising from its operations in the normal course of business. Management believes that the ultimate resolution of any such additional litigation or administrative proceedings currently pending against Martek is unlikely, either individually or in the aggregate, to have a material adverse effect on Martek’s results of operations or financial condition.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The Company’s common stock is traded on the NASDAQ Stock Market under the symbol MATK. As of January 9, 2007, there were approximately 322 holders of record of the Company’s common stock. The price of the Company’s common stock was $23.83 on January 9, 2007. No cash dividends have been paid on the common stock and the Company does not anticipate paying any cash dividend in the foreseeable future. Dividend payments are restricted under the Company’s Amended and Restated Loan and Security Agreement dated September 30, 2005. The following table sets forth, for the calendar periods indicated, the range of high and low sales prices for the Company’s common stock as reported by NASDAQ:

Sales Price Range of Common Stock

Fiscal 2005	High		Low
November 1, 2004 — January 31, 2005	$	53.85	$	38.50
February 1, 2005 — April 30, 2005	$	70.50	$	32.00
May 1, 2005 — July 31, 2005	$	46.23	$	33.57
August 1, 2005 — October 31, 2005	$	52.48	$	28.20

Fiscal 2006	High		Low
November 1, 2005 — January 31, 2006	$	32.00	$	23.14
February 1, 2006 — April 30, 2006	$	37.22	$	27.56
May 1, 2006 — July 31, 2006	$	30.75	$	21.70
August 1, 2006 — October 31, 2006	$	30.84	$	20.15

No repurchases of common stock took place during fiscal 2006.

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ITEM 6. SELECTED FINANCIAL DATA.

The selected financial data set forth below with respect to the Company’s consolidated statements of income for each of the years in the three-year period ended October 31, 2006 and with respect to the consolidated balance sheets as of October 31, 2006 and 2005 are derived from the audited consolidated financial statements included elsewhere in this Form 10-K. The statements of operations data for each of the years in the two-year period ended October 31, 2003 and the balance sheet data at October 31, 2004, 2003 and 2002 are derived from audited financial statements not included in this Form 10-K.

The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes contained in this Form 10-K.

	Year ended October 31,
In thousands, except per share data	2006			2005		2004			2003			2002
Consolidated Statements of Operations Data
Revenues:
Product sales	$	255,838		$	203,765	$	170,565		$	112,298		$	46,055
Contract manufacturing sales		14,816			14,087		13,928			2,439			—
Total revenues		270,654			217,852		184,493			114,737			46,055
Cost of revenues:
Cost of product sales		144,457			120,865		103,423			66,347			29,794
Cost of contract manufacturing sales		14,676			12,516		11,570			2,192			—
Idle capacity costs		9,620			—		—			—			—
Total cost of revenues		168,753			133,381		114,993			68,539			29,794
Gross margin		101,901			84,471		69,500			46,198			16,261
Operating expenses:
Research and development (1)		24,823			20,468		18,596			13,154			12,188
Selling, general and administrative (1)		41,614			33,404		25,804			16,275			11,804
Restructuring charge		4,729			—		—			(250	)		1,266
Other operating expenses		1,158			7,654		4,000			1,943			406
Acquired in-process research and development		—			—		—			—			15,788
Total operating expenses		72,324			61,526		48,400			31,122			41,452
Income (loss) from operations		29,577			22,945		21,100			15,076			(25,191	)
Interest and other income (expense), net		(1,528	)		1,125		772			916			958
Income (loss) before income tax provision (benefit)		28,049			24,070		21,872			15,992			(24,233	)
Income tax provision (benefit) (1)		10,238			8,786		(25,176	)		—			—
Net income (loss)	$	17,811		$	15,284	$	47,048		$	15,992		$	(24,233	)
Net income (loss) per share, basic	$	0.55		$	0.49	$	1.62		$	0.63		$	(1.10	)
Net income (loss) per share, diluted	$	0.55		$	0.48	$	1.55		$	0.58		$	(1.10	)
Shares used in computing basic earnings per share		32,113			31,164		29,033			25,510			21,982
Shares used in computing diluted earnings per share		32,343			32,032		30,386			27,417			21,982
(1)   Includes the following amounts related to equity-based compensation expense:
Research and development		1,143			—		—			—			—
Selling, general and administrative		2,129			—		—			—			—
Income tax provision (benefit)		(1,194	)		—		—			—			—

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	October 31,
	2006			2005			2004			2003			2002
Consolidated Balance Sheets and Other Data
Cash, cash equivalents, short-term investments and marketable securities	$	26,828		$	33,347		$	42,650		$	96,971		$	22,419
Working capital		120,182			124,208			68,195			106,218			30,457
Total assets		600,846			578,485			501,398			295,523			124,312
Long-term debt, notes payable and other long-term obligations		46,277			66,115			97,175			10,441			—
Long-term portion of deferred revenue		9,335			8,959			9,140			8,992			2,246
Accumulated deficit		(31,425	)		(49,236	)		(64,520	)		(111,568	)		(127,560	)
Total stockholders’ equity		495,448			469,205			346,164			243,964			105,977
Cash dividends declared — common stock		—			—			—			—			—

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements concerning our business and operations, including, among other things, statements concerning the following:

• expectations regarding future revenue growth, gross margin and overall profitability;

• expectations regarding product introductions and growth in nutritional product sales;

• expectations regarding potential collaborations and acquisitions

• expectations regarding demand for products with our nutritional oils;

• expectations regarding sales to and by our infant formula licensees and supplemented infant formula market penetration levels;

• expectations regarding marketing of our oils by our infant formula licensees;

• expectations regarding continued interest by and agreements with food, beverage and supplement companies;

• expectations regarding growing consumer recognition of the key health benefits of DHA and ARA;

• expectations regarding competitive products;

• expectations regarding future efficiencies and improvements in manufacturing processes and the cost of production of our nutritional oils;

• expectations regarding future purchases of third-party manufactured oils;

• expectations regarding the amount of production capacity and our ability to meet future demands for our nutritional oils;

• expectations regarding the amount of inventory held by us or our customers;

• expectations regarding production capacity utilization and the effects of excess production capacity;

• expectations regarding future selling, general and administrative and research and development costs;

• expectations regarding future capital expenditures;

• expectations regarding levels of consumption through governmental programs of infant formula products containing our nutritional oils;

• expectations regarding possibly significant expenses to defend putative securities class action lawsuits alleging false and material misstatements and omissions of material facts concerning our business and prospects; and

• expectations regarding our ability to protect our intellectual property.

Forward-looking statements include those statements containing words such as the following:

• “will,”

• “should,”

• “could,”

• “anticipate,”

• “believe,”

• “plan,”

• “estimate,”

• “expect,”

• “intend,” and other similar expressions.

All of these forward-looking statements involve risks and uncertainties. They and other forward-looking statements in this Form 10-K are all made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We wish to caution you that our actual results may differ significantly from the results we discuss in our forward-looking statements. We discuss some of the risks that could cause such differences in Item 1A. Risk Factors in this report on Form 10-K and in our various other filings with the Securities and Exchange Commission. Our forward-looking statements speak only as of the date of this document, and we do not intend to update these statements to reflect events or circumstances that occur after that date.

GENERAL

Martek was founded in 1985. We are a leader in the innovation and development of omega-3 DHA products that promote health and wellness through every stage of life. We produce life’sDHA™ , a vegetarian source of the omega-3 fatty acid DHA (docosahexaenoic acid), for use in infant formula, perinatal products, foods and beverages and dietary supplements, and ARA (arachidonic acid), an omega-6 fatty acid, for use in infant formula. We sell oils containing these fatty acids as DHASCO^®, life’sDHA™, Neuromins^® and ARASCO^®. We derive DHA from microalgae and ARA from fungi, using proprietary processes. Cell membranes throughout the body contain these fatty acids, and they are particularly concentrated in the brain, central nervous system, retina and heart. Research has shown that DHA and ARA may enhance mental and visual development in infants. In addition, research has shown that DHA may play a pivotal role in brain function throughout life and may reduce the risk of cardiovascular disease. Low levels of DHA in adults have been linked to a variety of health risks, including Alzheimer’s disease and dementia. Further research is underway to assess the role of supplementation with our DHA on mitigating a variety of health risks. Additional applications of our patented technology based upon microalgae include our currently marketed fluorescent detection products that can be used by researchers as an aid in drug discovery and diagnostics.

In 1992, we realized our first revenues from license fees related to our nutritional oils containing DHA and ARA and sales of sample quantities of these oils. In 1995, we recognized our first product and royalty revenues from sales of infant formula containing these oils, and in 1996 we began to

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realize revenues from the sale of Neuromins^®, a DHA dietary supplement. In 2001, the FDA completed a favorable review of our generally recognized as safe notification for the use of our DHA and ARA oil blend in specified ratios in infant formula. We have entered into license agreements with 24 infant formula manufacturers, who collectively represent approximately 70% of the estimated $8.5 to $9.5 billion worldwide wholesale market for infant formula and nearly 100% of the estimated $3.0 to $3.5 billion U.S. wholesale market for infant formula, including the wholesale value of Women, Infant & Children program (“WIC”) rebates. WIC is a federal grant program administered by the states for the benefit of low-income, nutritionally at-risk women, infants and children. Our licensees include infant formula market leaders Mead Johnson Nutritionals, Nestle, Abbott Laboratories, Wyeth and Royal Numico, each of whom is selling infant formula fortified with our nutritional oils. Our licensees are now selling term infant formula products containing our oils collectively in over 30 countries and preterm infant formula products containing our oils collectively in over 60 countries around the world. Preterm infant formula products comprise less than 3% of the total infant formula market worldwide. Supplemented infant formulas manufactured by Mead Johnson Nutritionals, Abbott Laboratories, PBM Products and Nestle are currently being sold in the United States.

Martek has patented certain separate and distinct DHA technology, which we refer to as DHA-S, that is derived from a different algal strain than our DHA authorized for addition to infant formula. We have received authorization from both the European Commission and the Australia New Zealand Food Authority for the use of DHA-S oil as a Novel Food ingredient. This Novel Food designation authorizes the use of our DHA-S as an ingredient in certain foods such as certain dairy products, including cheese and yogurt (but not milk-based drinks), spreads and dressings, breakfast cereals, food supplements and dietary foods for special medical purposes in the European Community. We have also received a favorable review by the FDA of our GRAS notification for the use of DHA-S in food and beverage applications in the U.S. and have received similar approvals in Canada.

During the past three years, several new products were launched that contained life’sDHA™, including:

• Mead Johnson launched Expecta™ LIPIL^®, a DHA supplement for pregnant and nursing women containing life’sDHA™.

• PBM Products launched a beverage containing life’sDHA™ that is formulated for diabetics and people with atypical glucose tolerance.

• GlaxoSmithKline launched a second powdered drink mix containing life’sDHA™ in India. The product, Junior Horlicks, is formulated for a child’s developing brain and nervous system. GlaxoSmithKline had previously launched an adult DHA beverage.

• Sciele Pharma, Inc. launched OptiNate™ and Mission Pharmacal launched Citracal^® Prenatal + DHA. Both of these products are prescription prenatal supplements containing life’sDHA™.

• Vincent Foods, LLC is selling Oh Mama! nutrition bars containing life’sDHA™, which also target pregnant and nursing women.

• Several egg producers, including Gold Circle Farms^®, are producing eggs and liquid eggs using life’sDHA™. These eggs are sold in several grocery store chains in the U.S. and Europe.

• Priégola is selling Simbi + Omega-3 yogurt with life’sDHA ™, which is now available in major supermarket chains throughout Spain and is being marketed to children and adults for its brain health benefits.

• Odwalla, Inc. is selling Odwalla Soymilk and the Soy Smart™ Chai Soymilk drink, both of which feature life’sDHA™, in the U.S.

• Dynamic Confections recently re-formulated the Botticelli Choco-Omeg^® line of nutritional bars to include life’sDHA™. The bars are available at Canadian retailers.

• Flora, Inc. recently launched Udo’s Choice^® DHA Oil Blend, a flaxseed oil blend, containing life’sDHA™. Flora’s Udo’s Choice brand is a line of vegetarian, organic and sustainable health oils.

• Italian dairy company Latteria Merano/Milchhof Meran recently launched Mente Viva™ fortified drinkable yogurt with life’sDHA™. This product is available in supermarkets throughout Italy.

• Italian company Centrale Del Latte Di Brescia launched Sprintissimo™ fortified drinkable yogurt with life’sDHA™. This product is available in supermarkets throughout Italy.

• NutraBella is selling Bellybar™ nutrition bars containing life’sDHA™.

• Life Science Nutritionals recently launched Nutri-Kids Nutrition-to-Go™ including life’sDHA™. This ready-to-drink milk product is available at select grocery and nutrition retailers in the U.S. and Canada.

• General Mills has introduced Yoplait Kids^® featuring life’sDHA™. This yogurt product will be available at U.S. retailers nationwide in mid-February 2007.

These products are expected to generate additional revenue for us during fiscal 2007. In addition, during fiscal 2005 and 2006, we entered into license agreements with several large food and beverage companies which we expect to yield multiple launches of products containing life’sDHA™ and revenues to us beginning in the next 3 to 18 months.

For the years ended October 31, 2006, 2005 and 2004, we recognized approximately $17.8 million, $15.3 million and $47.0 million of net income, respectively, and as of October 31, 2006, our accumulated deficit was approximately $31.4 million. Although we anticipate future growth in annual sales of our nutritional oils, we are likely to continue to experience quarter-to-quarter and year-to-year fluctuations in our future operating results, some of which may be significant. The timing and extent of future oils-related revenues are largely dependent upon the following factors:

• the timing of infant formula market introductions by our customers both domestically and internationally;

• the timing of our customers’ production and ordering patterns;

• the timing and extent of stocking and destocking of inventory by our customers, including the potential that customers will move to “just in time” inventory purchasing now that we have reached a base finished goods inventory level;

• the timing and extent of our customers’ plant maintenance shutdowns;

• the timing and extent of introductions of DHA into various child and/or adult applications;

• the continued acceptance of products containing our oils under WIC programs in the U.S.;

• the continued acceptance of these products by consumers and continued demand by our customers;

• the ability by us and our third-party manufacturers to produce adequate levels of our nutritional oils on a consistent basis;

• our ability to protect against competitive products through our patents;

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• competition from alternative sources of DHA and ARA; and

• agreements with other future third-party collaborators to market our products or develop new products.

As such, the likelihood, timing and extent of future profitability are largely dependent on factors such as those mentioned above, as well as others, over which we have limited or no control.

MANAGEMENT OUTLOOK

At present, we estimate that infant formula supplemented with our oils has penetrated approximately 85% of the U.S. infant formula market. As such, our revenue growth in the U.S. infant formula market is slowing. International demand for supplemented formulas, however, is increasing, particularly in Asian markets, which should drive higher revenues for Martek. With respect to the food and beverage market, over the next several quarters, we anticipate more announcements of supply agreements with food companies that will position us for increased future sales of our oils. We also expect additional launches of products containing life’sDHA™ and increased sales in fiscal 2007 of our oils to food, beverage and supplement customers for products promoting cognitive function and cardiovascular health. Management believes that over the next few years, non- infant formula sales will continue to expand and could ultimately represent a larger opportunity than infant formula.

Absent a favorable resolution of our current negotiations with our third-party ARA supplier, our gross margins during much of fiscal 2007 will be negatively impacted by higher ARA costs. We expect, however, that the impact of ARA cost increases will be largely offset by the gross margin improvements resulting from the Company’s October 2006 plant restructuring. The restructuring is expected to reduce manufacturing costs and operating expenses due to improved overall manufacturing efficiency and a reduction in Martek’s workforce at its Winchester, Kentucky site. During fiscal 2007, we will continue to work with our third-party ARA supplier and pursue other strategies in efforts to improve future margins.

In fiscal 2007, we intend to invest heavily in our sales and marketing efforts, particularly in the food and beverage area, as we aggressively pursue this market. These costs, which are intended to accelerate growth in future years, will impact our results of operations in the coming year, but nonetheless, we expect increases to overall profitability in fiscal 2007 as compared with fiscal 2006.

PRODUCTION

We manufacture oils rich in DHA at our fermentation and oil processing facilities located in Winchester, Kentucky and Kingstree, South Carolina. In 2005, we completed the extensive expansion at our Kingstree facility for the fermentation and processing of our nutritional oils and now have two fully redundant production facilities. The oils that we produce in these facilities are certified kosher by the Orthodox Union and are certified Halal by the Islamic Food and Nutrition Council of America. In addition, both manufacturing facilities have received a rating of “superior,” the highest possible rating, by the American Institute of Baking (“AIB”). In October 2006, we restructured our plant operations following a review of the Company’s current production and cost structure. Under the restructuring, a substantial portion of production formerly taking place in Winchester was transferred to Kingstree. The restructuring is expected to reduce manufacturing costs and operating expenses, starting in the first quarter of fiscal 2007, due to improved manufacturing efficiency and a reduction in our workforce at the Winchester site. We plan to maintain the essential redundancy of dual-plant manufacturing capacity in order to mitigate production risk and to meet future customer demand. We believe that we can bring the Winchester assets back to full production in a matter of months as required by customer demand.

Our ARA oils are purchased from DSM as manufactured at its Capua, Italy and Belvidere, New Jersey plants. In fiscal 2006, we received approximately one-half of our ARA from each of DSM’s facilities, and in fiscal 2007, we expect to receive approximately 40% from Capua and 60% from Belvidere. Because DSM is a third-party manufacturer, we have only limited control over the timing and level of its Capua and Belvidere production volumes.

In February 2006, we and DSM entered into an amendment to the original agreement (“the Amendment”). The Amendment served to provide certain clarifying and updating language to the original agreement and to establish the overall economics associated with DSM’s expansion at both its Belvidere, New Jersey and Capua, Italy production facilities. We guaranteed the recovery of certain costs incurred by DSM in connection with these expansions, up to $40 million, with such amount being reduced annually through December 31, 2008 (the “Recoupment Period”) based upon ARA purchases by us in excess of specified minimum thresholds. As of October 31, 2006, the guarantee amount has been reduced to approximately $25.0 million. The guarantee amount payable, if any, at the end of the Recoupment Period, must be paid by January 31, 2009. The amount paid, if any, will be credited against a portion of DSM invoices for purchases made after the Recoupment Period. Annual ARA unit pricing under the agreement with DSM utilizes a cost-plus approach that is based on the prior year’s actual costs incurred adjusted for current year volume and cost expectations. Calendar 2006 ARA purchases have been valued by us based on amounts and unit prices invoiced by DSM. Certain issues, however, still need to be resolved in order to finalize 2006 ARA pricing. Absent a favorable resolution to us, our recorded cost of ARA will approximate, in all material respects, the agreed-upon amounts when negotiations with DSM are complete.

We have attempted to reduce the risk inherent in having a single supplier, such as DSM, through certain elements of our supply agreement with DSM. In connection with this agreement, we have the ability to produce, either directly or through a third party, an unlimited amount of ARA. The sale of such self-produced ARA is limited annually, however, to the greater of (i) 100 tons of ARA oil or (ii) any amounts ordered by us that DSM is unable to fulfill. We have demonstrated the ability to produce limited amounts of ARA in our plants. To further improve our overall ARA supply chain, we have directly engaged a U.S.-based provider of certain post-fermentation ARA manufacturing services. Along with our ARA downstream processing capabilities at Kingstree and Winchester, this third-party facility provides us with multiple U.S. sites for the full downstream processing of ARA.

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When combining our current DHA production capabilities in Winchester and Kingstree with DSM’s current ARA production capabilities in Italy and the U.S., we have production capacity for DHA and ARA products in excess of $500 million in annualized sales to the infant formula, perinatal, food and beverage and dietary supplement markets. As such, our production capabilities exceed current demand; however, we have the ability to manage production levels and, to a certain extent, control our manufacturing costs. Nonetheless, when experiencing excess capacity, we may be unable to produce the required quantities of oil cost-effectively due to the existence of significant levels of fixed production costs at our plants and the plants of our suppliers.

The commercial success of our nutritional oils will depend, in part, on our ability to manufacture these oils or have them manufactured at large scale on a continuous basis and at a commercially acceptable cost. Our success will also be somewhat dependent on our ability to align our production with customer demand. If market demand subsides due to our inability to meet demand for our products, our customers’ use of competing products or for any other reason, our results could be negatively impacted. There can also be no assurance that we will be able to successfully optimize production of our nutritional oils, or continue to comply with applicable regulatory requirements, including GMP requirements. Under the terms of several of our infant formula licenses, those licensees may elect to manufacture these oils themselves. We are currently unaware of any of our licensees producing our oils or preparing to produce our oils, and estimate that it would take a licensee a minimum of one year to implement a process for making our oils.

CRITICAL ACCOUNTING POLICIES AND
THE USE OF ESTIMATES

The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and judgments, which are based on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. By their nature, estimates are subject to an inherent degree of uncertainty and, as such, actual results may differ from our estimates. We believe that the following significant accounting policies and assumptions involve a higher degree of judgment and complexity than others.

Valuation of Long-lived Assets We review our long-lived assets, including fixed assets and certain identified intangibles, for impairment as events or changes in circumstances occur indicating that the carrying amount of the asset may not be recoverable. As of October 31, 2006, these long-lived assets had a total net book value of $376.9 million. Included in these long-lived assets are approximately $90.7 million of production equipment whose use is not currently required based on present customer demand. Undiscounted cash flow analyses are used to assess impairment. The estimates of future cash flows involve considerable management judgment and are based on many assumptions for each target market, including the food and beverage market. Such assumptions include market size, penetration levels and future product margins. While management believes that its projections are reasonable and that no impairment of these assets exists, different assumptions could affect these evaluations and result in material impairment charges against the carrying value of these assets.

Revenue Recognition We derive revenue principally from two sources: product sales and contract manufacturing. We recognize product sales revenue when persuasive evidence of an arrangement exists, the fee is fixed or determinable, collectibility is probable and the product is shipped thereby transferring title and risk of loss. Typical infant formula license contracts include an upfront license fee, a prepayment of product sales and established pricing on future product sales, which also may include discounts based on the achievement of certain volume purchases. In accordance with Emerging Issues Task Force No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF No. 00-21”), the consideration from these contracts is allocated based on the relative fair values of the separate elements. Revenue is recognized on product sales when goods are shipped and all other conditions for revenue recognition are met. If volume pricing discounts are deemed to be a separate element, revenue on related product shipments is recognized using the estimated average price to the customer over the term of the discount period, which requires an estimation of total production shipments over that time frame. Once the requisite volume thresholds have been satisfied, the previously recorded deferred revenue is recognized over the remaining discount period. Cash received as a prepayment on future product purchases is deferred and recognized as revenue when product is shipped. Revenue from product licenses is deferred and recognized on a straight-line basis over the term of the agreement. Royalty income is recorded when earned, based on information provided by our licensees.

Contract manufacturing revenue is recognized when goods are shipped to customers and all other conditions for revenue recognition are met. Cash received that is related to future performance under such contracts is deferred and recognized as revenue when earned.

Deferred Income Taxes We provide for income taxes in accordance with the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial reporting bases and the tax bases of assets and liabilities. We also recognize deferred tax assets for tax net operating loss carryforwards. These deferred tax assets and liabilities are measured using the enacted tax rates and laws expected to be in effect when such amounts are projected to reverse or be utilized. As of October 31, 2006, our total gross deferred tax asset was $59.7 million. The realization of total deferred tax assets is contingent upon the generation of future taxable income. When appropriate, we recognize a valuation allowance to reduce such deferred tax assets to amounts more likely than not to be ultimately realized. The calculation of deferred tax assets (including valuation allowances) and liabilities requires management to apply significant judgment related to such factors as the application of complex tax laws and the changes in such laws. We have also considered our future operating results which require assumptions such as future market penetration levels, forecasted revenues and the mix of earnings in the jurisdictions in which we operate in determining the need for a valuation allowance. We review our deferred tax assets on a quarterly basis to determine if a change to our valuation allowance is required based upon these factors. As of October 31, 2006, our deferred tax asset valuation allowance was $18.6 million, which related primarily to certain net operating loss carryforwards whose realization is uncertain. Changes in our assessment of the need for a valuation allowance could give rise to a change in such allowance, potentially resulting in material amounts of additional expense or benefit in the period of change.

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Inventory We carry our inventory at the lower of cost or market and include appropriate elements of material, labor and indirect costs. Inventories are valued using a weighted average approach that approximates the first-in, first-out method. We regularly review inventory quantities on hand and record a reserve for excess, obsolete and “off-spec” inventory based primarily on an estimated forecast of product demand and the likelihood of consumption in the normal course of manufacturing operations. Those reserves are based on significant estimates. Our estimates of future product demand or assessments of future consumption may prove to be inaccurate, in which case we may have understated or overstated the provision required. Although we make every effort to ensure the accuracy of our forecasts and assessments, any significant unanticipated changes, particularly in demand or competition levels, could have a significant impact on the values of our inventory and our reported operating results. In addition, abnormal amounts of inventory costs related to, among other things, idle facilities, freight handling and waste material expenses are recognized as period charges and expensed as incurred. The determination of such period costs requires the use of judgment in establishing the level of production that the Company considers normal. A different conclusion as to what constitutes normal production levels could result in material changes to idle capacity expenses recognized.

Equity-Based Compensation Expense Effective November 1, 2005, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Shared-Based Payment” (“SFAS 123R”), using the modified prospective transition method, and therefore have not restated prior periods’ results. Under this method, we recognize equity-based compensation expense for all share-based payment awards granted after November 1, 2005 and granted prior to but not yet vested as of November 1, 2005, in accordance with SFAS 123R. Under the fair value recognition provisions of SFAS 123R, we recognize equity-based compensation expense net of an estimated forfeiture rate and recognize compensation cost for only those shares expected to vest on a straight-line basis over the requisite service period of the award. Prior to SFAS 123R adoption, we accounted for share-based payment awards under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and, accordingly, we were required to recognize compensation expense only when options were granted with a discounted exercise price.

Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. Management determined that our historical volatility is a better indicator of expected volatility and future stock price trends. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our equity-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the equity-based compensation expense could be significantly different from what we have recorded in the current period.

Restructuring Charge In October 2006, we restructured our plant operations. An accounting charge resulted from this restructuring, which required management to utilize significant estimates related to expenses for severance and other employee separation costs and the realizable values of certain assets formerly supporting production. If the actual amounts differ from our estimates, the amount of the restructuring charges could be materially impacted.

Patent Cost Capitalization We capitalize legal and related costs incurred in connection with pending patent applications. Such costs are amortized over the life of the patent, if successful, or charged to operations upon denial or in the period during which a determination not to further pursue such application is made. We also capitalized external legal costs incurred in the defense of our patents when it is believed that the future economic benefit of the patent will be increased and a successful defense is probable. Capitalized patent defense costs are amortized over the remaining life of the related patent. Our assessment of future economic benefit and/ or a successful defense of our patents involves considerable management judgment. A different conclusion could result in material write-offs of the carrying value of these assets.

RESULTS OF OPERATIONS

Revenues

The following table presents revenues by category (in thousands):

	Year ended October 31,
	2006		2005		2004
Product sales	$	255,838	$	203,765	$	170,565
Contract manufacturing sales		14,816		14,087		13,928
Total revenues	$	270,654	$	217,852	$	184,493

Product sales increased by $52.1 million or 26% in fiscal 2006 as compared to fiscal 2005 and increased by $33.2 million or 19% in fiscal 2005 as compared to fiscal 2004, primarily due, in both comparative periods, to higher sales of nutritional products to our infant formula licensees. Substantially all of our product sales in fiscal 2006, 2005 and 2004 relate to the sale of our oils for use in infant formulas, and continued sales increases in both the U.S. and international markets contributed to our revenue growth. Included in product sales in fiscal 2006 and 2005 was $4.0 and $5.6 million, respectively, in sales of DHA oil to the pregnancy and nursing market. Sales to the pregnancy and nursing market began during the fourth quarter of fiscal 2004 and initial customer stocking occurred in fiscal 2005. Also included in product sales in fiscal 2006, 2005 and 2004 was $7.6 million, $5.4 million and $4.0 million, respectively, of sales of our oils for uses outside of the infant formula and pregnancy and nursing markets.

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Approximately 83%, 88% and 90% of our product sales in fiscal 2006, 2005 and 2004, respectively, was generated by sales to Mead Johnson Nutritionals, Abbott Laboratories, Nestle and Wyeth. Although we are not given precise information by our customers as to the countries in which infant formula containing our oils is ultimately sold, we estimate that approximately 60%, 67% and 67% of our sales to infant formula licensees for fiscal 2006, 2005 and 2004, respectively, relate to sales in the U.S. The first infant formulas containing our oils were introduced in the U.S. in February 2002 and, as of October 31, 2006, we estimate that formula supplemented with our oils had penetrated approximately 85% of the U.S. infant formula market.

Although we anticipate that annual product sales will continue to grow, our future sales growth is dependent to a significant degree upon the following factors: (i) the launches and expansions of current products containing our nutritional oils by our customers in new and existing markets; (ii) the launches of new products containing our nutritional oils by current or future customers; (iii) the timing and extent of stocking and destocking of inventory by our customers; and (iv) the availability and use by our customers and others of competitive products.

Contract manufacturing sales revenues, totaling approximately $14.8 million, $14.1 million and $13.9 million in fiscal 2006, 2005 and 2004, respectively, relate to fermentation work performed for various third parties at our Kingstree, South Carolina facility.

As a result of the above, total revenues increased by $52.8 million or 24% in fiscal 2006 as compared to fiscal 2005 and increased by $33.4 million or 18% in fiscal 2005 as compared to fiscal 2004.

Cost of Revenues

The following table presents our cost of revenues (in thousands):

	Year ended October 31,
	2006		2005		2004
Cost of product sales	$	144,457	$	120,865	$	103,423
Cost of contract manufacturing sales		14,676		12,516		11,570
Idle capacity costs		9,620		—		—
Total cost of revenues	$	168,753	$	133,381	$	114,993

Cost of product sales, including idle capacity costs, as a percentage of product sales increased to 60% in fiscal 2006 from 59% in fiscal 2005. The increase was due to idle capacity charges (4%), partially offset by DHA productivity improvements (1%) and decreases in our overall cost of ARA (2%). Idle capacity costs were $9.6 million in fiscal 2006. Idle capacity costs represent certain fixed period costs associated with underutilized manufacturing capacity.

Cost of product sales decreased as a percentage of product sales to 59% in fiscal 2005 from 61% in fiscal 2004. The decrease was primarily due to DHA productivity improvements (a decrease of approximately 4%) partially offset by an increase in our overall cost of ARA due primarily to the decline of the U.S. dollar against the euro, the currency in which we purchase a portion of our ARA.

Cost of contract manufacturing sales, totaling $14.7 million, $12.5 million and $11.6 million in fiscal 2006, 2005 and 2004, respectively, are the costs related to the fermentation work performed for various third parties at our Kingstree, South Carolina facility. Our contract manufacturing sales achieve significantly lower gross margins than our product sales but contribute to the recovery of our fixed overhead costs. These overall margins will vary between periods primarily due to contract mix and volume.

We expect our overall gross profit margin in fiscal 2007 to reflect the improvements derived from the October 2006 plant restructuring, which will significantly reduce idle capacity costs. We expect, however, that for much of fiscal 2007 these benefits will be more than offset by increases to our ARA purchase costs from our third-party supplier. We are currently in negotiations with our ARA supplier in attempts to mitigate such price increases.

Operating Expenses

The following table presents our operating expenses (in thousands):

	Year ended October 31,
	2006		2005		2004
Research and development	$	24,823	$	20,468	$	18,596
Selling, general and administrative		41,614		33,404		25,804
Restructuring charge		4,729		—		—
Other operating expenses		1,158		7,654		4,000
Total operating expenses	$	72,324	$	61,526	$	48,400

Research and Development Our research and development costs increased by $4.4 million or 21% in fiscal 2006 as compared to fiscal 2005. The increase is primarily due to additional costs incurred on clinical studies focusing on the cognitive benefits of DHA. Research and development expenses also include $1.2 million of non-cash equity-based compensation charges in fiscal 2006.

Our research and development costs increased by $1.9 million or 10% in fiscal 2005 as compared to fiscal 2004 due to additional resources focused on DHA and ARA production improvements, the development of new DHA products for the food and beverage industry and the commencement of new DHA clinical studies.

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Selling, General and Administrative Our selling, general and administrative costs increased by $8.2 million or 25% in fiscal 2006 as compared to fiscal 2005. The increase was largely due to higher personnel costs, including an expansion of our sales and marketing staff (increase of $3.8 million), and legal costs (increase of $1.4 million). Selling, general and administrative expenses also include $2.1 million of non-cash equity-based compensation charges in fiscal 2006.

Our selling, general and administrative costs increased by $7.6 million or 29% in fiscal 2005 as compared to fiscal 2004. The increase was primarily due to increased personnel costs (increase of $1.8 million), legal costs (increase of $1.6 million) and insurance costs (increase of $1.1 million) required to manage our overall growth as well as the costs of Sarbanes-Oxley Act compliance (increase of $1.0 million) and certain patent-related expenses (increase of $1.1 million).

Restructuring Charge We recognized a charge of $4.7 million in fiscal 2006 resulting from the plant restructuring announced in October 2006 following a review of our current production and cost structure. This charge primarily includes employee separation costs and a write-down of certain assets supporting production in Winchester. We anticipate incurring approximately $500,000 of additional restructuring costs in fiscal 2007 related mainly to outplacement services and employee relocation costs. See Note 11 to the consolidated financial statements for further discussion.

Other Operating Expenses We incurred other operating expenses of $1.2 million, $7.7 million and $4.0 million in fiscal 2006, 2005 and 2004, respectively. These costs were significantly lower in fiscal 2006 as production start-up costs incurred by us have greatly diminished as a result of the completion in late 2005 of the Kingstree facility expansion. These expenditures in fiscal 2005 and 2004 related primarily to production start-up costs associated with the expansion at our Kingstree facility, which include training expenses and costs related to the scale-up and validation of new equipment and production processes. These costs also include qualification of certain third-party manufacturers as well as expenses related to the Winchester wastewater treatment matter in fiscal 2004.

Interest and Other Income, Net

Interest and other income, net, increased by $100,000 in fiscal 2006 as compared to fiscal 2005 and increased by $700,000 in fiscal 2005 as compared to fiscal 2004, due primarily to varying levels of cash, cash equivalents and short-term investments and changes in interest rates.

Interest Expense

Interest expense increased by $2.7 million in fiscal 2006 as compared to fiscal 2005 and increased by $300,000 in fiscal 2005 as compared to fiscal 2004, as capitalization of interest costs has largely ceased with the completion of the Kingstree expansion. See “Liquidity and Capital Resources” for further discussion.

Income Tax Provision (Benefit)

The non-cash provision for income taxes totaled $10.2 million and $8.8 million in fiscal 2006 and 2005, respectively, and has been recorded based upon our effective tax rate of 36.5%.

In fiscal 2004, we reversed approximately $51 million of our deferred tax asset valuation allowance. This reversal resulted in the recognition of an income tax benefit totaling $25.2 million, a direct increase to stockholders’ equity of approximately $22.8 million due to non-qualified stock option exercises and a decrease to goodwill of approximately $2.6 million due to certain basis differences and net operating loss carryforwards resulting from our acquisition of OmegaTech. As of October 31, 2006, the net recorded value of our deferred tax asset was approximately $41.2 million. Realization of deferred tax assets is contingent upon the generation of future taxable income. As such, the realization of this $41.2 million asset will require the generation of approximately $113 million of future taxable income.

As of October 31, 2006, we had net operating loss carryforwards for Federal income tax purposes of approximately $183 million, which expire at various dates between 2010 and 2025. Of the total net operating loss carryforwards, the tax effect of approximately $51.6 million continues to be fully reserved through a valuation allowance as realizability of these assets is uncertain at this time. Should realization of these and other deferred tax assets become more likely than not, approximately $9.9 million of the resulting benefit will be reflected as an income tax benefit upon reversal of the allowance, approximately $7.3 million will be reflected as a reduction to goodwill and approximately $1.4 million will be reflected as an increase to stockholders’ equity.

Net Income

As a result of the foregoing, net income was $17.8 million in fiscal 2006 as compared to net income of $15.3 million in fiscal 2005 and net income of $47.0 million in fiscal 2004.

Prior to November 1, 2005, we accounted for our equity-based compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Effective November 1, 2005, we adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), using the modified prospective transition method. Under the modified prospective transition method, compensation cost recognized in fiscal 2006 includes: (a) compensation cost for all share-based payments granted prior to but not yet vested as of November 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (b) compensation cost for all share-based payments granted subsequent to November 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Results for prior periods have not been restated.

As a result of adopting SFAS 123R on November 1, 2005, income before income taxes and net income in fiscal 2006 were $3.3 million and $2.1 million lower, respectively, than if we had continued to account for equity-based compensation under APB 25. Basic and diluted earnings per share in fiscal 2006 were each $0.06 lower than if we had continued to account for equity-based compensation under APB 25. As of October 31, 2006, there

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was $2.3 million of total unrecognized compensation cost related to unvested stock options granted under our equity-based compensation plans. The cost is expected to be recognized through fiscal 2011 with a weighted average recognition period of approximately one year.

In December 2004 and January and May 2005, we modified the terms of certain outstanding and unvested stock options whose exercise prices were greater than our closing stock price on the modification dates. Total modifications served to immediately vest approximately 1.2 million unvested stock options. The accelerations enabled us to avoid recording approximately $27 million of compensation cost that would have been required to be recognized under SFAS 123R.

RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and disclosure for uncertain income tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. This interpretation will be effective for the fiscal year beginning November 1, 2007. We are currently assessing the effect of adopting FIN 48 on our consolidated financial position and results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the effect that the adoption of SFAS 157 will have on our consolidated financial position and results of operations.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations primarily from the following sources:

• cash generated from operations;

• proceeds from the sale of equity securities;

• cash received from the exercise of stock options and warrants; and

• debt financing.

At October 31, 2006, our primary sources of liquidity were our cash, cash equivalents and short-term investments totaling $26.8 million as well as the $99 million available portion of our revolving credit facility. Cash, cash equivalents and short-term investments decreased $6.5 million from October 31, 2005. This decrease was due primarily to repayment of borrowings under our revolving credit facility, partially offset by our net income which allowed for the generation of positive operating cash flows.

In general, we believe that our current production infrastructure can accommodate our short- and medium-term growth objectives in all material respects. As such, in total, we expect that capital expenditures over the next twelve months will not exceed $20 million. In fiscal 2006, we incurred interest on borrowings of approximately $3.6 million and recorded amortization of related debt fees of approximately $200,000, of which, in total, approximately $700,000 was capitalized. Interest costs have been capitalized to the extent that the related borrowings were used to cover the balance of projects under construction.

Since our inception, we have raised approximately $420 million from public and private sales of our equity securities, as well as from option and warrant exercises. In August 2004, our shelf registration statement was declared effective by the Securities and Exchange Commission. The shelf registration statement enables us to raise funds through the offering of debt securities, preferred stock, common stock and warrants, as well as any combination thereof, from time to time and through one or more methods of distribution, in an aggregate amount of up to $200 million. In January 2005, we completed an underwritten public offering of 1,756,614 shares of our common stock at price of $49.10 per share pursuant to the shelf registration statement. Net proceeds to us, after deducting an underwriting discount and offering expenses, amounted to approximately $81.4 million. Of the proceeds, $30 million was used for the partial repayment of debt with the remainder intended to be used for capital expenditures, working capital and general corporate purposes. Remaining availability under the shelf registration statement is approximately $110 million at October 31, 2006.

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The following table sets forth our future minimum payments under contractual obligations at October 31, 2006:

			Less than		1-3		3-5		More than
In thousands	Total		1 year		years		years		5 years
Notes payable(1)	$	11,368	$	1,163	$	9,043	$	370	$	792
Borrowings under revolving credit facility		36,000		—		—		36,000		—
Operating lease obligations(2)		4,422		1,013		1,895		1,172		342
Unconditional purchase obligations(3), (4)		35,667		4,289		31,378		—		—
Total contractual cash obligations	$	87,457	$	6,465	$	42,316	$	37,542	$	1,134

(1)	Minimum payments above include interest and principal due under these notes.
(2)	Does not include lease payments on equipment formerly subject to operating lease at our Kingstree facility that we repurchased for $3.9 million in November 2006.
(3)	Primarily includes future inventory purchases from DSM pursuant to the guarantee described below in “Off-Balance Sheet Arrangements.”
(4)	Does not include $750,000 license payment for plant-based DHA technology due upon execution of an amendment to collaboration agreement between Martek and a Canadian biotechnology company in January 2007.

Included within notes payable is a $10 million note with a stated interest rate of 5% that we assumed as part of the acquisition of FermPro. The note was amended in January 2004 and is now an unsecured obligation of the Company with a maturity date of December 31, 2008. Principal is amortized over a 20-year period, with the balance due at maturity.

In September 2005, we entered into a $135 million secured revolving credit facility that amended and expanded our existing $100 million credit facility. The revolving credit facility is collateralized by accounts receivable, inventory and all capital stock of our subsidiaries and expires in September 2010. The weighted average interest rate on amounts outstanding under the credit facility was approximately 6.4%, 4.9% and 3.5% for the years ended October 31, 2006, 2005 and 2004, respectively, and the weighted average commitment fee rate on unused amounts was approximately 0.2%, 0.3% and 0.3%, respectively. Both the interest and commitment fee rates are based on LIBOR and our current leverage ratio. Among other things, the credit facility agreement contains restrictions on future debt, the payment of dividends and the further encumbrance of assets. In addition, the credit facility requires that we comply with specified financial ratios and tests, including minimum coverage ratios and maximum leverage ratios. We do not believe that these covenants restrict our ability to carry out our current business plan. As of October 31, 2006, we were in compliance with all of these debt covenants and had outstanding borrowings of $36 million under the revolving credit facility.

In December 2003, we entered into a collaboration agreement with a Canadian biotechnology company to co-develop DHA products from plants. This arrangement included the reimbursement of expenses incurred by the co-collaborator as well as the payment by us of potential royalties and additional milestone payment amounts if certain scientific results were achieved in the future. In January 2007, an amendment to this agreement was executed. Pursuant to the amendment, the co-collaborator will continue its research and development until June 2007, with expenses to be reimbursed by us through April 2007. Furthermore, we acquired exclusive license rights to the plant-based DHA technology developed by the co-collaborator for a period of at least 16 years. As consideration for this exclusive license, we will make a license payment of $750,000, with additional payments of up to $750,000 due in certain circumstances, subject to minimum royalties of 1.5% of gross margin, as defined, if we ultimately commercialize a plant-based DHA using any technology. During the term of the license, we may be required to pay additional royalties of up to 6.0% of gross margin, as defined, on sales of products in the future which utilize certain licensed technologies. At the amendment date, the respective milestones provided for in the original agreement had not been achieved, and no milestone payments specified in the original agreement have been or will be made.

We believe that the revolving credit facility, when combined with our cash, cash equivalents and short-term investments of $26.8 million on-hand at October 31, 2006, and anticipated operating cash flows, will provide us with adequate capital to meet our obligations for at least the next twelve to eighteen months.

The ultimate amount of additional funding that we may require will depend, among other things, on one or more of the following factors:

• our ability to operate profitably and generate positive cash flow;

• growth in our infant formula, food and beverage and other nutritional product sales;

• the extent and progress of our research and development programs;

• the progress of pre-clinical and clinical studies;

• the time and costs of obtaining and maintaining regulatory clearances for our products that are subject to such clearances;

• the costs involved in filing, protecting and enforcing patent claims;

• competing technological and market developments;

• the development or acquisition of new products;

• the cost of acquiring additional and/or operating and expanding existing manufacturing facilities for our various products and potential products (depending on which products we decide to manufacture and continue to manufacture ourselves);

• the costs associated with our internal build-up of inventory levels;

• the costs associated with our defense against a putative securities class action and other lawsuits;

• the costs of merger and acquisition activity; and

• the costs of marketing and commercializing our products.

We can offer no assurance that, if needed, any of our financing alternatives will be available to us on terms that would be acceptable, if at all.

41

OFF-BALANCE SHEET ARRANGEMENTS

We have entered into lease agreements for certain laboratory and administrative space as well as manufacturing equipment with rental payments aggregating $4.4 million over the remaining lease terms, which expire through 2011.

In February 2006, we and DSM entered into an amendment to the April 2004 agreement (“the Amendment”). The Amendment served to provide certain clarifying and updating language to the original agreement and to establish the overall economics associated with DSM’s expansion at both its Belvidere, New Jersey and Capua, Italy production facilities. We guaranteed the recovery of certain costs incurred by DSM in connection with these expansions, up to $40 million, with such amount being reduced annually through December 31, 2008 (the “Recoupment Period”) based upon ARA purchases by us in excess of specified minimum thresholds. As of October 31, 2006, the guarantee amount has been reduced to approximately $25.0 million. The guarantee amount payable, if any, at the end of the Recoupment Period, must be paid by January 31, 2009. The amount paid, if any, will be credited against a portion of DSM invoices for purchases made after the Recoupment Period.

We do not engage in any other off-balance sheet financing arrangements. In particular, we do not have any interest in entities referred to as variable interest entities, which include special purpose entities and structured finance entities.

42

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are subject to market risk associated with changes in foreign currency exchange rates and interest rates.

Purchases of ARA from DSM’s plant in Capua, Italy are denominated in euros, which exposes us to risks related to changes in exchange rates between the U.S. dollar and the euro. Fluctuations between the U.S. dollar and the euro will impact our cost of ARA oil and gross margins. Our exposure to these currency fluctuations has decreased with DSM now producing 60% of its ARA in the U.S. at its Belvidere, New Jersey facility. We enter into foreign currency cash flow hedges to reduce the related market risk on our payment obligations. We do not enter into foreign currency cash flow hedges for speculative purposes. At October 31, 2006, we had unrealized gains on such hedge instruments totaling $200,000, net of income tax provision. We estimate that a 5% change in the exchange rate would impact gross margins of our infant formula products by approximately 1%.

We are subject to risk from adverse changes in interest rates, primarily relating to variable-rate borrowings used to maintain liquidity. Based on our variable-rate debt outstanding at October 31, 2006, a 1% change in LIBOR would change annual interest costs by approximately $400,000. At October 31, 2006, the carrying amounts of debt approximate fair value.

43

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS	PAGE
Management’s Report on Internal Control Over Financial Reporting	45
Report of Ernst &Young LLP, Independent Registered Public Accounting Firm	46
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Internal Control Over Financial Reporting	47
Consolidated Balance Sheets as of October 31, 2006 and 2005	48
Consolidated Statements of Income for the years ended October 31, 2006, 2005 and 2004	49
Consolidated Statements of Stockholders’ Equity for the years ended October 31, 2006, 2005 and 2004	50
Consolidated Statements of Cash Flows for the years ended October 31, 2006, 2005 and 2004	51
Notes to Consolidated Financial Statements	52

44

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Martek Biosciences Corporation (“Martek”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rule 13a-15(f). Martek’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Martek’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect Martek’s transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that Martek’s receipts and expenditures are being made only in accordance with authorizations of Martek’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Martek’s assets that could have a material effect on the financial statements.

There are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of controls. 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. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation.

Martek’s management, including the principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of Martek’s internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation under the framework in Internal Control—Integrated Framework, management concluded that Martek’s internal control over financial reporting was effective as of October 31, 2006 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Management discussed its assessment with the Audit Committee of the Board of Directors. Management’s assessment of the effectiveness of Martek’s internal control over financial reporting as of October 31, 2006 has been audited by Ernst & Young LLP, independent registered public accounting firm, as stated in their report which is included herein.

/s/ Steve Dubin Steve Dubin Chief Executive Officer and Director	/s/ Peter L. Buzy Peter L. Buzy Chief Financial Officer, Treasurer and Executive Vice President for Finance and Administration
January 9, 2007	January 9, 2007

45

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Martek Biosciences Corporation

We have audited the accompanying consolidated balance sheets of Martek Biosciences Corporation as of October 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended October 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and 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 consolidated 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 Martek Biosciences Corporation at October 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Martek Biosciences Corporation’s internal control over financial reporting as of October 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated January 9, 2007 expressed an unqualified opinion thereon.

As discussed in Note 3 to the consolidated financial statements, in fiscal year 2006, Martek Biosciences Corporation changed its method of accounting for equity-based compensation in accordance with guidance provided in Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”.

/s/ Ernst & Young LLP

January 9, 2007
McLean, Virginia

46

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON
INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Stockholders
Martek Biosciences Corporation

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Martek Biosciences Corporation maintained effective internal control over financial reporting as of October 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Martek Biosciences Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of 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, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, 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, management’s assessment that Martek Biosciences Corporation maintained effective internal control over financial reporting as of October 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Martek Biosciences Corporation maintained, in all material respects, effective internal control over financial reporting as of October 31, 2006, 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 sheets of Martek Biosciences Corporation as of October 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended October 31, 2006 of Martek Biosciences Corporation and our report dated January 9, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

January 9, 2007
McLean, Virginia

47

MARTEK BIOSCIENCES CORPORATION

CONSOLIDATED BALANCE SHEETS

	October 31,
In thousands, except share and per share data	2006			2005
Assets
Current assets
Cash and cash equivalents	$	15,578		$	11,047
Short-term investments and marketable securities		11,250			22,300
Accounts receivable, net		32,746			27,603
Inventories, net		100,320			91,535
Other current assets		10,074			5,929
Total current assets		169,968			158,414
Property, plant and equipment, net		291,445			290,733
Deferred tax asset		39,969			48,201
Goodwill		48,603			48,490
Other intangible assets, net		36,828			31,129
Other assets, net		14,033			1,518
Total assets	$	600,846		$	578,485
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	21,663		$	16,661
Accrued liabilities		24,098			13,692
Current portion of notes payable and other long-term obligations		1,231			3,113
Current portion of deferred revenue		2,794			740
Total current liabilities		49,786			34,206
Long-term debt under revolving credit facility		36,000			55,000
Notes payable and other long-term obligations		10,277			11,115
Long-term portion of deferred revenue		9,335			8,959
Total liabilities		105,398			109,280
Commitments
Stockholders’ equity
Preferred stock, $.01 par value, 4,700,000 shares authorized; none issued or outstanding		—			—
Series A junior participating preferred stock, $.01 par value; 300,000 shares authorized; none issued or outstanding		—			—
Series B junior participating preferred stock, $.01 par value; 300,000 shares authorized; none issued or outstanding		—			—
Common stock, $.10 par value; 100,000,000 shares authorized; 32,156,162 and 32,026,595 shares issued and outstanding, respectively		3,216			3,203
Additional paid-in capital		523,486			515,237
Accumulated other comprehensive income		171			1
Accumulated deficit		(31,425	)		(49,236	)
Total stockholders’ equity		495,448			469,205
Total liabilities and stockholders’ equity	$	600,846		$	578,485

See accompanying notes.

48

MARTEK BIOSCIENCES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

	Year ended October 31,
In thousands, except share and per share data	2006			2005			2004
Revenues:
Product sales	$	255,838		$	203,765		$	170,565
Contract manufacturing sales		14,816			14,087			13,928
Total revenues		270,654			217,852			184,493
Cost of revenues:
Cost of product sales		144,457			120,865			103,423
Cost of contract manufacturing sales		14,676			12,516			11,570
Idle capacity costs		9,620			—			—
Total cost of revenues		168,753			133,381			114,993
Gross margin		101,901			84,471			69,500
Operating expenses:
Research and development (1)		24,823			20,468			18,596
Selling, general and administrative (1)		41,614			33,404			25,804
Restructuring charge		4,729			—			—
Other operating expenses		1,158			7,654			4,000
Total operating expenses		72,324			61,526			48,400
Income from operations		29,577			22,945			21,100
Interest and other income, net		1,490			1,428			777
Interest expense		(3,018	)		(303	)		(5	)
Income before income tax provision (benefit)		28,049			24,070			21,872
Income tax provision (benefit) (1)		10,238			8,786			(25,176	)
Net income	$	17,811		$	15,284		$	47,048
Net income per share
Basic	$	0.55		$	0.49		$	1.62
Diluted	$	0.55		$	0.48		$	1.55
Weighted average common shares outstanding
Basic		32,113,301			31,164,149			29,033,241
Diluted		32,343,015			32,031,503			30,385,707
(1)   Includes the following amounts related to equity-based compensation expense:
Research and development		1,143			—			—
Selling, general and administrative		2,129			—			—
Income tax provision (benefit)		(1,194	)		—			—

See accompanying notes.

49

MARTEK BIOSCIENCES CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

							Accumulated
					Additional		Other
	Common Stock				Paid-in		Comprehensive			Accumulated
In thousands, except share data	Shares		Amount		Capital		Income			Deficit			Total
Balance at October 31, 2003		28,041,323	$	2,804	$	352,728	$	—		$	(111,568	)	$	243,964
Issuance of common stock, net of issuance costs		176,885		18		11,272		—			—			11,290
Exercise of stock options and warrants		1,272,919		127		20,817		—			—			20,944
Equity-based compensation		—		—		28		—			—			28
Tax benefit of exercise of non-qualified stock options		—		—		22,822		—			—			22,822
Net income		—		—		—		—			47,048			47,048
Other comprehensive income:
Unrealized gain on exchange rate forward contract, net of tax of $0		—		—		—		68			—			68
Comprehensive income														47,116
Balance at October 31, 2004		29,491,127		2,949		407,667		68			(64,520	)		346,164
Issuance of common stock, net of issuance costs		1,756,614		176		81,268		—			—			81,444
Exercise of stock options		778,854		78		18,592		—			—			18,670
Equity-based compensation		—		—		36		—			—			36
Tax benefit of exercise of non-qualified stock options		—		—		7,674		—			—			7,674
Net income		—		—		—		—			15,284			15,284
Other comprehensive income:
Unrealized loss on exchange rate forward contract, net of tax of $0		—		—		—		(67	)		—			(67	)
Comprehensive income														15,217
Balance at October 31, 2005		32,026,595		3,203		515,237		1			(49,236	)		469,205
Exercise of stock options and warrants		129,567		13		2,909		—			—			2,922
Equity-based compensation		—		—		3,753		—			—			3,753
Tax benefit of exercise of non-qualified stock options		—		—		1,587		—			—			1,587
Net income		—		—		—		—			17,811			17,811
Other comprehensive income:
Unrealized gain on exchange rate forward contract, net of tax of $102		—		—		—		170			—			170
Comprehensive income														17,981
Balance at October 31, 2006		32,156,162	$	3,216	$	523,486	$	171		$	(31,425	)	$	495,448

See accompanying notes.

50

MARTEK BIOSCIENCES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended October 31,
In thousands	2006			2005			2004
Operating activities
Net income	$	17,811		$	15,284		$	47,048
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		17,149			16,494			8,687
Provision for inventory obsolescence		500			2,000			500
Deferred tax provision (benefit)		10,238			8,786			(25,176	)
Equity-based compensation expense		3,272			—			—
Incremental tax benefit from exercise of non-qualified stock options		(1,587	)		—			—
Loss from disposal and write-down of assets and other		2,845			1,131			169
Changes in operating assets and liabilities:
Accounts receivable		(5,143	)		9,689			(17,128	)
Inventories		(20,804	)		(63,156	)		(15,525	)
Other assets		(4,393	)		1,413			1,324
Accounts payable		5,002			(10,303	)		9,150
Accrued liabilities		8,527			2,947			1,552
Deferred revenue and other liabilities		2,205			(1,429	)		(511	)
Net cash provided by (used in) operating activities		35,622			(17,144	)		10,090
Investing activities
Sale (purchase) of short-term investments and marketable securities, net		11,050			(9,095	)		53,842
Expenditures for property, plant and equipment		(10,902	)		(57,181	)		(180,409	)
(Repurchase) proceeds from sale-leaseback transaction and other		(6,877	)		4,272			10,895
Capitalization of intangible and other assets		(6,862	)		(4,989	)		(9,383	)
Net cash used in investing activities		(13,591	)		(66,993	)		(125,055	)
Financing activities
Repayments of notes payable and other long-term obligations		(3,009	)		(4,875	)		(2,748	)
(Repayments) borrowings under revolving credit facility, net		(19,000	)		(30,000	)		85,000
Proceeds from the issuance of common stock, net of issuance costs		—			81,444			11,290
Proceeds from the exercise of stock options and warrants		2,922			18,670			20,944
Incremental tax benefit from exercise of non-qualified stock options		1,587			—			—
Other		—			500			—
Net cash (used in) provided by financing activities		(17,500	)		65,739			114,486
Net increase (decrease) in cash and cash equivalents		4,531			(18,398	)		(479	)
Cash and cash equivalents, beginning of year		11,047			29,445			29,924
Cash and cash equivalents, end of year	$	15,578		$	11,047		$	29,445
Supplemental cash flow disclosures:
Interest paid	$	3,625		$	3,528		$	2,084
Income taxes paid	$	280		$	—		$	—
Notes payable issued in acquisition of land	$	—		$	800		$	—
Purchase of DSM license through long-term obligation	$	—		$	—		$	6,000

See accompanying notes.

51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

Martek Biosciences Corporation (the “Company” or “Martek”), a Delaware corporation, was founded in 1985. The Company develops, manufactures and sells naturally produced products derived from microalgae, fungi and other microbes. The Company’s products and services include: (1) specialty, nutritional oils for infant formula, dietary supplements and food and beverage fortification ingredients, (2) contract manufacturing services and (3) fluorescent marker products for diagnostics, rapid miniaturized screening and gene and protein detection.

Martek’s nutritional oils are comprised of fatty acid components, primarily docosahexaenoic acid, commonly known as DHA, and arachidonic acid, commonly known as ARA. Many researchers believe that these fatty acids may enhance mental and visual development in infants and play a pivotal role in brain function throughout life. Low levels of DHA in adults have also been linked to a variety of health risks, including cardiovascular problems and various neurological and visual disorders. Additional research is underway to assess what impact, if any, supplementation with the Company’s DHA will have on these health risks. Martek’s fluorescent detection products and technologies aid researchers in drug discovery and diagnostics.

Martek also provides contract manufacturing services. These services are for both large and small companies and relate primarily to the production of enzymes, specialty chemicals, vitamins, agricultural specialties and intermediates.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation The consolidated financial statements include the accounts of Martek and its wholly-owned subsidiaries, Martek Biosciences Boulder Corporation (“Martek Boulder”) and Martek Biosciences Kingstree Corporation (“Martek Kingstree”), (collectively, “the Company”) after elimination of all significant intercompany balances and transactions. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. generally accepted accounting principles”) requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates and judgments, which are based on historical and anticipated results and trends and on various other assumptions that the Company believes to be reasonable under the circumstances. By their nature, estimates are subject to an inherent degree of uncertainty and, as such, actual results may differ from the Company’s estimates.

Segment Information The Company currently operates in one material business segment, the development and commercialization of novel products from microalgae, fungi and other microbes. The Company is managed and operated as one business. The entire business is comprehensively managed by a single management team that reports to the Chief Executive Officer. The Company does not operate any material separate lines of business or separate business entities with respect to its products or product candidates. Accordingly, the Company does not have separately reportable segments as defined by Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

Revenue Recognition The Company derives revenue principally from two sources: product sales and contract manufacturing. The Company recognizes product sales revenue when persuasive evidence of an arrangement exists, the fee is fixed or determinable, collectibility is probable and the product is shipped thereby transferring title and risk of loss. Typical infant formula license contracts include an upfront license fee, a prepayment of product sales and established pricing on future product sales, which also may include discounts based on the achievement of certain volume purchases. In accordance with Emerging Issues Task Force No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF No. 00-21”), the consideration from these contracts is allocated based on the relative fair values of the separate elements. Revenue is recognized on product sales when goods are shipped and all other conditions for revenue recognition are met. If volume pricing discounts are deemed to be a separate element, revenue on related product shipments is recognized using the estimated average price to the customer. Once the requisite volume thresholds have been satisfied, the previously recorded deferred revenue is recognized over the remaining discount period. Cash received as a prepayment on future product purchases is deferred and recognized as revenue when product is shipped. Revenue from product licenses is deferred and recognized on a straight-line basis over the term of the agreement. Royalty income is recorded when earned, based on information provided by the Company’s licensees. Royalty income was approximately $3.6 million, $2.4 million and $2.2 million in fiscal 2006, 2005 and 2004, respectively, and is included in product sales revenue in the consolidated statements of income.

Contract manufacturing revenue is recognized when goods are shipped to customers and all other conditions for revenue recognition are met. Cash received that is related to future performance under such contracts is deferred and recognized as revenue when earned.

Shipping Income and Costs The Company accounts for income and costs related to shipping activities in accordance with the Emerging Issues Task Force Issue No. 00-10, “Accounting for Shipping and Handling Revenues and Costs.” Shipping costs charged to customers are recorded as revenue in the period that the related product sale revenue is recorded, and associated costs of shipping are included in cost of product sales.

52

Foreign Currency Transactions and Hedging Activities Foreign currency transactions are translated into U.S. dollars at prevailing rates. Gains or losses resulting from foreign currency transactions are included in current period income or loss as incurred. All material transactions of the Company are denominated in U.S. dollars with the exception of certain purchases of ARA from DSM Food Specialties’ B.V. (“DSM”), which are denominated in euros.

The Company has entered into foreign currency forward contracts to reduce its transactional foreign currency exposures associated with the purchases of ARA from DSM. The Company does not use derivative financial instruments for speculative purposes. These forward contracts have been designated as highly effective cash flow hedges and thus, qualify for hedge accounting under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” As of October 31, 2006, outstanding forward contracts had notional values aggregating approximately 9.8 million euros (equivalent to $12.5 million at October 31, 2006). The resulting unrealized gains and losses are recorded as a component of other comprehensive income. These contracts effectively fix our exchange rate between the U.S. dollar and the euro for periods ranging from 30 to 120 days.

Research and Development Research and development costs are charged to operations as incurred and include internal labor, materials and overhead costs associated with the Company’s ongoing research and development activity and third-party costs for contracted work as well as ongoing clinical trials costs.

Advertising Advertising costs are expensed as incurred. Advertising costs were approximately $1,000,000 in each of fiscal 2006, 2005 and 2004.

Other Operating Expenses Other operating expenses relate primarily to production start-up costs, including materials, training and other such costs, incurred in connection with the expansion of the Company’s internal manufacturing operations, costs incurred in connection with qualification of certain third-party manufacturers, and amounts related to the Winchester wastewater treatment matter. All such costs are expensed as incurred.

Deferred Income Taxes Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting bases and the tax bases of assets and liabilities. Deferred tax assets are also recognized for tax net operating loss carryforwards. These deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when such amounts are projected to reverse or be utilized. The realization of total deferred tax assets is contingent upon the generation of future taxable income. Valuation allowances are provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized.

Equity-Based Compensation Prior to November 1, 2005, the Company accounted for its equity-based compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Effective November 1, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), using the modified prospective transition method. Under the modified prospective transition method, compensation cost recognized in fiscal 2006 includes: (a) compensation cost for all equity-based payments granted prior to but not yet vested as of November 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (b) compensation cost for all equity-based payments granted subsequent to November 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.

Net Income Per Share Basic net income per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed using the weighted average number of shares of common stock outstanding, giving effect to stock options and warrants using the treasury stock method (see Note 14).

Comprehensive Income Comprehensive income is comprised of net earnings and other comprehensive income, which includes certain changes in equity that are excluded from net income. The Company includes unrealized holding gains and losses on available-for-sale securities, if any, as well as changes in the market value of exchange rate forward contracts in other comprehensive income in the Consolidated Statements of Stockholders’ Equity.

Cash and Cash Equivalents Cash equivalents consist of highly liquid investments with an original maturity of three months or less.

Short-Term Investments and Marketable Securities The Company has classified all short-term investments and marketable securities as available-for-sale. Unrealized gains and losses on these securities, if any, are reported as accumulated other comprehensive income, which is a separate component of stockholders’ equity. Realized gains and losses are included in other income based on the specific identification method.

The Company periodically evaluates whether any declines in the fair value of investments are other than temporary. This evaluation consists of a review of several factors, including, but not limited to: length of time and extent that a security has been in an unrealized loss position; the existence of an event that would impair the issuer’s future earnings potential; the near term prospects for recovery of the market value of a security; and the intent and ability of the Company to hold the security until the market value recovers. Declines in value below cost for debt securities where it is considered probable that all contractual terms of the security will be satisfied, where the decline is due primarily to changes in interest rates (and not because of increased credit risk), and where the Company intends and has the ability to hold the investment for a period of time sufficient to allow a market recovery, are not assumed to be other than temporary. If management determines that such an impairment exists, the carrying value of the investment will be reduced to the current fair value of the investment and the Company will recognize a charge in the consolidated statements of income equal to the amount of the carrying value reduction.

At October 31, 2006 and 2005, the Company’s short-term investments consisted primarily of auction rate debt securities issued by state and local government-sponsored agencies. The Company’s investments in these securities are recorded at cost which approximates market value due to their variable interest rates that reset approximately every 30 days. The underlying maturities of these investments range from 15 to 40 years. Despite the

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long-term nature of their stated contractual maturities, there is a readily liquid market for these securities and, therefore, these securities have been classified as short-term.

Fair Value of Financial Instruments The Company considers the recorded cost of its financial assets and liabilities, which consist primarily of cash and cash equivalents, short-term investments and marketable securities, accounts receivable, accounts payable, notes payable and long-term debt, to approximate the fair value of the respective assets and liabilities at October 31, 2006 and 2005.

Trade Receivables Trade receivables are reported in the consolidated balance sheets at outstanding principal less any allowance for doubtful accounts. The Company writes off uncollectible receivables against the allowance for doubtful accounts when the likelihood of collection is remote. The Company may extend credit terms up to 50 days and considers receivables past due if not paid by the due date. The Company performs ongoing credit evaluations of its customers and extends credit without requiring collateral. The Company maintains an allowance for doubtful accounts, which is determined based on historical experience, existing economic conditions and management’s expectations of losses. The Company analyzes historical bad debts, customer concentrations, customer creditworthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Losses have historically been within management’s expectations. The allowance for doubtful accounts was approximately $40,000 and $100,000 as of October 31, 2006 and 2005, respectively.

Concentration of Credit Risk and Significant Customers Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. Concentrations of credit risk with respect to accounts receivable are present due to the small number of customers comprising the Company’s customer base. However, the credit risk is reduced through the Company’s efforts to monitor its exposure for credit losses and by maintaining allowances, if necessary. Four customers accounted for approximately 83%, 88% and 90% of the Company’s product sales in fiscal 2006, 2005 and 2004, respectively. At October 31, 2006 and 2005, four customers accounted for approximately 70% and 77%, respectively, of the Company’s outstanding accounts receivable balance. Included in these amounts, one of the Company’s customers accounted for approximately 45%, 49% and 55% of total product sales in fiscal 2006, 2005 and 2004, respectively, and represented 43% and 55% of the Company’s outstanding accounts receivable balance at October 31, 2006 and 2005, respectively. Approximately 60% of the Company’s sales were to domestic customers in fiscal 2006 and approximately 67% of the Company’s sales were to domestic customers in each of fiscal 2005 and 2004.

Inventories Inventories are stated at the lower of cost or market and include appropriate elements of material, labor and indirect costs. Inventories are valued using a weighted average approach that approximates the first-in, first-out method. The Company analyzes both historical and projected sales volumes and, when needed, reserves for inventory that is either obsolete, slow moving or impaired. Abnormal amounts of inventory costs related to, among other things, idle facilities, freight handling and waste material expenses are recognized as period charges and expensed as incurred.

Property, Plant and Equipment Property, plant and equipment, including leasehold improvements, is stated at cost and depreciated or amortized when placed into service using the straight-line method, based on useful lives as follows:

Asset Description	Useful Life (years)
Building		15 — 30
Fermentation equipment		10 — 20
Oil processing equipment		10 — 20
Other machinery and equipment		5 — 10
Furniture and fixtures		5 — 7
Computer hardware and software		3 — 7

Leasehold improvements are amortized over the shorter of the useful life of the asset or the lease term, including renewals when probable. Costs for capital assets not yet available for commercial use have been capitalized as construction in progress and will be depreciated in accordance with the above guidelines once placed into service. Assets classified as “held for future use” are not depreciated until they are placed in or returned to productive service. Costs for repairs and maintenance are expensed as incurred.

Patent Costs The Company has filed a number of patent applications in the U.S. and in foreign countries. Legal and related costs incurred in connection with pending patent applications have been capitalized. Costs related to patent applications are amortized over the life of the patent, if successful, or charged to operations upon denial or in the period during which a determination not to further pursue such application is made. The Company has also capitalized external legal costs incurred in the defense of its patents when it is believed that the future economic benefit of the patent will be increased and a successful defense is probable. Capitalized patent defense costs are amortized over the remaining life of the related patent.

Goodwill and Other Intangible Assets The Company recorded goodwill and purchased intangible assets in its acquisition of OmegaTech in April, 2002 and goodwill in its acquisition of FermPro in September 2003. The goodwill acquired in the OmegaTech and FermPro acquisitions is subject to the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), and, accordingly, is not being amortized. In accordance with SFAS 142, goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. Furthermore, SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets and patents are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally ten to seventeen years (see Note 8).

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Impairment of Long-Lived Assets In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), the Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Recoverability measurement and estimating of undiscounted cash flows is done at the lowest possible level for which there is identifiable assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Recently Issued Accounting Pronouncements In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and disclosure for uncertain income tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. This interpretation will be effective for the fiscal year beginning November 1, 2007. The Company is currently assessing the effect of adopting FIN 48 on its consolidated financial position and results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect that the adoption of SFAS 157 will have on its consolidated financial position and results of operations.

3. EQUITY-BASED COMPENSATION

Prior to November 1, 2005, the Company accounted for its equity-based compensation plans under the recognition and measurement provisions of APB 25, and related interpretations, as permitted by SFAS 123. Effective November 1, 2005, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified prospective transition method. Under the modified prospective transition method, compensation cost recognized in fiscal 2006 includes: (a) compensation cost for all equity-based payments granted prior to but not yet vested as of November 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (b) compensation cost for all equity-based payments granted subsequent to November 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Results for prior periods have not been restated.

As a result of adopting SFAS 123R on November 1, 2005, the Company’s income before income taxes and net income for the year ended October 31, 2006 were $3.3 million and $2.1 million lower, respectively, than if the Company had continued to account for equity-based compensation under APB 25. Basic and diluted earnings per share for the year ended October 31, 2006 were each $0.06 lower than if the Company had continued to account for equity-based compensation under APB 25.

The following table (in thousands, except per share amounts) illustrates the effect on net income and net income per share as if the Company had applied the fair value recognition provisions of SFAS 123 to equity-based compensation for the years ended October 31, 2005 and 2004. The reported and pro forma net income and net income per share for the year ended October 31, 2006 are the same because equity-based compensation is calculated under the provisions of SFAS 123R. The amounts for the year ended October 31, 2006 are included in the following table only to provide net income and net income per share for a comparative presentation to the periods of the previous years. The pro forma disclosure for the years ended October 31, 2005 and 2004 utilized the Black-Scholes-Merton option-pricing formula to estimate the value of the respective options with such value amortized to expense over the options’ vesting periods.

	Year ended October 31,
	2006		2005			2004
Net income, as reported	$	17,811	$	15,284		$	47,048
Deduct: Total equity-based employee compensation expense determined under fair value-based methods for all awards		—		(58,349	)		(17,920	)
Pro forma net income (loss)	$	17,811	$	(43,065	)	$	29,128
Net income (loss) per share:
Basic — as reported	$	0.55	$	0.49		$	1.62
Basic — pro forma	$	0.55	$	(1.38	)	$	1.00
Diluted — as reported	$	0.55	$	0.48		$	1.55
Diluted — pro forma	$	0.55	$	(1.38	)	$	0.96

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In December 2004 and January and May 2005, the Company modified the terms of certain outstanding and unvested stock options whose exercise prices were greater than Martek’s closing stock price on the modification dates. Total modifications served to immediately vest approximately 1.2 million unvested stock options. The accelerations enabled the Company to avoid recording approximately $27 million of compensation cost that would have been required to be recognized under SFAS 123R.

The Company has utilized the Black-Scholes-Merton valuation model for estimating the fair value of the stock options granted during the year ended October 31, 2006, as well as for option grants during all prior periods. As follows are the weighted average assumptions used in valuing the stock options granted during the years ended October 31, 2006, 2005 and 2004, and a discussion of the Company’s methodology for developing each of the assumptions used:

	Year ended October 31,
	2006			2005			2004
Expected volatility		61.1	%		62.7	%		78.9	%
Risk-free interest rate		4.7	%		3.9	%		3.9	%
Expected life of options	5 years			5 years			5 years
Expected dividend yield		0	%		0	%		0	%
Forfeiture rate		1	%		2	%		2	%

Expected Volatility — Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses the historical volatility over the preceding five-year period to estimate expected volatility. Since fiscal 2001, the Company’s annual volatility has ranged from 61.1% to 78.9% with an average of 68.1%.

Risk-Free Interest Rate — This is the average U.S. Treasury rate (having a term that most closely resembles the expected life of the option) for the quarter in which the option was granted.

Expected Life of Options — This is the period of time that the options granted are expected to remain outstanding. This estimate is based primarily on historical exercise data. Options granted during the years ended October 31, 2006, 2005 and 2004 have a maximum term of ten years.

Expected Dividend Yield — The Company has never declared or paid dividends on its common stock and does not anticipate paying any dividends in the foreseeable future.

Forfeiture Rate — This is the estimated percentage of options granted that are expected to be forfeited or cancelled on an annual basis before becoming fully vested. The Company estimates the forfeiture rate based on past turnover data with further consideration given to the level of the employees to whom the options were granted.

As of October 31, 2006, the Company had several equity-based compensation plans, which are described below. The compensation cost that has been charged against income for those plans for the year ended October 31, 2006 was approximately $3.3 million. The total income tax benefit recognized in the income statement for equity-based compensation arrangements was approximately $1.2 million in the year ended October 31, 2006. Compensation cost capitalized as part of inventory during the year ended October 31, 2006 was approximately $500,000. For stock subject to graded vesting, the Company has utilized the “straight-line” method for allocating compensation cost by period.

Stock Option Plans

As of October 31, 2006, the Company had stock options outstanding that were previously granted under the Company’s 1986 Stock Option Plan, the 1994 Directors’ Option Plan, the 1997 Stock Option Plan, the 2001 Stock Option Plan, the 2002 Stock Incentive Plan, the 2003 New Employee Stock Option Plan and the 2004 Stock Incentive Plan, collectively referred to as the “Option Plans.” With exception of the 1994 Directors’ Option Plan, option awards under the Option Plans are granted at prices as determined by the Compensation Committee, but shall not be less than the fair market value of the Company’s common stock on the date of grant. Stock options granted include both qualified and non-qualified options and vest over a period of up to five years and have a maximum term of ten years from the date of grant. At October 31, 2006, approximately 1.3 million shares of common stock were available for future grants under the Option Plans.

As result of the Company’s purchase of OmegaTech in 2002, the Company assumed 154,589 options from the OmegaTech, Inc. 1996 Stock Option Plan (“OmegaTech Plan”). No new options may be issued under this plan as of the date of the purchase. Under the OmegaTech Plan, exercise prices were determined by the Compensation Committee, but at an exercise price not less than the fair market value of OmegaTech’s common stock on the date of grant. Stock options granted include both qualified and non-qualified options and were all 100% vested as of the purchase date. The 2003 New Employee Stock Option Plan (“2003 Plan”) was adopted in conjunction with the acquisition of FermPro in 2003.

A summary of option activity under the Option Plans as of October 31, 2006 and changes during the three years then ended are as follows (shares and intrinsic value in thousands):

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								Weighted Average
								Remaining
	Number of			Weighted Average		Aggregate		Contractual
	Shares			Price/Share		Intrinsic Value		Term (years)
Options outstanding at October 31, 2003		4,294		$	22.55
Options exercisable at October 31, 2003		2,514		$	18.45
Granted		1,067		$	59.60
Exercised		(1,240	)	$	16.39
Cancelled		(71	)	$	36.39
Options outstanding at October 31, 2004		4,050		$	33.91
Options exercisable at October 31, 2004		2,138		$	26.33
Granted		700		$	48.69
Exercised		(779	)	$	23.98
Cancelled		(47	)	$	44.79
Options outstanding at October 31, 2005		3,924		$	38.39
Options exercisable at October 31, 2005		3,438		$	40.14
Granted		59		$	31.71
Exercised		(98	)	$	24.92
Cancelled		(171	)	$	40.21
Options outstanding at October 31, 2006		3,714		$	38.56	$	6,483		6.2
Options exercisable at October 31, 2006		3,466		$	39.32	$	6,049		6.2

Detailed information on the options outstanding under the Option Plans on October 31, 2006 by price range is set forth as follows:

	OPTIONS OUTSTANDING						OPTIONS EXERCISABLE
			Weighted
			Average
			Remaining		Weighted				Weighted
			Contractual		Average				Average
Range of	Options		Life		Exercise		Options		Exercise
Exercise Prices	Outstanding		(years)		Price		Exercisable		Price
$6.25 — $9.37		32,675		2.5	$	7.35		32,675	$	7.35
$9.38 — $14.07		128,529		3.3	$	11.84		128,529	$	11.84
$14.08 — $21.12		602,839		4.2	$	16.48		537,129	$	16.39
$21.13 — $31.69		1,151,962		6.0	$	27.68		1,046,994	$	27.85
$31.70 — $47.55		170,075		7.8	$	39.40		115,635	$	41.78
$47.56 — $68.08		1,628,369		7.2	$	57.07		1,605,369	$	57.13
		3,714,449		6.2	$	38.56		3,466,331	$	39.32

The weighted average fair market value of the options at the date of grant for options granted during the years ended October 31, 2006, 2005 and 2004 was $17.84, $28.59 and $39.21, respectively. The total intrinsic value of stock options exercised during the year ended October 31, 2006 was approximately $600,000.

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As of October 31, 2006, there was $2.3 million of total unrecognized compensation cost related to unvested stock options granted under the Option Plans. The cost is expected to be recognized through fiscal 2011 with a weighted average recognition period of approximately one year.

4. DSM SUPPLY AND LICENSE AGREEMENT

In April 2004, the Company entered into an agreement with DSM extending the existing relationship between the two companies involving the production and supply of ARA, one of the Company’s nutritional oils that it sells to its infant formula licensees. Among other things, this agreement provides for the grant to the Company by DSM of a license related to certain technologies associated with the manufacture of ARA. This grant involved a license fee totaling $10 million, which is being amortized over the 15-year term of the agreement using the straight-line method. In February 2006, the Company and DSM entered into an amendment to the original agreement (“the Amendment”). The Amendment served to provide certain clarifying and updating language to the original agreement and to establish the overall economics associated with DSM’s expansion at both its Belvidere, New Jersey and Capua, Italy production facilities. Martek guaranteed the recovery of certain costs incurred by DSM in connection with these expansions, up to $40 million, with such amount being reduced annually through December 31, 2008 (the “Recoupment Period”) based upon ARA purchases by us in excess of specified minimum thresholds. As of October 31, 2006, the guarantee amount has been reduced to approximately $25.0 million. The guarantee amount payable, if any, at the end of the Recoupment Period, must be paid by January 31, 2009. The amount paid, if any, will be credited against a portion of DSM invoices for purchases made after the Recoupment Period. Annual ARA unit pricing under the agreement with DSM utilizes a cost-plus approach that is based on the prior year’s actual costs incurred adjusted for current year volume and cost expectations. Calendar 2006 ARA purchases have been valued by us based on amounts and unit prices invoiced by DSM. Certain issues, however, still need to be resolved in order to finalize 2006 ARA pricing. Absent a favorable resolution to us, the recorded cost of ARA will approximate, in all material respects, the agreed-upon amounts when negotiations with DSM are complete.

5. SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES

The Company has classified all short-term investments and marketable securities as available-for-sale. Available-for-sale securities are carried at fair value, based on specific identification. Unrealized gains and losses on these securities, if any, are reported as accumulated other comprehensive income, which is a separate component of stockholders’ equity. The Company’s available-for-sale securities consist primarily of taxable municipal auction rate securities, and totaled $11.3 million and $22.3 million as of October 31, 2006 and October 31, 2005, respectively. There were no unrealized holding gains or losses or realized gains or losses during the years ended October 31, 2006, 2005 and 2004.

6. INVENTORIES

Inventories consist of the following (in thousands):

	October 31,
	2006			2005
Finished goods	$	43,928		$	34,328
Work in process		66,968			55,073
Raw materials		3,024			3,634
Total inventories		113,920			93,035
Less: inventory reserve		(1,600	)		(1,500	)
Total inventories, net		112,320			91,535
Less: long-term portion		(12,000	)		—
Inventories, net	$	100,320		$	91,535

Idle capacity costs totaled $9.6 million for the year ended October 31, 2006 and related primarily to certain fixed costs associated with the underutilized portion of the Company’s Kingstree, South Carolina production plant. See Note 11 for a discussion of the Company’s restructuring of plant operations in October 2006.

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7. PROPERTY, PLANT AND EQUIPMENT

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

	October 31,
	2006			2005
Land	$	2,320		$	2,318
Building and improvements		53,177			45,515
Machinery and equipment		152,635			164,039
Furniture and fixtures		2,716			3,161
Computer hardware and software		8,602			8,085
		219,450			223,118
Less: accumulated depreciation and amortization		(29,674	)		(26,764	)
		189,776			196,354
Construction in progress		10,984			56,840
Assets held for future use, net		90,685			37,539
Property, plant and equipment, net	$	291,445		$	290,733

Depreciation and amortization expense on property, plant and equipment totaled approximately $14.3 million, $14.0 million and $6.8 million for the years ended October 31, 2006, 2005 and 2004, respectively.

Assets held for future use are comprised of certain production assets that are not expected to be utilized in the manufacturing process for a period of at least six months. See Note 11 for discussion of assets being held for sale.

8. GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets and related accumulated amortization consist of the following (in thousands):

	October 31, 2006							October 31, 2005
			Accumulated							Accumulated
Intangible Asset	Gross		Amortization			Net		Gross		Amortization			Net
Trademarks	$	2,053	$	(545	)	$	1,508	$	2,026	$	(401	)	$	1,625
Patents		19,233		(1,835	)		17,398		11,741		(1,734	)		10,007
Core technology		1,708		(455	)		1,253		1,708		(342	)		1,366
Current products		10,676		(3,228	)		7,448		10,676		(2,516	)		8,160
Licenses		11,091		(1,870	)		9,221		11,091		(1,120	)		9,971
Goodwill		48,603		—			48,603		48,490		—			48,490
	$	93,364	$	(7,933	)	$	85,431	$	85,732	$	(6,113	)	$	79,619

Core technology and current products relate to the value assigned to the products purchased as part of the OmegaTech acquisition in fiscal 2002. The Company recorded amortization expense on intangible assets of approximately $2.8 million, $2.5 million and $1.9 million during the years ended October 31, 2006, 2005 and 2004, respectively. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the succeeding five years will be approximately $3.2 million.

The Company recorded patent amortization expense of approximately $1.1 million, $800,000 and $600,000 in the years ended October 31, 2006, 2005 and 2004, respectively.

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9. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):

	October 31,
	2006		2005
Salaries and employee benefits	$	12,328	$	7,214
Inventory receipt obligations		3,094		1,544
Other		8,676		4,934
	$	24,098	$	13,692

10. NOTES PAYABLE AND LONG-TERM DEBT

In September 2005, the Company entered into a $135 million secured revolving credit facility that amended and expanded the $100 million credit facility entered into in May 2004. The revolving credit facility is collateralized by accounts receivable, inventory and all capital stock of the Company’s subsidiaries and expires in September 2010. The weighted average interest rate on amounts outstanding under the credit facility was approximately 6.4%, 4.9% and 3.5% for the years ended October 31, 2006, 2005 and 2004, respectively, and the weighted average commitment fee rate on unused amounts was approximately 0.2%, 0.3% and 0.3% for the years ended October 31, 2006, 2005 and 2004, respectively. Both the interest and commitment fee rates are based on LIBOR and the Company’s current leverage ratio. Among other things, the credit facility agreement contains restrictions on future debt, the payment of dividends and the further encumbrance of assets. In addition, the credit facility requires that the Company comply with specified financial ratios and tests, including minimum coverage ratios and maximum leverage ratios. As of October 31, 2006, the Company was in compliance with all of these debt covenants and had outstanding borrowings of $36 million under the revolving credit facility. All borrowings are due at maturity.

In connection with the purchase of certain assets and the assumption of certain liabilities of FermPro in fiscal 2003, the Company assumed a $10 million secured note. The note was amended in January 2004 and is now an unsecured obligation of the Company with a maturity date of December 31, 2008. The note has a stated interest rate of 5% and principal is amortized over a 20-year period with the balance due at maturity.

The annual maturities of the Company’s notes payable and long-term debt at October 31, 2006 are summarized as follows (in thousands):

Fiscal Year
2007	$	670
2008		686
2009		7,777
2010		183
2011		100
Subsequent to 2011		626
	$	10,042

During the years ended October 31, 2006, 2005 and 2004, the Company incurred interest on borrowings of approximately $3.6 million, $3.5 million and $2.1 million, respectively, and recorded amortization of related debt fees of approximately $200,000, $300,000 and $200,000, respectively. Interest costs have been capitalized to the extent that the related borrowings were used to cover the balance of projects under construction. Accordingly, during the years ended October 31, 2006, 2005 and 2004, approximately $700,000, $3.5 million and $2.3 million of interest has been capitalized in the accompanying financial statements.

The carrying amounts of notes payable and long-term debt under the revolving credit facility at October 31, 2006 and 2005 approximate their fair values based on instruments of similar terms available to the Company.

11. RESTRUCTURING CHARGE

In October 2006, the Company restructured its plant operations following a review of production and cost structure. Under the restructuring, a substantial portion of production previously taking place at the Winchester, Kentucky manufacturing facility was transferred to the Kingstree, South Carolina manufacturing facility. The restructuring is expected to reduce manufacturing costs and operating expenses due to improved overall manufacturing efficiency and a reduction in the Company’s workforce at the Winchester site.

As a result of the restructuring, a charge of approximately $4.7 million was recorded in fiscal 2006. This charge includes employee separation costs of $2.0 million, a write-down of certain assets of $2.6 million and professional fees of $100,000. Employee separation costs include salary

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continuation, severance, medical and other benefits. The recorded asset write-down relates primarily to certain assets which formerly supported Winchester production and which are now being held for sale. The resulting net book value of these assets included in the Company’s consolidated financial statements is approximately $200,000 at October 31, 2006, which represents their estimated fair market value less costs to sell. The Company anticipates incurring approximately $500,000 of additional restructuring costs in fiscal 2007 related to employee separation costs.

The following table summarizes the activity related to the restructuring charge and liability for restructuring costs (in thousands):

	Employee
	Separation			Asset
	Costs			Write-down			Other			Total
Initial charge in the fourth quarter of fiscal 2006	$	2,032		$	2,568		$	129		$	4,729
Cash payments		(60	)		—			(55	)		(115	)
Asset write-down		—			(2,568	)		—			(2,568	)
Liability for restructuring costs at October 31, 2006	$	1,972		$	—		$	74		$	2,046

12. COMMITMENTS AND CONTINGENCIES

Leases The Company leases its Columbia, Maryland premises under an operating lease. In May 2004, the Company amended its existing lease for laboratory and administrative space at the Columbia, Maryland office to extend the term of the lease as well as expand the Company’s leased space by approximately 15%. In fiscal 2006, the Company expanded its Columbia leased space by an additional 20%. The leases expire in January 2011. The terms of the lease include annual rent escalations of 2.5%.

The Company also leases its premises in Boulder, Colorado under an operating lease that expires in May 2008. The terms of the lease include annual rent escalations of 3.5%. Additionally, the Company leases certain property classified as operating leases at its Winchester, Kentucky and Kingstree, South Carolina manufacturing facilities and its Boulder offices.

Rent expense was approximately $5.0 million, $4.0 million and $1.6 million for the years ended October 31, 2006, 2005 and 2004, respectively. The Company received sublease income of approximately $100,000 for the year ended October 31, 2004 for office and lab space that it had previously subleased in Columbia, Maryland.

Future minimum lease payments under operating leases at October 31, 2006 are as follows (in thousands):

Fiscal Year
2007	$	1,013
2008		997
2009		898
2010		915
2011		257
After 2011		342
	$	4,422

Scientific Research Collaborations The Company has entered into various collaborative research and license agreements for its non-nutritional algal technology. Under these agreements, the Company is required to fund research or to collaborate on the development of potential products. Certain of these agreements also commit the Company to pay royalties upon the sale of certain products resulting from such collaborations. Martek incurred approximately $100,000 in each of fiscal 2006, 2005 and 2004 in royalties under such agreements pertaining to the Company’s fluorescent detection products.

In December 2003, the Company entered into a collaboration agreement with a Canadian biotechnology company to co-develop DHA products from plants. This arrangement included the reimbursement of expenses incurred by the co-collaborator as well as the payment by the Company of potential royalties and additional milestone payment amounts if certain scientific results were achieved in the future. In January 2007, an amendment to this agreement was executed. Pursuant to the amendment, the co-collaborator will continue its research and development until June 2007, with expenses to be reimbursed by the Company through April 2007. Furthermore, the Company acquired exclusive license rights to the plant-based DHA technology developed by the co-collaborator for a period of at least 16 years. As consideration for this exclusive license, the Company will make a license payment of $750,000, with additional payments of up to $750,000 due in certain circumstances, subject to minimum royalties of 1.5% of gross margin, as defined, if Martek ultimately commercializes a plant-based DHA using any technology. During the term of the license, the Company may be required to pay additional royalties of up to 6.0% of gross margin, as defined, on sales of products in the future which utilize certain licensed technologies. At the amendment date, the respective milestones provided for in the original agreement had not been achieved, and no milestone payments specified in the original agreement have been or will be made.

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Purchase Commitments The Company has entered into an agreement to purchase from a third-party manufacturer a minimum quantity of extraction services to be utilized in ARA production. The commitment expires on December 31, 2008. As of October 31, 2006, the Company’s remaining obligation was approximately $10.2 million.

OmegaTech Milestone In April 2002, the Company completed its acquisition of OmegaTech, Inc. (“OmegaTech”), a DHA producer located in Boulder, Colorado. In connection with the purchase, the Company issued 1,765,728 shares of the Company’s common stock in exchange for all of the outstanding capital stock of OmegaTech. The aggregate purchase price for OmegaTech was approximately $54.1 million. The purchase agreement also provided for additional stock consideration of up to $40 million, subject to certain pricing adjustments, if four milestones are met. Two of these milestones relate to operating results and two relate to regulatory and labeling approvals in the U.S. and Europe. In June 2003, the conditions of one of the regulatory milestones were met, and accordingly, approximately 358,566 shares of Martek common stock, valued at approximately $14.2 million, were issued. The payment of this additional consideration was recorded as goodwill.

As of October 31, 2006, the Company does not believe the second regulatory milestone has been achieved. In addition, the Company does not believe that either financial milestone has been achieved. The representative of the former OmegaTech stockholders has advised us that he believes that the common stock issuable with respect to the second regulatory milestone and one of the financial milestones should be issued. Martek disagrees with that conclusion. The parties are currently involved in litigation to resolve this dispute with respect to the second regulatory milestone. The total Martek common stock that may be issued relating to the three remaining milestones is subject to a formula that is based on the average market price of the Company’s stock on the dates that the individual milestones are determined to have been achieved, up to a maximum of 1.9 million shares. Any contingent consideration paid related to these milestones would be recorded as goodwill.

Patent Infringement Litigation In September 2003, the Company filed a patent infringement lawsuit in the U.S. District Court in Delaware against Nutrinova Nutrition Specialties & Food Ingredients GmbH (Nutrinova) and others alleging infringement of certain of our U.S. patents. In December 2005, Nutrinova’s DHA business was sold to Lonza Group LTD, a Swiss chemical and biotechnology group, and the parties agreed to add Lonza to the U.S. lawsuit. In October 2006, the infringement action in the United States was tried, and a verdict favorable to Martek was returned. The jury found that Lonza infringed all the asserted claims of several Martek patents and that these patents were valid. It also found that Lonza acted willfully in its infringement of one of these patents. The judge will now determine if any of the jury’s decisions were inappropriate as a matter of law, whether Martek is entitled to a permanent injunction against Lonza, and, if so, whether the permanent injunction should be stayed pending the outcome of any appeal. In connection with its patent defense, the Company has incurred and capitalized costs totaling $9.6 million.

Class Action Lawsuit Since the end of April 2005, several lawsuits have been filed against the Company and certain of its officers, which have been consolidated and in which plaintiffs are seeking class action status. The consolidated lawsuit was filed in United States District Court for the District of Maryland and alleges, among other things, that the defendants, including the Company, made false and misleading public statements and omissions of material facts concerning the Company. The Company believes it has meritorious defenses and is defending vigorously against this action. The Company is unable at this time to predict the outcome of this lawsuit or reasonably estimate a range of possible loss, if any. The Company believes that the costs and expenses related to this litigation could be significant. These lawsuits are further described in Item 3 of Part I of this Form 10-K, “Legal Proceedings.”

Other The Company is involved in various other legal actions. Management believes that these actions, either individually or in the aggregate, will not have a material adverse effect on the Company’s results of operations or financial condition.

13. LICENSE AGREEMENTS

The Company has licensed certain technologies and recognized license fee revenue under various agreements. License fees are recorded as deferred revenue and amortized on a straight-line basis over the term of the agreement, generally 15 to 25 years. The Company recognized approximately $500,000, $500,000 and $400,000 as license revenue for the years ended October 31, 2006, 2005 and 2004, respectively. The balance of these license fees and prepaid product purchases remaining in deferred revenue was approximately $12.1 million and $9.7 million at October 31, 2006 and 2005, respectively.

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14. NET INCOME PER SHARE

Basic net income per share is computed using the weighted average number of common shares outstanding. Diluted net income per share is computed using the weighted average number of common shares outstanding, giving effect to stock options and warrants using the treasury stock method.

The following table presents the calculation of basic and diluted net income per share (in thousands, except per share amounts):

	Year ended October 31,
	2006		2005		2004
Net income	$	17,811	$	15,284	$	47,048
Weighted average shares outstanding, basic		32,113		31,164		29,033
Effect of dilutive potential common shares:
Stock options		230		849		1,315
Warrants		—		19		38
Total dilutive potential common shares		230		868		1,353
Weighted average shares outstanding, diluted		32,343		32,032		30,386
Net income per share, basic	$	0.55	$	0.49	$	1.62
Net income per share, diluted	$	0.55	$	0.48	$	1.55

Employee stock options to purchase approximately 2.7 million, 1.7 million and 600,000 shares were outstanding but were not included in the computation of diluted net income per share for the years ended October 31, 2006, 2005 and 2004, respectively, because the effects would have been antidilutive.

15. STOCKHOLDERS’ EQUITY

Issuance of Common Stock

In January 2005, the Company completed an underwritten public offering of 1,756,614 shares of common stock at price of $49.10 per share pursuant to a shelf registration statement. Net proceeds to the Company, after deducting an underwriting discount and offering expenses, amounted to approximately $81.4 million. Of the proceeds, $30 million was used for the partial repayment of debt.

In February 2004, the Company completed an underwritten issuance of 176,885 shares of common stock at a price of $65.59 per share pursuant to a shelf registration. Net proceeds to the Company, after deducting underwriters’ fees and expenses, amounted to approximately $11.3 million.

Stockholder Rights Plan

In February 2006, the Company’s Board of Directors approved the renewal of its Stockholder Rights Plan through the adoption of a new Rights Agreement. The new Rights Agreement was effective as of February 7, 2006, which was the date that Martek’s then-existing Rights Agreement expired. All rights under the previous Rights Agreement were cancelled upon its expiration.

In connection with the adoption of the new Rights Agreement, preferred stock purchase rights (“Rights”) were granted as a dividend at the rate of one Right for each share of the Company’s common stock held of record at the close of business on February 7, 2006. Each share issued after February 7, 2006 also is accompanied by a Right. Each Right provides the holder the opportunity to purchase 1/1000th of a share of Series B Junior Participating Preferred Stock under certain circumstances at a price of $150 per share of such preferred stock. All rights expire on February 7, 2016.

At the time of adoption of the Rights Plan, the Rights were neither exercisable nor traded separately from the common stock. The Rights will be exercisable only if a person or group in the future becomes the beneficial owner of 20% or more of the common stock or announces a tender or exchange offer which would result in its ownership of 20% or more of the common stock. Ten days after a public announcement that a person or group has become the beneficial owner of 20% or more of the common stock, each holder of a Right, other than the acquiring person, would be entitled to purchase $300 worth of the common stock of the Company for each Right at the exercise price of $150 per Right, which would effectively enable such Right-holders to purchase the common stock at one-half of the then-current price.

If the Company is acquired in a merger, or 50% or more of the Company’s assets are sold in one or more related transactions, each Right would entitle the holder thereof to purchase $300 worth of common stock of the acquiring company at the exercise price of $150 per Right, which would effectively enable such Right-holders to purchase the acquiring company’s common stock at one-half of the then-current market price.

At any time after a person or group of persons becomes the beneficial owner of 20% or more of the common stock, the Board of Directors, on behalf of all stockholders, may exchange one share of common stock for each Right, other than Rights held by the acquiring person.

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The Board of Directors may authorize the redemption of the Rights, at a redemption price of $.001 per Right, at any time until ten days (as such period may be extended or shortened by the Board) following the public announcement that a person or group of persons has acquired beneficial ownership of 20% or more of the outstanding common stock.

The Rights Agreement provides that at least once every three years the Board of Directors will review and evaluate the Rights Agreement in order to consider whether the maintenance of the Rights Agreement continues to be in the interests of the Company and its stockholders.

16. INCOME TAXES

The difference between the tax provision and the amount that would be computed by applying the statutory Federal income tax rate to income before taxes is attributable to the following (in thousands):

	Year ended October 31,
	2006		2005		2004
Federal income tax expense at 35%	$	9,817	$	8,425	$	7,656
State taxes, net of Federal benefit		251		283		828
Change in valuation allowance		—		—		(33,593	)
Other		170		78		(67	)
Total provision (benefit)	$	10,238	$	8,786	$	(25,176	)

During the year ended October 31, 2004, the Company reversed approximately $51 million of its deferred tax asset valuation allowance. This reversal resulted in the recognition of an income tax benefit totaling $25.2 million, a direct increase to stockholders’ equity of approximately $22.8 million due to historical non-qualified stock option exercises and a decrease to goodwill of approximately $2.6 million due to certain basis differences and net operating loss carryforwards resulting from the Company’s acquisition of OmegaTech.

Substantially all of the provision or benefit for income taxes in fiscal 2006, 2005 and 2004 results from changes in deferred income taxes.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes as well as net operating loss carryforwards. Significant components of the Company’s net deferred income taxes are as follows (in thousands):

	October 31,
	2006			2005
Deferred tax assets:
Accruals and reserves	$	1,815		$	1,408
Patents and trademarks		309			528
Net operating loss carryforwards		66,437			77,833
Deferred revenue		4,271			3,494
Equity-based compensation		1,306			—
Other		79			214
Total assets		74,217			83,477
Deferred tax liabilities:
Property, plant and equipment		(10,513	)		(5,958	)
Acquired intangibles		(3,051	)		(3,507	)
Goodwill		(816	)		(559	)
Other		(101	)		—
Total liabilities		(14,481	)		(10,024	)
Total deferred tax asset		59,736			73,453
Valuation allowance		(18,586	)		(23,832	)
Deferred tax asset, net of valuation allowance		41,150			49,621
Less: current deferred tax asset		(1,181	)		(1,420	)
Long-term deferred tax asset	$	39,969		$	48,201

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Realization of total deferred tax assets is contingent upon the generation of future taxable income. Due to the uncertainty of realization, a valuation allowance against certain deferred tax assets primarily related to net operating loss carryforwards has been recorded as of October 31, 2006 and 2005. Should realization of these deferred tax assets become more likely than not, approximately $9.9 million of the resulting benefit will be reflected as an income tax benefit upon reversal of the allowance, approximately $7.3 million will be reflected as a reduction to goodwill and approximately $1.4 million will be reflected as an increase to stockholders’ equity. Although the Company has net operating losses available to offset future taxable income, the Company may be subject to Federal alternative minimum taxes.

In connection with its implementation of SFAS 123R on November 1, 2006, the Company adopted the tax law method for determining the order in which deductions, carryforwards and credits are realized by the Company. Consistent with the tax law approach, the Company recorded increases to additional paid-in capital of approximately $4.9 million in fiscal 2006 which related to the realization of the tax benefits associated with fiscal 2006 non-qualified stock exercises and the reversal of valuation allowance on certain net operating loss carryforwards related to stock option exercises in prior years that were deemed realized during fiscal year 2006. Furthermore, during the fiscal 2006, the Company made a correction to its accounting for certain prior year stock option exercises whose benefit had been fully recognized as an increase to additional paid in capital. This correction resulted in a $3.3 million decrease to deferred tax asset and a corresponding decrease to additional paid-in capital.

As of October 31, 2006, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $183 million, which expire at various dates between 2010 and 2025. The timing and manner in which U.S. net operating loss carryforwards may be utilized may be limited if the Company incurs a change in ownership as defined under Section 382 of the Internal Revenue Code.

17. EMPLOYEE 401(K) PLAN

The Company maintains an employee 401(k) Plan (the “Plan”). The Plan, which covers all employees 21 years of age or older, stipulates that participating employees may elect an amount up to 100% of their total compensation to contribute to the Plan, not to exceed the maximum allowable by Internal Revenue Service regulations. The Company may make “matching contributions” equal to a discretionary percentage up to 3% of a participant’s salary, based on deductions of up to 6% of a participant’s salary. All amounts deferred by a participant under the 401(k) Plan’s salary reduction feature vest immediately in the participant’s account while contributions the Company may make would vest over a five-year period in the participant’s account. The Company contribution was approximately $900,000, $800,000 and $600,000 for the years ended October 31, 2006, 2005 and 2004, respectively.

18. QUARTERLY FINANCIAL INFORMATION (unaudited)

Quarterly financial information for fiscal 2006 and 2005 is presented in the following table (in thousands, except per share data):

	1st		2nd		3rd			4th
	Quarter		Quarter		Quarter			Quarter
2006
Total revenues	$	62,892	$	70,218	$	70,358		$	67,186
Cost of revenues		38,209		42,975		43,875			43,694
Income from operations		9,295		10,280		8,717			1,285	(1)
Net income		5,583		6,288		5,299			641	(1)
Net income per share, basic		0.17		0.20		0.16			0.02
Net income per share, diluted		0.17		0.19		0.16			0.02
2005
Total revenues	$	66,489	$	55,831	$	39,489	(2)	$	56,043
Cost of revenues		38,906		35,377		25,690			33,408
Income (loss) from operations		11,137		4,951		(587	)(2)		7,444
Net income (loss)		7,072		3,433		(109	)(2)		4,888
Net income (loss) per share, basic		0.24		0.11		(0.00	)		0.15
Net income (loss) per share, diluted		0.23		0.11		(0.00	)		0.15

(1)	In the fourth quarter of fiscal 2006, Martek recognized a charge of $4.7 million related to the restructuring of plant operations (see Note 11).
(2)	In the third quarter of fiscal 2005, revenues declined due to a build-up of inventory by certain customers.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

     None.

ITEM 9A. CONTROLS AND PROCEDURES.

a)

Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act rules 13a—15 (e) and 15d—15 (e). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report the disclosure controls and procedures were effective.

b)

Internal Control Over Financial Reporting. The report called for by Item 308(a) of Regulation S-K is incorporated herein by reference to Management’s Report on Internal Control Over Financial Reporting, included in Part II, Item 8 of this Form 10-K. The attestation report called for by Item 308(b) of Regulation S-K is incorporated herein by reference to the attestation report of Ernst & Young LLP, our independent registered public accounting firm, on management’s assessment of internal control over financial reporting, included in Part II, Item 8 of this Form 10-K. There was no change in our internal control over financial reporting during our last fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information relating to our Directors and Executive Officers is set forth in Part I of this report under the caption Item 1 — Business “Directors and Executive Officers of the Registrant.” Additional information on our directors and the other information required by this item will be contained in the following sections of our 2007 Definitive Proxy Statement, which sections are hereby incorporated by reference:

Election of Directors
Board Committees
Section 16(a) Beneficial Ownership Reporting Compliance

As part of our system of corporate governance, our Board of Directors has adopted a code of ethics for senior financial officers that is specifically applicable to our chief executive officer, president, chief financial officer and controller. This code of ethics is available on the corporate governance page of the investor information section of our website at http://www.martek.com. We intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on our website at the address above.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item will be contained in the following sections of our 2007 Definitive Proxy Statement, which sections are hereby incorporated by reference:

Directors Fees
Compensation

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by this item will be contained in the following sections of our 2007 Definitive Proxy Statement, which sections are hereby incorporated by reference:

Beneficial Ownership of Common Stock
Equity Compensation Plan Information

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item will be contained in the following sections of our 2007 Definitive Proxy Statement, which section is hereby incorporated by reference:

Certain Relationships and Related Transactions

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by this item will be contained in the following sections of our 2007 Definitive Proxy Statement, which section is hereby incorporated by reference:

Independent Auditors

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)(1) Index to Consolidated Financial Statements

The Financial Statements listed in the Index to Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K. See Part II, Item 8- Financial Statements and Supplementary Data.

(a)(2) Financial Statement Schedules

Schedule II Valuation and Qualifying Accounts- Years Ended October 31, 2006 and 2005 69

Other financial statement schedules for the years ended October 31, 2006 and 2005 and financial statement schedules for the year ended October 31, 2004 have been omitted since they are either not required, not applicable, or the information is otherwise included in the consolidated financial statements or the notes to consolidated financial statements.

(a)(3) Exhibits

The Exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report.

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SCHEDULE II

MARTEK BIOSCIENCES CORPORATION

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED OCTOBER 31, 2006 AND 2005

In thousands
	Balance at							Balance at
Description	Beginning of Year		Additions		Deductions			End of Year
Year ended October 31, 2006:
Deferred tax valuation allowance	$	23,832	$	—	$	(5,246	)	$	18,586
Reserve for inventory obsolescence	$	1,500	$	500	$	(400	)	$	1,600
Year ended October 31, 2005:
Deferred tax valuation allowance	$	22,077	$	1,755	$	—		$	23,832
Reserve for inventory obsolescence	$	1,000	$	2,000	$	(1,500	)	$	1,500

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on January 16, 2007.

MARTEK BIOSCIENCES CORPORATION
By	/s/ Steve Dubin
	Steve Dubin
	Chief Executive Officer and Director

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

Signatures	Title	Date
/s/ Steve Dubin Steve Dubin	Chief Executive Officer and Director (Principal Executive Officer)	January 16, 2007
/s/ Peter L. Buzy Peter L. Buzy	Chief Financial Officer, Treasurer and Executive Vice President for Finance and Administration (Principal Financial Officer and Accounting Officer)	January 16, 2007
/s/ James R. Beery James R. Beery	Director	January 16, 2007
/s/ Harry J. D’Andrea Harry J. D’Andrea	Director	January 16, 2007
/s/ Robert J. Flanagan Robert J. Flanagan	Director	January 16, 2007
/s/ Polly B. Kawalek Polly B. Kawalek	Director	January 16, 2007
/s/ Jerome C. Keller Jerome C. Keller	Director	January 16, 2007
/s/ Henry Linsert, Jr. Henry Linsert, Jr.	Director	January 16, 2007

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Signatures	Title	Date
/s/ Douglas J. MacMaster, Jr. Douglas J. MacMaster, Jr.	Director	January 16, 2007
/s/ John H. Mahar John H. Mahar	Director	January 16, 2007
/s/ Eugene H. Rotberg Eugene H. Rotberg	Director	January 16, 2007

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EXHIBIT INDEX

EXHIBIT
NUMBER#	DESCRIPTION
3.01	Revised Restated Certificate of Incorporation.
3.02	Certificate of Amendment to the Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-3, File No. 33-89760, filed March 15, 1995, and incorporated by reference herein).
3.03	Certificate of Elimination of Series A Junior Participating Preferred Stock (filed as Exhibit 3.2 to the Company’s current report on Form 8-K, File No. 0-22354, filed on February 8, 2006, and incorporated by reference herein).
3.04	Certificate of Amendment to the Restated Certificate of Incorporation of the Company (filed as exhibit 3.07 to the Company’s quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended January 31, 2002, and incorporated by reference herein).
3.05	Amended By-Laws of Registrant (filed as exhibit 3.1 to the Company’s current report on Form 8-K, File No. 0-22354, filed on September 27, 2006, and incorporated by reference herein).
3.06	Certificate of Designation, Preferences and Rights of Series B Junior Participating Preferred Stock (filed as Exhibit 3.1 to the Company’s current report on Form 8-K, File No. 0-22354, filed on February 8, 2006, and incorporated by reference herein).
4.01	Specimen Stock Certificate for Common Stock.
4.02	Rights Agreement, dated as of February 7, 2006, between the Company and Registrar and Transfer Company, as Rights Agent (filed as Exhibit 4.1 to the Company’s current report on Form 8-K, File No. 0-22354, filed on February 8, 2006, and incorporated by reference herein).
10.01	Form Indemnification Agreement for directors.
10.02	1986 Stock Option Plan, as amended. +
10.03	Form of Proprietary Information, Inventions and Non-Solicitation Agreement.
10.04	Lease, commencement date October 15, 1992, between the Company and Aetna Life Insurance Company, as modified on August 5, 1993.
10.05	License Agreement, dated September 10, 1992, between the Company and Bestuurcentrum Der Verenigde Bedrijven Nutricia B.V. (filed as Exhibit 10.01 to the Company’s current report on Form 8-K, File No. 0-22354, dated December 15, 2006 and incorporated by reference herein).*
10.05A	Exhibits to September 10, 1992 License Agreement between the Company and Bestuurcentrum Der Verenigde Bedrijven Nutricia B.V.*
10.06	License Agreement, dated October 28, 1992, between the Company and Mead Johnson & Company (filed as Exhibit 10.02 to the Company’s current report on Form 8-K, File No. 0-22354, dated December 15, 2006 and incorporated by reference herein).*
10.06A	Exhibits to October 28, 1992 License Agreement between the Company and Mead Johnson & Company.*
10.07	License Agreement, dated January 28, 1993 between the Company and American Home Products Corporation represented by the Wyeth-Ayerst Division (Domestic Version) and American Home Products Corporation represented by its agent Wyeth-Ayerst International (International Version) (filed as Exhibit 10.03 to the Company’s current report on Form 8-K, File No. 0-22354, dated December 15, 2006 and incorporated by reference herein).*
10.07A	Exhibits to January 28, 1993 License Agreements between the Company and American Home Products Corporation represented by the Wyeth-Ayerst Division (Domestic Version) and American Home Products Corporation represented by its agent Wyeth-Ayerst International (International Version).*
10.08	Lease Modification Agreement, dated October 14, 1993 between the Company and Aetna Life Insurance Company.

1

EXHIBIT
NUMBER#	DESCRIPTION
10.09	Second Lease Modification Agreement, dated September 27, 1994, between the Company and Aetna Life Insurance Company (filed as Exhibit 10.20 to the Company’s annual report on Form 10-K, File No. 0-22354, for the year ended October 31,1995, and incorporated by reference herein).
10.10	Directors’ Stock Option Plan (filed as Exhibit 4.1(b) to the Company’s Registration Statement on Form S-8, File No. 33-79222, filed May 23, 1994, and incorporated by reference herein). +
10.11	Martek Biosciences Corporation 1997 Stock Option Plan (filed as Exhibit 4.1(e) to the Company’s Registration Statement on Form S-8, File No. 333-27671, filed May 22, 1997, and incorporated by reference herein). +
10.12	Third Amendment of Lease, dated August 1, 1997 between the Company and M.O.R Columbia Limited Partnership (filed as Exhibit 10.25 to the Company’s annual report on Form 10-K, File No. 0-22354, for the year ended October 31, 1997, and incorporated by reference herein).
10.13	Fourth Amendment of Lease, dated August 5, 1998 between the Company and M.O.R Columbia Limited Partnership (filed as Exhibit 10.26 to the Company’s annual report on Form 10-K, File No. 0-22354, for the year ended October 31, 1998, and incorporated by reference herein).
10.14	License Agreement, dated March 31, 2000 between the Company and Abbott Laboratories (filed as Exhibit 10.30 to the Company’s quarterly report on Form 10-Q for the quarter ended April 30, 2000, and incorporated by reference herein).
10.15	Martek Biosciences Corporation 2001 Stock Option Plan (filed as Exhibit 10.01 to the Company’s Registration Statement on Form S-8, filed on November 16, 2001, and incorporated by reference herein). +
10.16	Common Stock and Warrant Purchase Agreement, dated February 28, 2001 by and among the Company and the Selling Stockholders (filed as Exhibit 99.2 to the Company’s current report on Form 8-K, File No. 0-22354, dated March 2, 2001 and incorporated by reference herein).
10.17	Common Stock Purchase Agreement, dated December 17, 2001 by and among the Company and The Gordon S. Macklin Family Trust (filed as Exhibit 10.34 to the Company’s annual report on Form 10-K, File No. 0-22354, for the year ended October 31, 2001, and incorporated by reference herein).
10.18	Form of Common Stock Purchase Agreement, dated December 17, 2001 by and among the Company and the Selling Stockholders Trust (filed as Exhibit 10.35 to the Company’s annual report on Form 10-K, File No. 0-22354, for the year ended October 31, 2001, and incorporated by reference herein).
10.19	Martek Biosciences Corporation Amended And Restated Management Cash Bonus Incentive Plan effective April 25, 2002 (filed as Exhibit 10.36 to the Company’s quarterly report on Form 10-Q, File No.0-22354, for the quarter ended April 30, 2002, and incorporated by reference herein). +
10.20	OmegaTech, Inc. 1996 Stock Option Plan, as amended on April 26, 2001 (filed as Exhibit 10.37 to the Company’s quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended April 30, 2002, and incorporated by reference herein). +
10.21	Employment Agreement dated April 25, 2002 between the Company and James Flatt (filed as Exhibit 10.39 to the Company’s quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended April 30, 2002, and incorporated by reference herein). +
10.22	Settlement Terms Related to Arbitration of License Agreement Dated September 15, 1993 between Pharmacia Corporation, on behalf of Monsanto, and OmegaTech dated May 10, 2000 (filed as Exhibit 10.41 to the Company’s quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended April 30, 2002, and incorporated by reference herein).*
10.23	Agreement and Plan of Merger, dated March 25, 2002, by and among the Company, OmegaTech, Inc. and OGTAQ Corp. (filed as Exhibit 99.2 to the Company’s current report on Form 8-K, File No. 0-22354, filed on May 3, 2002 and incorporated by reference herein).
10.24	First Amendment to the Agreement and Plan of Merger dated as of March 25, 2002 by and among OmegaTech, Inc., the Company, and OGTAQ Corp., dated April 24, 2002 by and among the Company, OmegaTech, Inc., OGTAQ Corp. and Robert Zuccaro, in his capacity as the Stockholders’ Representative (filed as Exhibit 99.3 to the Company’s current report on Form 8-K, File No. 0-22354, filed on May 3, 2002 and incorporated by reference herein).

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EXHIBIT
NUMBER#	DESCRIPTION
10.25	Martek Biosciences Corporation 2002 Stock Incentive Plan (filed as Exhibit 1 to the Company’s Definitive Proxy, Schedule 14A, filed on February 8, 2002 and incorporated by reference herein). +
10.26	Second Amendment to the Agreement and Plan of Merger dated as of March 25, 2002, as amended on April 24, 2002, by and among OmegaTech, Inc., the Company and OGTAQ Corp., entered into as of July 27, 2002 by and among Martek, Martek Biosciences Boulder Corporation (formerly called OmegaTech, Inc.) and Robert Zuccaro, in his capacity as the Stockholders’ Representative. (filed as Exhibit 99.2 to the Company’s current report on Form 8-K, File No. 0-22354, filed on July 31, 2002 and incorporated by reference herein).
10.27	Amendment No. 3 to Settlement Terms Related to Arbitration of License Agreement dated as of December 20, 2002 by and among Monsanto Company and Martek Biosciences Boulder Corporation. (filed as Exhibit 10.48 to the Company’s annual report on Form 10-K, File No. 0-22354, for the year ended October 31, 2002, and incorporated by reference herein).
10.28	License and Supply Agreement, dated June 13, 2003 between the Company and Nestec Ltd. (filed as exhibit 10.50 to the Company’s quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended July 31, 2003, and incorporated by reference herein).
10.29	Martek Biosciences Corporation 2003 New Employee Stock Option Plan (filed as Exhibit 10.55 to the Company’s quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended July 31, 2003, and incorporated by reference herein). +
10.30	Promissory Note payable to the order of Genencor International, Inc., a Delaware Corporation, dated January 26, 2004 (filed as Exhibit 10.61 to the Company’s annual report on Form 10-K, File No. 0-22354, for the year ended October 31, 2003, and incorporated by reference herein).
10.31	ARA Alliance, Purchase and Production Agreement by and between the Company and DSM Food Specialties B.V. (filed as Exhibit 10.63 to the Company’s quarterly report on Form 10-Q, as amended, File No. 0-22354, for the quarter ended April 30, 2004, and incorporated by reference herein). *
10.32	Sixth Amendment of Lease, dated May 13, 2004, by and between M.O.R. CBC LLC and the Company (filed as Exhibit 10.64 to the Company’s quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended April 30, 2004, and incorporated by reference herein).
10.33	Form of Stock Option Award Agreement under Martek Biosciences Corporation 2003 New Employee Stock Option Plan (filed as Exhibit 10.46 to the Company’s annual report on Form 10-K, File No. 0-22354, for the year ended October 31, 2004, and incorporated by reference herein). +
10.34	Form of Stock Option Award Agreement under Martek Biosciences Corporation 2004 Stock Incentive Plan (filed as Exhibit 10.47 to the Company’s annual report on Form 10-K, File No. 0-22354, for the year ended October 31, 2004, and incorporated by reference herein). +
10.35	Martek Biosciences Corporation Amended and Restated 2004 Stock Incentive Plan (filed as Appendix A to the Company’s Definitive Proxy, Schedule 14A, filed on February 8, 2005 and incorporated by reference herein). +
10.36	Form of Nonqualified Stock Option Agreement under Martek Biosciences Corporation Amended and Restated 2004 Stock Incentive Plan (filed as Exhibit 10.1 to the Company’s Registration Statement on Form S-8, File No. 333-125802, filed June 14, 2005, and incorporated by reference herein).
10.37	Amended and Restated Loan and Security Agreement by and among the Company, as Borrower, and the Lenders party thereto and Manufacturers and Traders Trust Company, as Administrative Agent and Sole Book Runner, and Bank of America, NA, as Syndication Agent, and SunTrust Bank, as Documentation Agent, dated September 30, 2005 (filed as Exhibit 10.1 to the Company’s current report on Form 8-K, File No. 0-22354, filed on October 6, 2005 and incorporated by reference herein).
10.37A	Form of Revolving Loan Promissory Note (filed as Exhibit 2.1.1 to Exhibit 10.2 to the Company’s current report on Form 8-K, File No. 0-22354, filed on October 6, 2005 and incorporated by reference herein).

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EXHIBIT
NUMBER#	DESCRIPTION
10.37B	Form of Guaranty Agreement (filed as Exhibit 3.8(a) to Exhibit 10.2 to the Company’s current report on Form 8-K, File No. 0-22354, filed on October 6, 2005 and incorporated by reference herein).
10.37C	Form of Security Agreement from Guarantors (filed as Exhibit 3.8(b) to Exhibit 10.2 to the Company’s current report on Form 8-K, File No. 0-22354, filed on October 6, 2005 and incorporated by reference herein).
10.37D	Form of Stock Pledge Agreement (filed as Exhibit 3.9 to Exhibit 10.2 to the Company’s current report on Form 8-K, File No. 0-22354, filed on October 6, 2005 and incorporated by reference herein).
10.37E	Form of Lender Assignment and Acceptance Agreement (filed as Exhibit 10.1.2.(c) to Exhibit 10.2 to the Company’s current report on Form 8-K, File No. 0-22354, filed on October 6, 2005 and incorporated by reference herein).
10.38	Second Modification Agreement effective as of September 30, 2005 by and between Manufacturers and Traders Trust Company, as Administrative Agent, the lenders named therein, Martek Biosciences Corporation, Martek Biosciences Boulder Corporation, and Martek Biosciences Kingstree Corporation (filed as Exhibit 10.2 to the Company’s current report on Form 8-K, File No. 0-22354, filed on October 6, 2005 and incorporated by reference herein).
10.39	First Amendment to ARA Alliance, Purchase, and Production Agreement (filed as Exhibit 10.01 to the Company’s quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended January 31, 2006, and incorporated by reference herein). *
10.40	Supply Agreement with Mead Johnson & Company dated May 17, 2006 (filed as Exhibit 10.01 to the Company’s quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended April 30, 2006, and incorporated by reference herein).*
10.41	Letter Agreement between the Company and Henry “Pete” Linsert, Jr. dated May 18, 2006 (filed as Exhibit 10.02 to the Company’s quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended April 30, 2006, and incorporated by reference herein). +
10.42	Form of Employment Agreement between the Company and Peter L. Buzy dated November 10, 2006. **+
10.43	Form of Employment Agreement between the Company and Steve Dubin dated December 21, 2006. **+
10.44	Form of Employment Agreement between the Company and Peter A. Nitze dated November 10, 2006. **+
10.45	Form of Employment Agreement between the Company and David Abramson dated November 10, 2006. **+
10.46	Form of Restricted Stock Unit Agreement for executives under the Martek Bioscience Corporation Amended and Restated 2004 Stock Incentive Plan. **+
10.47	Form of Restricted Stock Unit Agreement for directors under the Martek Bioscience Corporation Amended and Restated 2004 Stock Incentive Plan. **+
21.01	Subsidiaries of the Registrant. **
23.01	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.**
31.01	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).**
31.02	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).**
32.01	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
32.02	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

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*	Confidential treatment was granted by the Securities and Exchange Commission for certain portions of these agreements. The confidential portions were filed separately with the Commission.
**	Filed herewith.
#	Unless otherwise noted, all Exhibits are incorporated by reference as an Exhibit to the Registrant’s Registration Statement on Form S-1 (No. 33-68522). The registrant will furnish a copy of any exhibit upon receipt of a written request and the payment of a specified reasonable fee which fee shall be limited to the registrant’s reasonable expenses in furnishing such exhibit.
+	Denotes management contract or compensatory arrangement required to be filed as an exhibit to this form.

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EX-10.42

Exhibit 10.42

EXECUTIVE EMPLOYMENT AGREEMENT

     THIS EXECUTIVE EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of the 10^th day of November, 2006 (“Effective Date”) by and between MARTEK BIOSCIENCES CORPORATION (“Company,” which term shall include all subsidiaries of the Company as the context may require), a Delaware corporation, and Peter L. Buzy (“Executive”).

RECITALS

     WHEREAS, the Company desires to employ the Executive and the Executive desires to be employed in accordance with the terms of this Agreement.

     WHEREAS, the Company and the Executive have previously entered into a Proprietary Information, Inventions, and Non-Solicitation Agreement dated February 5, 1998; and

     WHEREAS, both the Company and the Executive believe it to be in their mutual interest to cancel and supersede the aforementioned Proprietary Information, Inventions, and Non-Solicitation Agreement.

TERMS

     NOW, THEREFORE, in consideration of the mutual promises and agreements set forth below, the Company and the Executive hereby agree as follows:

     1. Term of Employment. The Company agrees to employ the Executive and the Executive agrees to accept such employment for an initial term of three (3) years (the “Initial Term”), such Term commencing on the Effective Date and ending on the date that is the third anniversary of the Effective Date. The term of employment shall be automatically extended for an additional consecutive 1-year period (an “Extended Term”) on the third anniversary of the Effective Date and on each subsequent anniversary of the Effective Date, unless and until the Company or the Executive provides written notice to the other party in accordance with Section 13 hereof not less than 60 days before such anniversary date that such party is electing not to extend the Initial Term or the Extended Term, as the case may be (“Non-Renewal”), in which case the term of employment hereunder shall end as of the end of such Initial Term or Extended Term, as the case may be. The Initial Term and any Extended Term(s) are collectively referred to herein as the “Term.” Notwithstanding any other provision of this Agreement, the Executive’s employment, and the Term, may be terminated at any time pursuant to Section 6 hereof. Portions of this Agreement that by their terms provide or imply that they survive the end of the Term, including but not limited to Sections 9, 10, and 11, shall survive the end of the Term.

     2. Duties and Responsibilities.

          2.1. During the Term, the Executive shall be employed as the Company’s Executive Vice President for Finance and Administration, Chief Financial Officer and Treasurer. The Executive shall have such duties, responsibilities, and authority as are customarily required of employees in the Executive’s position and such other duties and responsibilities commensurate with such position as the Company may assign to the Executive from time to time.

          2.2. During the Term, the Executive shall devote his entire business time, attention and energies to the business and interests of the Company.

          2.3. The Executive agrees that he is subject to and will comply with the policies and procedures of the Company, including but not limited to the Company’s Code of Ethics for Directors, Officers and Employees and policies concerning confidential information, as such policies and procedures may be modified, added to or eliminated from time to time at the sole discretion of the Company, except to the extent any such policy or procedure conflicts with the express terms of this Agreement, in which case the terms of this Agreement shall control.

          2.4. The Executive’s principal place of employment will be Columbia, Maryland or at such other place as may be mutually determined by the Executive and the Company; provided, however, that the Executive will travel to such other locations as may be reasonably necessary and/or required by the Company in its sole discretion in order to discharge his duties.

     3. Outside Activities. Except with the prior written consent of the Company’s Board of Directors, the Executive will not, while employed by the Company, undertake or engage in any other employment, occupation or business enterprise, other than activities in which the Executive is a passive investor. The Executive may serve on outside boards of directors for both for profit and non-profit entities so long as (i) such service does not create a conflict of interest between the Executive and the Company, (ii) such service will not interfere with the Executive’s duties as set forth in this Agreement, and (iii) if the Executive was not already serving on such board on the Effective Date, he receives advance written permission from the Company’s Chief Executive Officer. The Executive may engage in voluntary community activities without written permission from the Company, so long as such service (i) does not create a conflict of interest between the Executive and the Company, and (ii) will not interfere with the Executive’s duties as set forth in this Agreement.

     4. Compensation and Benefits.

          4.1. The Executive shall be paid an annual base salary (a “Base Salary”) of Three Hundred Seventy Thousand Dollars ($370,000), payable in accordance with the Company’s normal payroll practices and schedule. The Executive’s Base Salary shall be reviewed annually, with the granting of any increases subject to the sole discretion of the Company. All payments provided for in this Agreement shall be subject to the deduction of payroll taxes and other withholdings and assessments as required by law or agreed to by the Executive.

          4.2. The Executive is entitled to participate in the benefit programs offered by the Company to employees holding similar positions as the Executive, provided the Executive meets the eligibility criteria for such programs. Such benefit programs currently include: health,

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disability, 401(k), life insurance and the Company’s Management Cash Bonus Incentive Program. These benefit programs may be modified or eliminated at any time in the Company’s sole discretion. The Executive shall be entitled to participate in the Company’s leave, holiday and vacation programs in accordance with the terms of such programs as they may be modified from time to time. The Executive shall be reimbursed for reasonable business expenses in accordance with the Company’s expense reimbursement procedures upon production of sufficient documentation.

          4.3. The Executive shall be eligible to participate in the Company’s stock option and other incentive compensation plans in the sole discretion of the Company’s Board of Directors and in accordance with applicable plans or policies.

     5. Representations Regarding Former Employment.

          5.1. The Executive represents that his performance of all the terms of this Agreement and the performance of his duties for the Company does not and will not breach any agreement or obligation of any kind made prior to his employment by the Company, including agreements or obligations he may have with prior employers or entities for which he has provided services. The Executive has not entered into, and agrees he will not enter into, any agreement or obligation either written or oral in conflict herewith.

          5.2. If, despite the fact that the Executive has made representations in Section 5.1 that he does not have any other agreements that would conflict with his employment herein, the Executive should find that confidential information belonging to any former employer or any other entity might be usable in connection with the Company’s business, the Executive will not disclose to the Company or use on behalf of the Company any confidential information belonging to any of the Executive’s former employers (except in accordance with agreements between the Company and any such former employer); but during the Executive’s employment by the Company he will use in the performance of his duties all information which is generally known and used by persons with training and experience comparable to his own and all information which is common knowledge in the industry or otherwise legally in the public domain.

     6. Termination of Employment and Severance. The Executive’s employment with the Company will terminate on the last day of the Initial Term or any Extended Term, as the case may be, upon Non-Renewal by either party. The parties further acknowledge that the Executive’s employment with the Company may be terminated at any time prior in accordance with this Section 6 and that upon such termination the Executive shall be entitled to (1) accrued but unpaid salary and accrued but unused vacation in accordance with the policy of the Company and (2) any vested stock options or other vested equity-based compensation previously granted but only in accordance with and subject to the terms of any agreements relating thereto executed by the Executive and the Company. Otherwise, the Executive shall be entitled to no compensation or benefits except as set forth in this Section 6.

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          6.1. Termination Without Cause or for Good Reason. The Company shall have the right to terminate the Executive’s employment with the Company at any time on thirty (30) days’ written notice without Cause (as “Cause” is defined in Section 6.2), and the Executive may terminate his employment at any time for Good Reason (as “Good Reason” is defined in Section 6.3). In the event the Executive’s employment is terminated without Cause or for Good Reason, the Company shall pay the Executive in a lump-sum a severance payment equal to twelve (12) months of his then-existing Base Salary and, in the event the Executive is eligible under a bonus plan for a bonus for the year of work in which his employment is terminated, an additional payment equivalent to the prorated portion (the number of business days that the Executive was employed during the year divided by 235) of the Executive’s target bonus for that year (for purposes of this Agreement “target bonus” shall mean either (i) any specific target bonus that may have been established for the Executive or (ii) if no specific target bonus has been established, a percentage of the Executive’s base salary equal to the maximum Potential Bonus Percentage established by the Compensation Committee of the Board for that year’s management bonus pool) (collectively, “Severance Pay”). The Company shall also reimburse the Executive for premiums he pays for health and dental insurance under COBRA, for the same level of coverage that the Executive maintained at the time of his termination, for a period of up to twelve (12) months, provided the Executive elects COBRA coverage (the “COBRA Benefit”). The Company’s reimbursement obligation is conditioned on the Executive’s providing written verification of his premium payments to the Company, and the reimbursement obligation will end immediately if the Executive is eligible to obtain health care insurance from any other employer during the payment period.

          6.2. Termination For Cause. The Company shall have the right to terminate the Executive’s employment with the Company at any time without notice for Cause. “Cause” for termination shall be deemed to exist if any of the following circumstances exist in the reasonable judgment of the Company: (i) the Executive has committed or engaged in intentional misconduct or gross negligence in the exercise of his duties under this Agreement; (ii) the Executive has committed theft, forgery, fraud, misappropriation, embezzlement, or any other act of material misconduct against the Company or any of its affiliates; (iii) the Executive has violated any fiduciary duty owed to the Company; (iv) the Executive is convicted of, or enters a guilty plea or plea of no contest to a felony or any other crime involving moral turpitude; (v) the Executive is unable to competently perform his duties under this Agreement because of his substantial dependence on alcohol or any controlled substance; (vi) the Executive has engaged in any act (including, but not limited to, unlawful discriminatory conduct) that results in substantial injury to the reputation, business or business relationships of the Company or that, in each case, has subjected, or if generally known would subject, the Company to public ridicule or embarrassment; (vii) the Executive has violated a material provision of this Agreement and has failed to cure such breach within ten (10) days of receiving written notice thereof, except that any breach by the Executive of Sections 6.2(i)-(vi) or (viii) shall constitute Cause for termination even in the absence of such written notice; or (viii) the Executive has failed to adequately perform the material duties of his position after having received thirty (30) days written notice specifying the reasons why his performance is inadequate and has not cured, to the satisfaction of the Board of Directors, the inadequate performance within such 30 days. In the event the Executive’s employment is terminated at any time for Cause, the Executive will not receive any

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Severance Pay, the COBRA Benefit, or any other such compensation or benefits, except for accrued but unpaid salary and accrued but unused vacation in accordance with the policy of the Company.

          6.3. Definition of Good Reason. “Good Reason” shall be deemed to exist if (i) without the Executive’s consent the Company effects a material reduction in the nature or scope of the Executive’s duties below those customarily performed by the Executive; (ii) the Company violates a material provision of this Agreement; (iii) without the Executive’s consent the Company reduces the Executive’s Base Salary; (iv) the Company becomes a division or subsidiary of another entity and the Executive’s duties are on behalf of the divisional or subsidiary entity rather than the parent; or (v) the Company relocates its principal office to a location more than fifty (50) miles from its current location at 6480 Dobbin Road, Columbia, Maryland (twenty-five (25) miles if Good Reason is being determined for purposes of Section 6.6 below). Good Reason shall not exist unless and until the Executive provides the Company written notice of the acts alleged to constitute Good Reason and the Company has failed to cure those acts within thirty (30) days of receipt of such notice.

          6.4. Termination Without Good Reason. The Executive may voluntarily terminate his employment with the Company at any time without Good Reason by providing sixty (60) days’ written notice of his intent to do so. In the event the Executive voluntarily terminates his employment without Good Reason, he will not receive any Severance Pay, the COBRA Benefit, or any other such compensation or benefits, except for accrued but unpaid salary and accrued but unused vacation in accordance with the policy of the Company.

          6.5. Termination upon Death or Disability. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. If the Executive becomes Disabled during the Employment Period, the Company may give him written notice in accordance with this Agreement of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Disabled” shall mean the absence of the Executive from the Executive’s duties with the Company on a full-time basis for 180 consecutive business days as a result of accident or incapacity due to mental or physical illness. Until the Disability Effective Date, the Executive shall be entitled to salary, bonus and other benefits to the extent provided for hereunder.

          6.6. Termination following a Change in Control. In the event that the Executive is terminated without Cause or the Executive terminates his employment for Good Reason within twelve (12) months following a Change in Control as defined in Section 6.7, the Company shall, in lieu of the Severance Pay and the COBRA Benefit set forth in Section 6.1, pay the Executive in a lump-sum a severance payment equal to (i) twenty-four (24) months of his then-existing Base Salary and (ii), in the event the Executive is eligible for a bonus under a bonus plan for the year of work in which his employment is terminated, an additional payment equivalent to 100% of the Executive’s “target bonus” for that year (as defined in Section 6.1

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above), without proration, provided that if the Executive did not participate in an executive annual bonus plan in the year prior to termination because the Executive was recently hired, the additional payment under clause (ii) above shall be a percentage of the Executive’s then-existing Base Salary equal to the percentage of the executive bonus pool actually paid in the prior year to then-serving executives. The Company shall also reimburse the Executive for premiums he pays for health and dental insurance under COBRA, for the same level of coverage that the Executive maintained at the time of his termination, for a period of up to eighteen (18) months, provided the Executive elects COBRA coverage. The Company’s reimbursement obligation is conditioned on the Executive’s providing written verification of his premium payments to the Company, and the reimbursement obligation will end immediately if the Executive is eligible to obtain health care insurance from any other employer during the payment period.

          6.7. Definition of Change in Control. For the purpose of this Agreement, a “Change of Control” shall mean:

               (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d) (3) or 14(d) (2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 6.7; or

               (b) Individuals who, as of the Effective Date, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

               (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting

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power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

               (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

          6.8. Payment in Lieu of Notice. Any time that notice of termination is required by any party under this Agreement, the Company may, in its sole discretion and at its option, relieve the Executive of his duties immediately and pay the Executive his regular base salary during the notice period.

          6.9. Outplacement Services. In the event that the Executive’s employment is terminated for any reason other than those set forth in Sections 6.2, 6.4, or 6.5, the Company will reimburse the Executive for payments made by the Executive for executive outplacement services for up to twelve (12) months under a program approved by the Company in the exercise of its reasonable discretion.

          6.10. Non-Renewal. In the event of a Non-Renewal by the Company, the Executive will not be entitled to any compensation or benefits under this Agreement except as follows:

               (a) If the Non-Renewal by the Company results in the Executive’s employment ending within twelve (12) months following a Change in Control, the Company shall provide the Executive the payments and benefits set forth in Section 6.6 (subject to the terms and conditions therein).

               (b) If the Non-Renewal by the Company results in the Executive’s employment ending at any other time, the Company shall provide the Executive (i) in a lump-sum a severance payment equal to twelve (12) months of his then-existing Base Salary; (ii) in the event the Executive is eligible for a bonus under a bonus plan for the year of work in which his employment is terminated, an additional payment equivalent to the prorated portion (the number of business days that the Executive was employed during the year divided by 235) of the

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Executive’s “target bonus” for that year; and (iii) the COBRA Benefit (as that term is defined in Section 6.1 and subject to the same terms and conditions as set forth in Section 6.1).

          6.11 Requirement of a General Release. The Company shall not be obligated to provide the Severance Pay, the COBRA Benefit, or any of the other payments and benefits set forth in Sections 6.1, 6.6, 6.9, or 6.10 above unless and until the Executive executes a general release of all claims against the Company substantially in the form of one of the two releases (whichever is appropriate) attached hereto as Exhibit A and the release becomes effective.

          6.12. Section 409A. Notwithstanding anything to the contrary contained herein, in the event that the Company determines that one or more payments under this Section 6, if payable, are subject to Section 409A of the Code: (i) such payment(s) under this Section 6 shall not commence until six (6) months after the Executive’s last day of employment (or, if earlier, the date Executive dies) to the extent necessary to avoid the imposition of the excise tax under Section 409A of the Code, and (ii) the Company may unilaterally amend this Agreement to the minimum extent necessary to avoid the imposition of the excise tax under Section 409A of the Code.

     7. Certain Additional Payment Contingencies.

          7.1. Notwithstanding anything in this Agreement to the contrary and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section) (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 7.1, if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Executive, after taking into account the Payments and the Gross-Up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to the Executive resulting from an elimination of the Gross-Up Payment and a reduction of the Payments, in the aggregate, to an amount (the “Reduced Amount”) such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount.

          7.2. Subject to the provisions of Section 7.3, all determinations required to be made under this Section 7, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such

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determination, shall be made by Ernst & Young LLP or such other certified public accounting firm as may be designated by the Executive (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 7, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 7.3, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

          7.3. The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

               (a) give the Company any information reasonably requested by the Company relating to such claim,

               (b) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

               (c) cooperate with the Company in good faith in order effectively to contest such claim, and

               (d) permit the Company to participate in any proceedings relating to such claim;

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provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 7.3, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

          7.4. If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7.3, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company’s complying with the requirements of Section 7.3) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7.3, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

     8. Indemnification. The Company will, to the fullest extent permitted by Delaware General Corporation Law, as amended, indemnify the Executive for all liabilities and expenses that may be incurred in connection with the Executive’s service on behalf of the Company.

     9. Proprietary Information.

          9.1. Proprietary Information Defined. The term “Proprietary Information” shall mean any and all confidential and/or proprietary knowledge, data or information of the Company. By way of illustration but not limitation, “Proprietary Information” includes (i) trade secrets, inventions, mask works, ideas, processes, formulas, source and object codes, data,

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programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as “Inventions”); (ii) information regarding plans for research, development, new products or services, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (iii) information regarding the skills and compensation of other employees of the Company.

          9.2. Non-Disclosure. At all times during the Executive’s employment and thereafter, the Executive agrees to hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company’s Proprietary Information, except as such disclosure, use or publication may be required in connection with the Executive’s work for the Company, or unless the Company expressly authorizes such in writing. The Executive will obtain the Company’s written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to the Executive’s work at the Company and/or incorporates any Proprietary Information. The Executive hereby assigns to the Company any rights the Executive may have or acquire in such Proprietary Information and recognizes that all Proprietary Information shall be the sole property of the Company and its assigns. The Executive has been informed and acknowledges that the unauthorized taking of the Company’s trade secrets will constitute Cause for termination and may subject the Executive to civil and/or criminal penalties.

          9.3. Own Knowledge. Subject to the foregoing non-disclosure obligations, it is understood that, at all such times, the Executive is free personally to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and which is gained through the Executive’s own, skill, knowledge, and experience.

     10. Assignment of Inventions.

          10.1. Proprietary Rights. The term “Proprietary Rights” shall mean all trade secret, patent, copyright, mask work and other intellectual property rights or “moral rights” throughout the world. “Moral rights” refers to any rights to claim authorship of an Invention or to object to or prevent the modification of any Invention, or to withdraw from circulation or control the publication or distribution of any Invention, and any similar right, existing under judicial or statutory law of any country in the world, or under any treaty, regardless of whether or not such right is denominated or generally referred to as a “moral right.”

          10.2. Prior Inventions. Inventions, if any, patented or unpatented, which the Executive made prior to the commencement of the Executive’s employment with the Company are excluded from the scope of this Agreement. To preclude any possible uncertainty, the Executive agrees to set forth on Exhibit B (Previous Inventions) attached hereto a complete list of all Inventions that the Executive has, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of the Executive’s employment with the Company, that the Executive considers to be his property or the property of third parties and that the Executive wishes to have excluded from the scope of this Agreement (collectively referred to as “Prior Inventions”). If disclosure of any such Prior Invention would cause the Executive to violate any prior confidentiality

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agreement, the Executive understands that he is not to list such Prior Inventions in Exhibit B but is only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit B for such purpose. If no such disclosure is attached, the Executive represents that there are no Prior Inventions. If, in the course of the Executive’s employment with the Company, the Executive incorporates a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, the Executive agrees that he will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company’s prior written consent.

          10.3. Assignment of Inventions. The Executive hereby assigns and agrees to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all his right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by the Executive, either alone or jointly with others, during the period of his employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 10, are hereinafter referred to as “Company Inventions.”

          10.4. Unassigned Inventions. The Company acknowledges that this Agreement will not be deemed to require assignment of any invention that was developed entirely on the Executive’s own time without using the Company’s equipment, supplies, facilities, or trade secrets and neither related to the Company’s actual or anticipated business, research or development, nor resulted from work performed by the Executive for the Company.

          10.5. Government or Third Party. The Executive also agrees to assign all his right, title and interest in and to any particular Company Invention to a third party, including without limitation the United States, as directed by the Company.

          10.6. Works for Hire. The Executive acknowledges that all original works of authorship which are made by him (solely or jointly with others) within the scope of Executive’s employment and which are protectable by copyright are “works made for hire,” pursuant to United States Copyright Act (17 U.S.C., Section 101).

          10.7. Enforcement of Proprietary Rights. The Executive agrees to assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end the Executive agrees to execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, the Executive will execute, verify and deliver assignments of

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such Proprietary Rights to the Company or its designee. The Executive’s obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of his employment, but the Company shall compensate the Executive at a reasonable rate after the Executive’s termination for the time actually spent by the Executive at the Company’s request on such assistance.

          10.8. Appointment of Attorney in Fact. In the event the Company is unable for any reason, after reasonable effort, to secure the Executive’s signature on any document needed in connection with the actions specified in this Section 10, the Executive hereby irrevocably designates and appoints the Company and any of its duly authorized officers and agents as his agent and attorney in fact, which appointment is coupled with an interest, to act for and in the Executive’s behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by the Executive. The Executive hereby waives and quitclaims to the Company any and all claims, of any nature whatsoever, which the Executive now or may hereafter have for infringement of any Proprietary Rights assigned hereunder to the Company.

     11. Restrictive Covenants. In consideration of the Executive’s employment or continued employment by the Company, and the compensation now and hereafter paid to Executive, the Executive hereby agrees to the following:

          11.1. Non-Solicitation of Employees. The Executive agrees that for the period of the Executive’s employment by the Company and for twelve (12) months after the date the Executive’s employment by the Company ends for any reason, the Executive will not, either directly or through others, except during the performance of his duties on behalf of the Company: (i) solicit for hire, or hire, any employee of the Company or otherwise encourage any employee of the Company to end his relationship with the Company; (ii) solicit or otherwise encourage any employee of the Company to accept employment with any other person or business entity; or (iii) assist any other person or entity in carrying out any act restricted by this Section 11.1. For purposes of this Section 11.1, an employee of the Company shall be any person who, at the time of the solicitation or encouragement prohibited by this Section, is employed by the Company or was employed by the Company at any time within the prior six (6) months.

          11.2. Business Restrictions with Customers, Contractors and Consultants. The Executive agrees that for the period of the Executive’s employment by the Company and for twelve (12) months after the date the Executive’s employment by the Company ends for any reason, the Executive will not, either directly or through others, except during the performance of his duties on behalf of the Company: (i) solicit or otherwise encourage any consultant, contractor, customer or prospective customer of the Company, with whom the Executive had business-related contact as a result of his employment or whose identity the Executive learned as a result of his employment, to diminish or materially alter its relationship with the Company; (ii) accept or conduct competitive business with any customer or prospective customer of the Company with whom the Executive had business-related contact as a result of his employment or

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whose identity the Executive learned as a result of his employment; or (iii) assist any other person or entity in carrying out any act restricted by this Section 11.2.

          11.3. Non-Competition. The Executive agrees that for the period of the Executive’s employment with the Company, and for the period of twelve (12) months after the later of the date the Executive’s employment with the Company ends for any reason, or the date a court of competent jurisdiction enters an order enforcing this provision and finding that the Executive has breached this Section 11.3, the Executive will not directly or through others: (i) in any capacity similar to the capacity in which he was employed by the Company or otherwise competitive with the Company, become employed by or provide services to any other person or entity that offers products or services competitive with the Company’s products or services within the United States or any other country where the Company provides or offers such products or services, or (ii) on his own behalf or on behalf of any other person or entity, compete with the Company in the sale, service, distribution or licensing of any products or services competitive with the Company’s products or services within the United States or any other country where the Company provides or offers such products or services.

          11.4. Acknowledgments. The Executive acknowledges that the Company’s business is national and international in scope, and, therefore, that the restrictions contained in this Section 11 are reasonable in scope and necessary to protect the best interests of the Company. The Executive further acknowledges that in the course of his employment with the Company, he also has duties involving the Company’s subsidiaries and affiliates, has learned or been exposed to trade secrets and proprietary information relating to such subsidiaries and affiliates and that the obligations of this Section 11 extend to such subsidiaries and affiliates. The parties intend that the covenants contained herein shall be deemed to be a series of separate covenants, one for each and every county of each state of the United States of America and the District of Columbia. If any of the provisions of such covenants shall be held unenforceable because of being excessively broad as to scope or subject, such provisions shall be modified and construed by a court of competent jurisdiction by limiting and reducing it so as to be enforceable to the extent compatible with the applicable law as it shall then appear.

          11.5. Injunctive Relief. In the event of a breach or a threatened or attempted breach of any provision of this Section 11 by the Executive, the Company shall, in addition to other remedies available to it, be entitled to temporary and permanent injunctions to enforce the provisions of this Section 11 without the necessity of showing any actual damages or injury and without posting bond or other security, which the Executive expressly waives. The Company shall further be entitled to an order by a court of competent jurisdiction for expedited discovery and the Executive covenants not to raise any objection to such a request by the Company.

          11.6. Notification of New Company. In the event that the Executive leaves the employ of the Company, the Executive authorizes the Company to provide notice of the Executive’s rights and obligations under this Agreement to the Executive’s subsequent employer and to any other entity or person to whom the Executive provides services.

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     12. Litigation Cooperation. The Executive will cooperate with the Company, during the Term and thereafter (including following the Executive’s termination of employment for any reason), by making himself reasonably available to testify on behalf of the Company in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, and to reasonably assist the Company in any such action, suit, or proceeding by providing information and meeting and consulting with the Board or its representatives or counsel, or representatives or counsel to the Company as reasonably requested. The Company will reimburse the Executive, for all expenses reasonably incurred by him in connection with his provision of testimony or assistance (except with respect to any litigation between the Executive and the Company or any litigation in which the parties are otherwise adverse).

     13. Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Executive:

Mr. Peter L. Buzy

If to the Company:

Martek Biosciences Corporation
6480 Dobbin Road
Columbia, Maryland 21045
Attention: General Counsel

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.

     14. General Provisions.

          14.1. Successors and Assigns. If the Company shall at any time be merged or consolidated into or with another corporation, or if substantially all the assets of the Company are transferred to another corporation, the provisions of this Agreement shall be binding upon and inure to the benefit of the corporation resulting from such merger, consolidation or transfer.

          14.2. Entire Agreement; Modification. This Agreement sets forth the entire understanding with respect to the subject of employment of the Executive and shall not be amended, modified, or rescinded except by a written instrument signed by both parties hereto and approved by the Board. This Agreement specifically supersedes and cancels the Proprietary Information, Inventions, and Non-Solicitation Agreement dated February 5, 1998 entered into by the Company and the Executive.

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          14.3. Choice of Law and Jurisdiction; Attorney’s Fees. This Agreement shall be governed by and construed under the laws of the State of Maryland, without regard to its conflict of laws doctrine. The Executive expressly consents to the jurisdiction of the state and federal courts serving the State of Maryland for all actions arising out of or relating to this Agreement and expressly waives any defense that such courts lack personal jurisdiction over him. All such claims shall be tried in the federal or state courts serving the State of Maryland to the exclusion of all others and such courts shall have exclusive jurisdiction over such disputes. In the event of any proceeding arising out of or relating to this Agreement in which the Executive is the prevailing party against the Company, the Company shall pay reasonable attorneys’ fees incurred by the Executive in such proceeding.

          14.4. Severability. If any provision of this Agreement or the application thereof is held invalid, the invalidity shall not affect other provisions or applications of this Agreement that can be given effect without the invalid provisions or applications and to this end the provisions of this Agreement are declared to be severable.

          14.5. Waiver of Breach. No waiver of any breach of any term or provision of this Agreement shall be construed to be, nor shall be, a waiver of any other breach of this Agreement. No waiver shall be binding unless in writing and signed by the party waiving the breach.

          14.6. Assignment of Agreement. The Executive acknowledges that his services are unique and personal. Accordingly, the Executive may not assign his rights or delegate his duties or obligations under this Agreement to any person or entity.

          14.7. Representation. The Executive represents that he is knowledgeable and sophisticated as to business matters, including the subject matter of this Agreement, that he has read this Agreement and that he understands its terms. The Executive acknowledges that, prior to assenting to the terms of this Agreement, he has been given a reasonable time to review it, to consult with counsel of his choice, and to negotiate at arm’s-length with the Company as to its contents. The Executive and the Company agree that the language used in this Agreement is the language chosen by the parties to express their mutual intent, and that they have entered into this Agreement freely and voluntarily and without pressure or coercion from anyone.

          14.8. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

[THIS SPACE INTENTIONALLY LEFT BLANK]

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     IN WITNESS WHEREOF, the Company and the Executive, intending to be legally bound, have executed this Agreement on the day and year first above written.

MARTEK BIOSCIENCES CORPORATION

By:

Name:

Title:

Peter L. Buzy

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EX-10.43

Exhibit 10.43

EXECUTIVE EMPLOYMENT AGREEMENT

     THIS EXECUTIVE EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of the 21^st day of December, 2006 (“Effective Date”) by and between MARTEK BIOSCIENCES CORPORATION (“Company,” which term shall include all subsidiaries of the Company as the context may require), a Delaware corporation, and Steve Dubin (“Executive”).

RECITALS

     WHEREAS, the Company desires to employ the Executive and the Executive desires to be employed in accordance with the terms of this Agreement.

     WHEREAS, the Company and the Executive have previously entered into a Proprietary Information, Inventions, and Non-Solicitation Agreement dated September 2, 1991; and

     WHEREAS, both the Company and the Executive believe it to be in their mutual interest to cancel and supersede the aforementioned Proprietary Information, Inventions, and Non-Solicitation Agreement.

TERMS

     NOW, THEREFORE, in consideration of the mutual promises and agreements set forth below, the Company and the Executive hereby agree as follows:

     1. Term of Employment. The Company agrees to employ the Executive and the Executive agrees to accept such employment for an initial term of three (3) years (the “Initial Term”), such Term commencing on the Effective Date and ending on the date that is the third anniversary of the Effective Date. The term of employment shall be automatically extended for an additional consecutive 1-year period (an “Extended Term”) on the third anniversary of the Effective Date and on each subsequent anniversary of the Effective Date, unless and until the Company or the Executive provides written notice to the other party in accordance with Section 13 hereof not less than 60 days before such anniversary date that such party is electing not to extend the Initial Term or the Extended Term, as the case may be (“Non-Renewal”), in which case the term of employment hereunder shall end as of the end of such Initial Term or Extended Term, as the case may be. The Initial Term and any Extended Term(s) are collectively referred to herein as the “Term.” Notwithstanding any other provision of this Agreement, the Executive’s employment, and the Term, may be terminated at any time pursuant to Section 6 hereof. Portions of this Agreement that by their terms provide or imply that they survive the end of the Term, including but not limited to Sections 9, 10, and 11, shall survive the end of the Term.

     2. Duties and Responsibilities.

          2.1. During the Term, the Executive shall be employed as the Company’s Chief Executive Officer. The Executive shall have such duties, responsibilities, and authority as are customarily required of employees in the Executive’s position and such other duties and responsibilities commensurate with such position as the Company may assign to the Executive from time to time.

          2.2. During the Term, the Executive shall devote his entire business time, attention and energies to the business and interests of the Company.

          2.3. The Executive agrees that he is subject to and will comply with the policies and procedures of the Company, including but not limited to the Company’s Code of Ethics for Directors, Officers and Employees and policies concerning confidential information, as such policies and procedures may be modified, added to or eliminated from time to time at the sole discretion of the Company, except to the extent any such policy or procedure conflicts with the express terms of this Agreement, in which case the terms of this Agreement shall control.

          2.4. The Executive’s principal place of employment will be Columbia, Maryland or at such other place as may be mutually determined by the Executive and the Company; provided, however, that the Executive will travel to such other locations as may be reasonably necessary and/or required by the Company in its sole discretion in order to discharge his duties.

     3. Outside Activities. Except with the prior written consent of the Company’s Board of Directors, the Executive will not, while employed by the Company, undertake or engage in any other employment, occupation or business enterprise, other than activities in which the Executive is a passive investor. The Executive may serve on outside boards of directors for both for profit and non-profit entities so long as (i) such service does not create a conflict of interest between the Executive and the Company, (ii) such service will not interfere with the Executive’s duties as set forth in this Agreement, and (iii) if the Executive was not already serving on such board on the Effective Date, he receives advance written permission from the Company’s Board of Directors. The Executive may engage in voluntary community activities without written permission from the Company, so long as such service (i) does not create a conflict of interest between the Executive and the Company, and (ii) will not interfere with the Executive’s duties as set forth in this Agreement.

     4. Compensation and Benefits.

          4.1. The Executive shall be paid an annual base salary (a “Base Salary”) of Five Hundred Fifty Thousand Dollars ($550,000), payable in accordance with the Company’s normal payroll practices and schedule. The Executive’s Base Salary shall be reviewed annually, with the granting of any increases subject to the sole discretion of the Company. All payments provided for in this Agreement shall be subject to the deduction of payroll taxes and other withholdings and assessments as required by law or agreed to by the Executive.

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          4.2. The Executive is entitled to participate in the benefit programs offered by the Company to employees holding similar positions as the Executive, provided the Executive meets the eligibility criteria for such programs. Such benefit programs currently include: health, disability, 401(k), life insurance and the Company’s Management Cash Bonus Incentive Program. These benefit programs may be modified or eliminated at any time in the Company’s sole discretion. The Executive shall be entitled to participate in the Company’s leave, holiday and vacation programs in accordance with the terms of such programs as they may be modified from time to time. The Executive shall be reimbursed for reasonable business expenses in accordance with the Company’s expense reimbursement procedures upon production of sufficient documentation.

          4.3. The Executive shall be eligible to participate in the Company’s stock option and other incentive compensation plans in the sole discretion of the Company’s Board of Directors and in accordance with applicable plans or policies.

     5. Representations Regarding Former Employment.

          5.1. The Executive represents that his performance of all the terms of this Agreement and the performance of his duties for the Company does not and will not breach any agreement or obligation of any kind made prior to his employment by the Company, including agreements or obligations he may have with prior employers or entities for which he has provided services. The Executive has not entered into, and agrees he will not enter into, any agreement or obligation either written or oral in conflict herewith.

          5.2. If, despite the fact that the Executive has made representations in Section 5.1 that he does not have any other agreements that would conflict with his employment herein, the Executive should find that confidential information belonging to any former employer or any other entity might be usable in connection with the Company’s business, the Executive will not disclose to the Company or use on behalf of the Company any confidential information belonging to any of the Executive’s former employers (except in accordance with agreements between the Company and any such former employer); but during the Executive’s employment by the Company he will use in the performance of his duties all information which is generally known and used by persons with training and experience comparable to his own and all information which is common knowledge in the industry or otherwise legally in the public domain.

     6. Termination of Employment and Severance. The Executive’s employment with the Company will terminate on the last day of the Initial Term or any Extended Term, as the case may be, upon Non-Renewal by either party. The parties further acknowledge that the Executive’s employment with the Company may be terminated at any time prior in accordance with this Section 6 and that upon such termination the Executive shall be entitled to (1) accrued but unpaid salary and accrued but unused vacation in accordance with the policy of the Company and (2) any vested stock options or other vested equity-based compensation previously granted but only in accordance with and subject to the terms of any agreements relating thereto executed

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by the Executive and the Company. Otherwise, the Executive shall be entitled to no compensation or benefits except as set forth in this Section 6.

          6.1. Termination Without Cause or for Good Reason. The Company shall have the right to terminate the Executive’s employment with the Company at any time on thirty (30) days’ written notice without Cause (as “Cause” is defined in Section 6.2), and the Executive may terminate his employment at any time for Good Reason (as “Good Reason” is defined in Section 6.3). In the event the Executive’s employment is terminated without Cause or for Good Reason, the Company shall pay the Executive in a lump-sum a severance payment equal to twelve (12) months of his then-existing Base Salary and, in the event the Executive is eligible under a bonus plan for a bonus for the year of work in which his employment is terminated, an additional payment equivalent to the prorated portion (the number of business days that the Executive was employed during the year divided by 235) of the Executive’s target bonus for that year (for purposes of this Agreement “target bonus” shall mean either (i) any specific target bonus that may have been established for the Executive or (ii) if no specific target bonus has been established, a percentage of the Executive’s base salary equal to the maximum Potential Bonus Percentage established by the Compensation Committee of the Board for that year’s management bonus pool) (collectively, “Severance Pay”). The Company shall also reimburse the Executive for premiums he pays for health and dental insurance under COBRA, for the same level of coverage that the Executive maintained at the time of his termination, for a period of up to twelve (12) months, provided the Executive elects COBRA coverage (the “COBRA Benefit”). The Company’s reimbursement obligation is conditioned on the Executive’s providing written verification of his premium payments to the Company, and the reimbursement obligation will end immediately if the Executive is eligible to obtain health care insurance from any other employer during the payment period.

          6.2. Termination For Cause. The Company shall have the right to terminate the Executive’s employment with the Company at any time without notice for Cause. “Cause” for termination shall be deemed to exist if any of the following circumstances exist in the reasonable judgment of the Company: (i) the Executive has committed or engaged in intentional misconduct or gross negligence in the exercise of his duties under this Agreement; (ii) the Executive has committed theft, forgery, fraud, misappropriation, embezzlement, or any other act of material misconduct against the Company or any of its affiliates; (iii) the Executive has violated any fiduciary duty owed to the Company; (iv) the Executive is convicted of, or enters a guilty plea or plea of no contest to a felony or any other crime involving moral turpitude; (v) the Executive is unable to competently perform his duties under this Agreement because of his substantial dependence on alcohol or any controlled substance; (vi) the Executive has engaged in any act (including, but not limited to, unlawful discriminatory conduct) that results in substantial injury to the reputation, business or business relationships of the Company or that, in each case, has subjected, or if generally known would subject, the Company to public ridicule or embarrassment; (vii) the Executive has violated a material provision of this Agreement and has failed to cure such breach within ten (10) days of receiving written notice thereof, except that any breach by the Executive of Sections 6.2(i)-(vi) or (viii) shall constitute Cause for termination even in the absence of such written notice; or (viii) the Executive has failed to adequately

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perform the material duties of his position after having received thirty (30) days written notice specifying the reasons why his performance is inadequate and has not cured, to the satisfaction of the Board of Directors, the inadequate performance within such 30 days. In the event the Executive’s employment is terminated at any time for Cause, the Executive will not receive any Severance Pay, the COBRA Benefit, or any other such compensation or benefits, except for accrued but unpaid salary and accrued but unused vacation in accordance with the policy of the Company.

          6.3. Definition of Good Reason. “Good Reason” shall be deemed to exist if (i) without the Executive’s consent the Company effects a material reduction in the nature or scope of the Executive’s duties below those customarily performed by the Executive; (ii) the Company violates a material provision of this Agreement; (iii) without the Executive’s consent the Company reduces the Executive’s Base Salary; (iv) the Company becomes a division or subsidiary of another entity and the Executive’s duties are on behalf of the divisional or subsidiary entity rather than the parent; or (v) the Company relocates its principal office to a location more than fifty (50) miles from its current location at 6480 Dobbin Road, Columbia, Maryland (twenty-five (25) miles if Good Reason is being determined for purposes of Section 6.6 below). Good Reason shall not exist unless and until the Executive provides the Company written notice of the acts alleged to constitute Good Reason and the Company has failed to cure those acts within thirty (30) days of receipt of such notice.

          6.4. Termination Without Good Reason. The Executive may voluntarily terminate his employment with the Company at any time without Good Reason by providing sixty (60) days’ written notice of his intent to do so. In the event the Executive voluntarily terminates his employment without Good Reason, he will not receive any Severance Pay, the COBRA Benefit, or any other such compensation or benefits, except for accrued but unpaid salary and accrued but unused vacation in accordance with the policy of the Company.

          6.5. Termination upon Death or Disability. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. If the Executive becomes Disabled during the Employment Period, the Company may give him written notice in accordance with this Agreement of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Disabled” shall mean the absence of the Executive from the Executive’s duties with the Company on a full-time basis for 180 consecutive business days as a result of accident or incapacity due to mental or physical illness. Until the Disability Effective Date, the Executive shall be entitled to salary, bonus and other benefits to the extent provided for hereunder.

          6.6. Termination following a Change in Control. In the event that the Executive is terminated without Cause or the Executive terminates his employment for Good Reason within twelve (12) months following a Change in Control as defined in Section 6.7, the

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Company shall, in lieu of the Severance Pay and the COBRA Benefit set forth in Section 6.1, pay the Executive in a lump-sum a severance payment equal to (i) twenty-four (24) months of his then-existing Base Salary and (ii), in the event the Executive is eligible for a bonus under a bonus plan for the year of work in which his employment is terminated, an additional payment equivalent to 100% of the Executive’s “target bonus” for that year (as defined in Section 6.1 above), without proration, provided that if the Executive did not participate in an executive annual bonus plan in the year prior to termination because the Executive was recently hired, the additional payment under clause (ii) above shall be a percentage of the Executive’s then-existing Base Salary equal to the percentage of the executive bonus pool actually paid in the prior year to then-serving executives. The Company shall also reimburse the Executive for premiums he pays for health and dental insurance under COBRA, for the same level of coverage that the Executive maintained at the time of his termination, for a period of up to eighteen (18) months, provided the Executive elects COBRA coverage. The Company’s reimbursement obligation is conditioned on the Executive’s providing written verification of his premium payments to the Company, and the reimbursement obligation will end immediately if the Executive is eligible to obtain health care insurance from any other employer during the payment period.

          6.7. Definition of Change in Control. For the purpose of this Agreement, a “Change of Control” shall mean:

               (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d) (3) or 14(d) (2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 6.7; or

               (b) Individuals who, as of the Effective Date, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

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               (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

               (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

          6.8. Payment in Lieu of Notice. Any time that notice of termination is required by any party under this Agreement, the Company may, in its sole discretion and at its option, relieve the Executive of his duties immediately and pay the Executive his regular base salary during the notice period.

          6.9. Outplacement Services. In the event that the Executive’s employment is terminated for any reason other than those set forth in Sections 6.2, 6.4, or 6.5, the Company will reimburse the Executive for payments made by the Executive for executive outplacement services for up to twelve (12) months under a program approved by the Company in the exercise of its reasonable discretion.

          6.10. Non-Renewal. In the event of a Non-Renewal by the Company, the Executive will not be entitled to any compensation or benefits under this Agreement except as follows:

               (a) If the Non-Renewal by the Company results in the Executive’s employment ending within twelve (12) months following a Change in Control, the Company

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shall provide the Executive the payments and benefits set forth in Section 6.6 (subject to the terms and conditions therein).

               (b) If the Non-Renewal by the Company results in the Executive’s employment ending at any other time, the Company shall provide the Executive (i) in a lump-sum a severance payment equal to twelve (12) months of his then-existing Base Salary; (ii) in the event the Executive is eligible for a bonus under a bonus plan for the year of work in which his employment is terminated, an additional payment equivalent to the prorated portion (the number of business days that the Executive was employed during the year divided by 235) of the Executive’s “target bonus” for that year; and (iii) the COBRA Benefit (as that term is defined in Section 6.1 and subject to the same terms and conditions as set forth in Section 6.1).

          6.11 Requirement of a General Release. The Company shall not be obligated to provide the Severance Pay, the COBRA Benefit, or any of the other payments and benefits set forth in Sections 6.1, 6.6, 6.9, or 6.10 above unless and until the Executive executes a general release of all claims against the Company substantially in the form of one of the two releases (whichever is appropriate) attached hereto as Exhibit A and the release becomes effective.

          6.12. Section 409A. Notwithstanding anything to the contrary contained herein, in the event that the Company determines that one or more payments under this Section 6, if payable, are subject to Section 409A of the Code: (i) such payment(s) under this Section 6 shall not commence until six (6) months after the Executive’s last day of employment (or, if earlier, the date Executive dies) to the extent necessary to avoid the imposition of the excise tax under Section 409A of the Code, and (ii) the Company may unilaterally amend this Agreement to the minimum extent necessary to avoid the imposition of the excise tax under Section 409A of the Code.

     7. Certain Additional Payment Contingencies.

          7.1. Notwithstanding anything in this Agreement to the contrary and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section) (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 7.1, if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Executive, after taking into

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account the Payments and the Gross-Up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to the Executive resulting from an elimination of the Gross-Up Payment and a reduction of the Payments, in the aggregate, to an amount (the “Reduced Amount”) such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount.

          7.2. Subject to the provisions of Section 7.3, all determinations required to be made under this Section 7, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young LLP or such other certified public accounting firm as may be designated by the Executive (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 7, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 7.3, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

          7.3. The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

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               (a) give the Company any information reasonably requested by the Company relating to such claim,

               (b) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

               (c) cooperate with the Company in good faith in order effectively to contest such claim, and

               (d) permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 7.3, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

          7.4. If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7.3, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company’s complying with the requirements of Section 7.3) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7.3, a determination

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is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

     8. Indemnification. The Company will, to the fullest extent permitted by Delaware General Corporation Law, as amended, indemnify the Executive for all liabilities and expenses that may be incurred in connection with the Executive’s service on behalf of the Company.

     9. Proprietary Information.

          9.1. Proprietary Information Defined. The term “Proprietary Information” shall mean any and all confidential and/or proprietary knowledge, data or information of the Company. By way of illustration but not limitation, “Proprietary Information” includes (i) trade secrets, inventions, mask works, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as “Inventions”); (ii) information regarding plans for research, development, new products or services, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (iii) information regarding the skills and compensation of other employees of the Company.

          9.2. Non-Disclosure. At all times during the Executive’s employment and thereafter, the Executive agrees to hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company’s Proprietary Information, except as such disclosure, use or publication may be required in connection with the Executive’s work for the Company, or unless the Company expressly authorizes such in writing. The Executive will obtain the Company’s written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to the Executive’s work at the Company and/or incorporates any Proprietary Information. The Executive hereby assigns to the Company any rights the Executive may have or acquire in such Proprietary Information and recognizes that all Proprietary Information shall be the sole property of the Company and its assigns. The Executive has been informed and acknowledges that the unauthorized taking of the Company’s trade secrets will constitute Cause for termination and may subject the Executive to civil and/or criminal penalties.

          9.3. Own Knowledge. Subject to the foregoing non-disclosure obligations, it is understood that, at all such times, the Executive is free personally to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and which is gained through the Executive’s own, skill, knowledge, and experience.

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     10. Assignment of Inventions.

          10.1. Proprietary Rights. The term “Proprietary Rights” shall mean all trade secret, patent, copyright, mask work and other intellectual property rights or “moral rights” throughout the world. “Moral rights” refers to any rights to claim authorship of an Invention or to object to or prevent the modification of any Invention, or to withdraw from circulation or control the publication or distribution of any Invention, and any similar right, existing under judicial or statutory law of any country in the world, or under any treaty, regardless of whether or not such right is denominated or generally referred to as a “moral right.”

          10.2. Prior Inventions. Inventions, if any, patented or unpatented, which the Executive made prior to the commencement of the Executive’s employment with the Company are excluded from the scope of this Agreement. To preclude any possible uncertainty, the Executive agrees to set forth on Exhibit B (Previous Inventions) attached hereto a complete list of all Inventions that the Executive has, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of the Executive’s employment with the Company, that the Executive considers to be his property or the property of third parties and that the Executive wishes to have excluded from the scope of this Agreement (collectively referred to as “Prior Inventions”). If disclosure of any such Prior Invention would cause the Executive to violate any prior confidentiality agreement, the Executive understands that he is not to list such Prior Inventions in Exhibit B but is only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit B for such purpose. If no such disclosure is attached, the Executive represents that there are no Prior Inventions. If, in the course of the Executive’s employment with the Company, the Executive incorporates a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, the Executive agrees that he will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company’s prior written consent.

          10.3. Assignment of Inventions. The Executive hereby assigns and agrees to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all his right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by the Executive, either alone or jointly with others, during the period of his employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 10, are hereinafter referred to as “Company Inventions.”

          10.4. Unassigned Inventions. The Company acknowledges that this Agreement will not be deemed to require assignment of any invention that was developed entirely on the Executive’s own time without using the Company’s equipment, supplies, facilities, or trade

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secrets and neither related to the Company’s actual or anticipated business, research or development, nor resulted from work performed by the Executive for the Company.

          10.5. Government or Third Party. The Executive also agrees to assign all his right, title and interest in and to any particular Company Invention to a third party, including without limitation the United States, as directed by the Company.

          10.6. Works for Hire. The Executive acknowledges that all original works of authorship which are made by him (solely or jointly with others) within the scope of Executive’s employment and which are protectable by copyright are “works made for hire,” pursuant to United States Copyright Act (17 U.S.C., Section 101).

          10.7. Enforcement of Proprietary Rights. The Executive agrees to assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end the Executive agrees to execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, the Executive will execute, verify and deliver assignments of such Proprietary Rights to the Company or its designee. The Executive’s obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of his employment, but the Company shall compensate the Executive at a reasonable rate after the Executive’s termination for the time actually spent by the Executive at the Company’s request on such assistance.

          10.8. Appointment of Attorney in Fact. In the event the Company is unable for any reason, after reasonable effort, to secure the Executive’s signature on any document needed in connection with the actions specified in this Section 10, the Executive hereby irrevocably designates and appoints the Company and any of its duly authorized officers and agents as his agent and attorney in fact, which appointment is coupled with an interest, to act for and in the Executive’s behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by the Executive. The Executive hereby waives and quitclaims to the Company any and all claims, of any nature whatsoever, which the Executive now or may hereafter have for infringement of any Proprietary Rights assigned hereunder to the Company.

     11. Restrictive Covenants. In consideration of the Executive’s employment or continued employment by the Company, and the compensation now and hereafter paid to Executive, the Executive hereby agrees to the following:

          11.1. Non-Solicitation of Employees. The Executive agrees that for the period of the Executive’s employment by the Company and for twelve (12) months after the date the Executive’s employment by the Company ends for any reason, the Executive will not, either directly or through others, except during the performance of his duties on behalf of the

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Company: (i) solicit for hire, or hire, any employee of the Company or otherwise encourage any employee of the Company to end his relationship with the Company; (ii) solicit or otherwise encourage any employee of the Company to accept employment with any other person or business entity; or (iii) assist any other person or entity in carrying out any act restricted by this Section 11.1. For purposes of this Section 11.1, an employee of the Company shall be any person who, at the time of the solicitation or encouragement prohibited by this Section, is employed by the Company or was employed by the Company at any time within the prior six (6) months.

          11.2. Business Restrictions with Customers, Contractors and Consultants. The Executive agrees that for the period of the Executive’s employment by the Company and for twelve (12) months after the date the Executive’s employment by the Company ends for any reason, the Executive will not, either directly or through others, except during the performance of his duties on behalf of the Company: (i) solicit or otherwise encourage any consultant, contractor, customer or prospective customer of the Company, with whom the Executive had business-related contact as a result of his employment or whose identity the Executive learned as a result of his employment, to diminish or materially alter its relationship with the Company; (ii) accept or conduct competitive business with any customer or prospective customer of the Company with whom the Executive had business-related contact as a result of his employment or whose identity the Executive learned as a result of his employment; or (iii) assist any other person or entity in carrying out any act restricted by this Section 11.2.

          11.3. Non-Competition. The Executive agrees that for the period of the Executive’s employment with the Company, and for the period of twelve (12) months after the later of the date the Executive’s employment with the Company ends for any reason, or the date a court of competent jurisdiction enters an order enforcing this provision and finding that the Executive has breached this Section 11.3, the Executive will not directly or through others: (i) in any capacity similar to the capacity in which he was employed by the Company or otherwise competitive with the Company, become employed by or provide services to any other person or entity that offers products or services competitive with the Company’s products or services within the United States or any other country where the Company provides or offers such products or services, or (ii) on his own behalf or on behalf of any other person or entity, compete with the Company in the sale, service, distribution or licensing of any products or services competitive with the Company’s products or services within the United States or any other country where the Company provides or offers such products or services.

          11.4. Acknowledgments. The Executive acknowledges that the Company’s business is national and international in scope, and, therefore, that the restrictions contained in this Section 11 are reasonable in scope and necessary to protect the best interests of the Company. The Executive further acknowledges that in the course of his employment with the Company, he also has duties involving the Company’s subsidiaries and affiliates, has learned or been exposed to trade secrets and proprietary information relating to such subsidiaries and affiliates and that the obligations of this Section 11 extend to such subsidiaries and affiliates. The parties intend that the covenants contained herein shall be deemed to be a series of separate

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covenants, one for each and every county of each state of the United States of America and the District of Columbia. If any of the provisions of such covenants shall be held unenforceable because of being excessively broad as to scope or subject, such provisions shall be modified and construed by a court of competent jurisdiction by limiting and reducing it so as to be enforceable to the extent compatible with the applicable law as it shall then appear.

          11.5. Injunctive Relief. In the event of a breach or a threatened or attempted breach of any provision of this Section 11 by the Executive, the Company shall, in addition to other remedies available to it, be entitled to temporary and permanent injunctions to enforce the provisions of this Section 11 without the necessity of showing any actual damages or injury and without posting bond or other security, which the Executive expressly waives. The Company shall further be entitled to an order by a court of competent jurisdiction for expedited discovery and the Executive covenants not to raise any objection to such a request by the Company.

          11.6. Notification of New Company. In the event that the Executive leaves the employ of the Company, the Executive authorizes the Company to provide notice of the Executive’s rights and obligations under this Agreement to the Executive’s subsequent employer and to any other entity or person to whom the Executive provides services.

     12. Litigation Cooperation. The Executive will cooperate with the Company, during the Term and thereafter (including following the Executive’s termination of employment for any reason), by making himself reasonably available to testify on behalf of the Company in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, and to reasonably assist the Company in any such action, suit, or proceeding by providing information and meeting and consulting with the Board or its representatives or counsel, or representatives or counsel to the Company as reasonably requested. The Company will reimburse the Executive, for all expenses reasonably incurred by him in connection with his provision of testimony or assistance (except with respect to any litigation between the Executive and the Company or any litigation in which the parties are otherwise adverse).

     13. Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Executive:

Mr. Steve Dubin

If to the Company:

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Martek Biosciences Corporation
6480 Dobbin Road
Columbia, Maryland 21045
Attention: General Counsel

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.

     14. General Provisions.

          14.1. Successors and Assigns. If the Company shall at any time be merged or consolidated into or with another corporation, or if substantially all the assets of the Company are transferred to another corporation, the provisions of this Agreement shall be binding upon and inure to the benefit of the corporation resulting from such merger, consolidation or transfer.

          14.2. Entire Agreement; Modification. This Agreement sets forth the entire understanding with respect to the subject of employment of the Executive and shall not be amended, modified, or rescinded except by a written instrument signed by both parties hereto and approved by the Board. This Agreement specifically supersedes and cancels the Proprietary Information, Inventions, and Non-Solicitation Agreement dated September 2, 1991 entered into by the Company and the Executive.

          14.3. Choice of Law and Jurisdiction; Attorney’s Fees. This Agreement shall be governed by and construed under the laws of the State of Maryland, without regard to its conflict of laws doctrine. The Executive expressly consents to the jurisdiction of the state and federal courts serving the State of Maryland for all actions arising out of or relating to this Agreement and expressly waives any defense that such courts lack personal jurisdiction over him. All such claims shall be tried in the federal or state courts serving the State of Maryland to the exclusion of all others and such courts shall have exclusive jurisdiction over such disputes. In the event of any proceeding arising out of or relating to this Agreement in which the Executive is the prevailing party against the Company, the Company shall pay reasonable attorneys’ fees incurred by the Executive in such proceeding.

          14.4. Severability. If any provision of this Agreement or the application thereof is held invalid, the invalidity shall not affect other provisions or applications of this Agreement that can be given effect without the invalid provisions or applications and to this end the provisions of this Agreement are declared to be severable.

          14.5. Waiver of Breach. No waiver of any breach of any term or provision of this Agreement shall be construed to be, nor shall be, a waiver of any other breach of this Agreement. No waiver shall be binding unless in writing and signed by the party waiving the breach.

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          14.6. Assignment of Agreement. The Executive acknowledges that his services are unique and personal. Accordingly, the Executive may not assign his rights or delegate his duties or obligations under this Agreement to any person or entity.

          14.7. Representation. The Executive represents that he is knowledgeable and sophisticated as to business matters, including the subject matter of this Agreement, that he has read this Agreement and that he understands its terms. The Executive acknowledges that, prior to assenting to the terms of this Agreement, he has been given a reasonable time to review it, to consult with counsel of his choice, and to negotiate at arm’s-length with the Company as to its contents. The Executive and the Company agree that the language used in this Agreement is the language chosen by the parties to express their mutual intent, and that they have entered into this Agreement freely and voluntarily and without pressure or coercion from anyone.

          14.8. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

[THIS SPACE INTENTIONALLY LEFT BLANK]

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     IN WITNESS WHEREOF, the Company and the Executive, intending to be legally bound, have executed this Agreement on the day and year first above written.

MARTEK BIOSCIENCES CORPORATION

By:

Name:

Title:

Steve Dubin

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EX-10.44

Exhibit 10.44

EXECUTIVE EMPLOYMENT AGREEMENT

     THIS EXECUTIVE EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of the 10th day of November, 2006 (“Effective Date”) by and between MARTEK BIOSCIENCES CORPORATION (“Company,” which term shall include all subsidiaries of the Company as the context may require), a Delaware corporation, and Peter A. Nitze (“Executive”).

RECITALS

     WHEREAS, the Company desires to employ the Executive and the Executive desires to be employed in accordance with the terms of this Agreement.

     WHEREAS, the Company and the Executive have previously entered into a Proprietary Information, Inventions, and Non-Solicitation Agreement dated October 31, 2005; and

     WHEREAS, both the Company and the Executive believe it to be in their mutual interest to cancel and supersede the aforementioned Proprietary Information, Inventions, and Non-Solicitation Agreement.

TERMS

     NOW, THEREFORE, in consideration of the mutual promises and agreements set forth below, the Company and the Executive hereby agree as follows:

     1. Term of Employment. The Company agrees to employ the Executive and the Executive agrees to accept such employment for an initial term of three (3) years (the “Initial Term”), such Term commencing on the Effective Date and ending on the date that is the third anniversary of the Effective Date. The term of employment shall be automatically extended for an additional consecutive 1-year period (an “Extended Term”) on the third anniversary of the Effective Date and on each subsequent anniversary of the Effective Date, unless and until the Company or the Executive provides written notice to the other party in accordance with Section 13 hereof not less than 60 days before such anniversary date that such party is electing not to extend the Initial Term or the Extended Term, as the case may be (“Non-Renewal”), in which case the term of employment hereunder shall end as of the end of such Initial Term or Extended Term, as the case may be. The Initial Term and any Extended Term(s) are collectively referred to herein as the “Term.” Notwithstanding any other provision of this Agreement, the Executive’s employment, and the Term, may be terminated at any time pursuant to Section 6 hereof. Portions of this Agreement that by their terms provide or imply that they survive the end of the Term, including but not limited to Sections 9, 10, and 11, shall survive the end of the Term.

     2. Duties and Responsibilities.

          2.1. During the Term, the Executive shall be employed as the Company’s Executive Vice President and Chief Operating Officer. The Executive shall have such duties, responsibilities, and authority as are customarily required of employees in the Executive’s

position and such other duties and responsibilities commensurate with such position as the Company may assign to the Executive from time to time.

          2.2. During the Term, the Executive shall devote his entire business time, attention and energies to the business and interests of the Company.

          2.3. The Executive agrees that he is subject to and will comply with the policies and procedures of the Company, including but not limited to the Company’s Code of Ethics for Directors, Officers and Employees and policies concerning confidential information, as such policies and procedures may be modified, added to or eliminated from time to time at the sole discretion of the Company, except to the extent any such policy or procedure conflicts with the express terms of this Agreement, in which case the terms of this Agreement shall control.

          2.4. The Executive’s principal place of employment will be Columbia, Maryland or at such other place as may be mutually determined by the Executive and the Company; provided, however, that the Executive will travel to such other locations as may be reasonably necessary and/or required by the Company in its sole discretion in order to discharge his duties.

     3. Outside Activities. Except with the prior written consent of the Company’s Board of Directors, the Executive will not, while employed by the Company, undertake or engage in any other employment, occupation or business enterprise, other than activities in which the Executive is a passive investor. The Executive may serve on outside boards of directors for both for profit and non-profit entities so long as (i) such service does not create a conflict of interest between the Executive and the Company, (ii) such service will not interfere with the Executive’s duties as set forth in this Agreement, and (iii) if the Executive was not already serving on such board on the Effective Date, he receives advance written permission from the Company’s Chief Executive Officer. The Executive may engage in voluntary community activities without written permission from the Company, so long as such service (i) does not create a conflict of interest between the Executive and the Company, and (ii) will not interfere with the Executive’s duties as set forth in this Agreement.

     4. Compensation and Benefits.

          4.1. The Executive shall be paid an annual base salary (a “Base Salary”) of Three Hundred Seventy Thousand Dollars ($370,000), payable in accordance with the Company’s normal payroll practices and schedule. The Executive’s Base Salary shall be reviewed annually, with the granting of any increases subject to the sole discretion of the Company. All payments provided for in this Agreement shall be subject to the deduction of payroll taxes and other withholdings and assessments as required by law or agreed to by the Executive.

          4.2. The Executive is entitled to participate in the benefit programs offered by the Company to employees holding similar positions as the Executive, provided the Executive meets the eligibility criteria for such programs. Such benefit programs currently include: health, disability, 401(k), life insurance and the Company’s Management Cash Bonus Incentive

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Program. These benefit programs may be modified or eliminated at any time in the Company’s sole discretion. The Executive shall be entitled to participate in the Company’s leave, holiday and vacation programs in accordance with the terms of such programs as they may be modified from time to time. The Executive shall be reimbursed for reasonable business expenses in accordance with the Company’s expense reimbursement procedures upon production of sufficient documentation.

          4.3. The Executive shall be eligible to participate in the Company’s stock option and other incentive compensation plans in the sole discretion of the Company’s Board of Directors and in accordance with applicable plans or policies.

     5. Representations Regarding Former Employment.

          5.1. The Executive represents that his performance of all the terms of this Agreement and the performance of his duties for the Company does not and will not breach any agreement or obligation of any kind made prior to his employment by the Company, including agreements or obligations he may have with prior employers or entities for which he has provided services. The Executive has not entered into, and agrees he will not enter into, any agreement or obligation either written or oral in conflict herewith.

          5.2. If, despite the fact that the Executive has made representations in Section 5.1 that he does not have any other agreements that would conflict with his employment herein, the Executive should find that confidential information belonging to any former employer or any other entity might be usable in connection with the Company’s business, the Executive will not disclose to the Company or use on behalf of the Company any confidential information belonging to any of the Executive’s former employers (except in accordance with agreements between the Company and any such former employer); but during the Executive’s employment by the Company he will use in the performance of his duties all information which is generally known and used by persons with training and experience comparable to his own and all information which is common knowledge in the industry or otherwise legally in the public domain.

     6. Termination of Employment and Severance. The Executive’s employment with the Company will terminate on the last day of the Initial Term or any Extended Term, as the case may be, upon Non-Renewal by either party. The parties further acknowledge that the Executive’s employment with the Company may be terminated at any time prior in accordance with this Section 6 and that upon such termination the Executive shall be entitled to (1) accrued but unpaid salary and accrued but unused vacation in accordance with the policy of the Company and (2) any vested stock options or other vested equity-based compensation previously granted but only in accordance with and subject to the terms of any agreements relating thereto executed by the Executive and the Company. Otherwise, the Executive shall be entitled to no compensation or benefits except as set forth in this Section 6.

          6.1. Termination Without Cause or for Good Reason. The Company shall have the right to terminate the Executive’s employment with the Company at any time on thirty

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(30) days’ written notice without Cause (as “Cause” is defined in Section 6.2), and the Executive may terminate his employment at any time for Good Reason (as “Good Reason” is defined in Section 6.3). In the event the Executive’s employment is terminated without Cause or for Good Reason, the Company shall pay the Executive in a lump-sum a severance payment equal to twelve (12) months of his then-existing Base Salary and, in the event the Executive is eligible under a bonus plan for a bonus for the year of work in which his employment is terminated, an additional payment equivalent to the prorated portion (the number of business days that the Executive was employed during the year divided by 235) of the Executive’s target bonus for that year (for purposes of this Agreement “target bonus” shall mean either (i) any specific target bonus that may have been established for the Executive or (ii) if no specific target bonus has been established, a percentage of the Executive’s base salary equal to the maximum Potential Bonus Percentage established by the Compensation Committee of the Board for that year’s management bonus pool) (collectively, “Severance Pay”). The Company shall also reimburse the Executive for premiums he pays for health and dental insurance under COBRA, for the same level of coverage that the Executive maintained at the time of his termination, for a period of up to twelve (12) months, provided the Executive elects COBRA coverage (the “COBRA Benefit”). The Company’s reimbursement obligation is conditioned on the Executive’s providing written verification of his premium payments to the Company, and the reimbursement obligation will end immediately if the Executive is eligible to obtain health care insurance from any other employer during the payment period.

          6.2. Termination For Cause. The Company shall have the right to terminate the Executive’s employment with the Company at any time without notice for Cause. “Cause” for termination shall be deemed to exist if any of the following circumstances exist in the reasonable judgment of the Company: (i) the Executive has committed or engaged in intentional misconduct or gross negligence in the exercise of his duties under this Agreement; (ii) the Executive has committed theft, forgery, fraud, misappropriation, embezzlement, or any other act of material misconduct against the Company or any of its affiliates; (iii) the Executive has violated any fiduciary duty owed to the Company; (iv) the Executive is convicted of, or enters a guilty plea or plea of no contest to a felony or any other crime involving moral turpitude; (v) the Executive is unable to competently perform his duties under this Agreement because of his substantial dependence on alcohol or any controlled substance; (vi) the Executive has engaged in any act (including, but not limited to, unlawful discriminatory conduct) that results in substantial injury to the reputation, business or business relationships of the Company or that, in each case, has subjected, or if generally known would subject, the Company to public ridicule or embarrassment; (vii) the Executive has violated a material provision of this Agreement and has failed to cure such breach within ten (10) days of receiving written notice thereof, except that any breach by the Executive of Sections 6.2(i)-(vi) or (viii) shall constitute Cause for termination even in the absence of such written notice; or (viii) the Executive has failed to adequately perform the material duties of his position after having received thirty (30) days written notice specifying the reasons why his performance is inadequate and has not cured, to the satisfaction of the Board of Directors, the inadequate performance within such 30 days. In the event the Executive’s employment is terminated at any time for Cause, the Executive will not receive any Severance Pay, the COBRA Benefit, or any other such compensation or benefits, except for

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accrued but unpaid salary and accrued but unused vacation in accordance with the policy of the Company.

          6.3. Definition of Good Reason. “Good Reason” shall be deemed to exist if (i) without the Executive’s consent the Company effects a material reduction in the nature or scope of the Executive’s duties below those customarily performed by the Executive; (ii) the Company violates a material provision of this Agreement; (iii) without the Executive’s consent the Company reduces the Executive’s Base Salary; (iv) the Company becomes a division or subsidiary of another entity and the Executive’s duties are on behalf of the divisional or subsidiary entity rather than the parent; or (v) the Company relocates its principal office to a location more than fifty (50) miles from its current location at 6480 Dobbin Road, Columbia, Maryland (twenty-five (25) miles if Good Reason is being determined for purposes of Section 6.6 below). Good Reason shall not exist unless and until the Executive provides the Company written notice of the acts alleged to constitute Good Reason and the Company has failed to cure those acts within thirty (30) days of receipt of such notice.

          6.4. Termination Without Good Reason. The Executive may voluntarily terminate his employment with the Company at any time without Good Reason by providing sixty (60) days’ written notice of his intent to do so. In the event the Executive voluntarily terminates his employment without Good Reason, he will not receive any Severance Pay, the COBRA Benefit, or any other such compensation or benefits, except for accrued but unpaid salary and accrued but unused vacation in accordance with the policy of the Company.

          6.5. Termination upon Death or Disability. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. If the Executive becomes Disabled during the Employment Period, the Company may give him written notice in accordance with this Agreement of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Disabled” shall mean the absence of the Executive from the Executive’s duties with the Company on a full-time basis for 180 consecutive business days as a result of accident or incapacity due to mental or physical illness. Until the Disability Effective Date, the Executive shall be entitled to salary, bonus and other benefits to the extent provided for hereunder.

          6.6. Termination following a Change in Control. In the event that the Executive is terminated without Cause or the Executive terminates his employment for Good Reason within twelve (12) months following a Change in Control as defined in Section 6.7, the Company shall, in lieu of the Severance Pay and the COBRA Benefit set forth in Section 6.1, pay the Executive in a lump-sum a severance payment equal to (i) twenty-four (24) months of his then-existing Base Salary and (ii), in the event the Executive is eligible for a bonus under a bonus plan for the year of work in which his employment is terminated, an additional payment equivalent to 100% of the Executive’s “target bonus” for that year (as defined in Section 6.1 above), without proration, provided that if the Executive did not participate in an executive

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annual bonus plan in the year prior to termination because the Executive was recently hired, the additional payment under clause (ii) above shall be a percentage of the Executive’s then-existing Base Salary equal to the percentage of the executive bonus pool actually paid in the prior year to then-serving executives. The Company shall also reimburse the Executive for premiums he pays for health and dental insurance under COBRA, for the same level of coverage that the Executive maintained at the time of his termination, for a period of up to eighteen (18) months, provided the Executive elects COBRA coverage. The Company’s reimbursement obligation is conditioned on the Executive’s providing written verification of his premium payments to the Company, and the reimbursement obligation will end immediately if the Executive is eligible to obtain health care insurance from any other employer during the payment period.

          6.7. Definition of Change in Control. For the purpose of this Agreement, a “Change of Control” shall mean:

               (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d) (3) or 14(d) (2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 6.7; or

               (b) Individuals who, as of the Effective Date, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

               (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of

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directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

               (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

          6.8. Payment in Lieu of Notice. Any time that notice of termination is required by any party under this Agreement, the Company may, in its sole discretion and at its option, relieve the Executive of his duties immediately and pay the Executive his regular base salary during the notice period.

          6.9. Outplacement Services. In the event that the Executive’s employment is terminated for any reason other than those set forth in Sections 6.2, 6.4, or 6.5, the Company will reimburse the Executive for payments made by the Executive for executive outplacement services for up to twelve (12) months under a program approved by the Company in the exercise of its reasonable discretion.

          6.10. Non-Renewal. In the event of a Non-Renewal by the Company, the Executive will not be entitled to any compensation or benefits under this Agreement except as follows:

               (a) If the Non-Renewal by the Company results in the Executive’s employment ending within twelve (12) months following a Change in Control, the Company shall provide the Executive the payments and benefits set forth in Section 6.6 (subject to the terms and conditions therein).

               (b) If the Non-Renewal by the Company results in the Executive’s employment ending at any other time, the Company shall provide the Executive (i) in a lump-sum a severance payment equal to twelve (12) months of his then-existing Base Salary; (ii) in the event the Executive is eligible for a bonus under a bonus plan for the year of work in which his employment is terminated, an additional payment equivalent to the prorated portion (the number of business days that the Executive was employed during the year divided by 235) of the

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Executive’s “target bonus” for that year; and (iii) the COBRA Benefit (as that term is defined in Section 6.1 and subject to the same terms and conditions as set forth in Section 6.1).

          6.11 Requirement of a General Release. The Company shall not be obligated to provide the Severance Pay, the COBRA Benefit, or any of the other payments and benefits set forth in Sections 6.1, 6.6, 6.9, or 6.10 above unless and until the Executive executes a general release of all claims against the Company substantially in the form of one of the two releases (whichever is appropriate) attached hereto as Exhibit A and the release becomes effective.

          6.12. Section 409A. Notwithstanding anything to the contrary contained herein, in the event that the Company determines that one or more payments under this Section 6, if payable, are subject to Section 409A of the Code: (i) such payment(s) under this Section 6 shall not commence until six (6) months after the Executive’s last day of employment (or, if earlier, the date Executive dies) to the extent necessary to avoid the imposition of the excise tax under Section 409A of the Code, and (ii) the Company may unilaterally amend this Agreement to the minimum extent necessary to avoid the imposition of the excise tax under Section 409A of the Code.

     7. Certain Additional Payment Contingencies.

          7.1. Notwithstanding anything in this Agreement to the contrary and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section) (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 7.1, if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Executive, after taking into account the Payments and the Gross-Up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to the Executive resulting from an elimination of the Gross-Up Payment and a reduction of the Payments, in the aggregate, to an amount (the “Reduced Amount”) such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount.

          7.2. Subject to the provisions of Section 7.3, all determinations required to be made under this Section 7, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such

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determination, shall be made by Ernst & Young LLP or such other certified public accounting firm as may be designated by the Executive (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 7, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 7.3, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

          7.3. The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

               (a) give the Company any information reasonably requested by the Company relating to such claim,

               (b) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

               (c) cooperate with the Company in good faith in order effectively to contest such claim, and

               (d) permit the Company to participate in any proceedings relating to such claim;

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provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 7.3, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

          7.4. If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7.3, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company’s complying with the requirements of Section 7.3) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7.3, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

     8. Indemnification. The Company will, to the fullest extent permitted by Delaware General Corporation Law, as amended, indemnify the Executive for all liabilities and expenses that may be incurred in connection with the Executive’s service on behalf of the Company.

     9. Proprietary Information.

          9.1. Proprietary Information Defined. The term “Proprietary Information” shall mean any and all confidential and/or proprietary knowledge, data or information of the Company. By way of illustration but not limitation, “Proprietary Information” includes (i) trade secrets, inventions, mask works, ideas, processes, formulas, source and object codes, data,

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programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as “Inventions”); (ii) information regarding plans for research, development, new products or services, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (iii) information regarding the skills and compensation of other employees of the Company.

          9.2. Non-Disclosure. At all times during the Executive’s employment and thereafter, the Executive agrees to hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company’s Proprietary Information, except as such disclosure, use or publication may be required in connection with the Executive’s work for the Company, or unless the Company expressly authorizes such in writing. The Executive will obtain the Company’s written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to the Executive’s work at the Company and/or incorporates any Proprietary Information. The Executive hereby assigns to the Company any rights the Executive may have or acquire in such Proprietary Information and recognizes that all Proprietary Information shall be the sole property of the Company and its assigns. The Executive has been informed and acknowledges that the unauthorized taking of the Company’s trade secrets will constitute Cause for termination and may subject the Executive to civil and/or criminal penalties.

          9.3. Own Knowledge. Subject to the foregoing non-disclosure obligations, it is understood that, at all such times, the Executive is free personally to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and which is gained through the Executive’s own, skill, knowledge, and experience.

     10. Assignment of Inventions.

          10.1. Proprietary Rights. The term “Proprietary Rights” shall mean all trade secret, patent, copyright, mask work and other intellectual property rights or “moral rights” throughout the world. “Moral rights” refers to any rights to claim authorship of an Invention or to object to or prevent the modification of any Invention, or to withdraw from circulation or control the publication or distribution of any Invention, and any similar right, existing under judicial or statutory law of any country in the world, or under any treaty, regardless of whether or not such right is denominated or generally referred to as a “moral right.”

          10.2. Prior Inventions. Inventions, if any, patented or unpatented, which the Executive made prior to the commencement of the Executive’s employment with the Company are excluded from the scope of this Agreement. To preclude any possible uncertainty, the Executive agrees to set forth on Exhibit B (Previous Inventions) attached hereto a complete list of all Inventions that the Executive has, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of the Executive’s employment with the Company, that the Executive considers to be his property or the property of third parties and that the Executive wishes to have excluded from the scope of this Agreement (collectively referred to as “Prior Inventions”). If disclosure of any such Prior Invention would cause the Executive to violate any prior confidentiality

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agreement, the Executive understands that he is not to list such Prior Inventions in Exhibit B but is only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit B for such purpose. If no such disclosure is attached, the Executive represents that there are no Prior Inventions. If, in the course of the Executive’s employment with the Company, the Executive incorporates a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, the Executive agrees that he will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company’s prior written consent.

          10.3. Assignment of Inventions. The Executive hereby assigns and agrees to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all his right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by the Executive, either alone or jointly with others, during the period of his employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 10, are hereinafter referred to as “Company Inventions.”

          10.4. Unassigned Inventions. The Company acknowledges that this Agreement will not be deemed to require assignment of any invention that was developed entirely on the Executive’s own time without using the Company’s equipment, supplies, facilities, or trade secrets and neither related to the Company’s actual or anticipated business, research or development, nor resulted from work performed by the Executive for the Company.

          10.5. Government or Third Party. The Executive also agrees to assign all his right, title and interest in and to any particular Company Invention to a third party, including without limitation the United States, as directed by the Company.

          10.6. Works for Hire. The Executive acknowledges that all original works of authorship which are made by him (solely or jointly with others) within the scope of Executive’s employment and which are protectable by copyright are “works made for hire,” pursuant to United States Copyright Act (17 U.S.C., Section 101).

          10.7. Enforcement of Proprietary Rights. The Executive agrees to assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end the Executive agrees to execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, the Executive will execute, verify and deliver assignments of

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such Proprietary Rights to the Company or its designee. The Executive’s obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of his employment, but the Company shall compensate the Executive at a reasonable rate after the Executive’s termination for the time actually spent by the Executive at the Company’s request on such assistance.

          10.8. Appointment of Attorney in Fact. In the event the Company is unable for any reason, after reasonable effort, to secure the Executive’s signature on any document needed in connection with the actions specified in this Section 10, the Executive hereby irrevocably designates and appoints the Company and any of its duly authorized officers and agents as his agent and attorney in fact, which appointment is coupled with an interest, to act for and in the Executive’s behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by the Executive. The Executive hereby waives and quitclaims to the Company any and all claims, of any nature whatsoever, which the Executive now or may hereafter have for infringement of any Proprietary Rights assigned hereunder to the Company.

     11. Restrictive Covenants. In consideration of the Executive’s employment or continued employment by the Company, and the compensation now and hereafter paid to Executive, the Executive hereby agrees to the following:

          11.1. Non-Solicitation of Employees. The Executive agrees that for the period of the Executive’s employment by the Company and for twelve (12) months after the date the Executive’s employment by the Company ends for any reason, the Executive will not, either directly or through others, except during the performance of his duties on behalf of the Company: (i) solicit for hire, or hire, any employee of the Company or otherwise encourage any employee of the Company to end his relationship with the Company; (ii) solicit or otherwise encourage any employee of the Company to accept employment with any other person or business entity; or (iii) assist any other person or entity in carrying out any act restricted by this Section 11.1. For purposes of this Section 11.1, an employee of the Company shall be any person who, at the time of the solicitation or encouragement prohibited by this Section, is employed by the Company or was employed by the Company at any time within the prior six (6) months.

          11.2. Business Restrictions with Customers, Contractors and Consultants. The Executive agrees that for the period of the Executive’s employment by the Company and for twelve (12) months after the date the Executive’s employment by the Company ends for any reason, the Executive will not, either directly or through others, except during the performance of his duties on behalf of the Company: (i) solicit or otherwise encourage any consultant, contractor, customer or prospective customer of the Company, with whom the Executive had business-related contact as a result of his employment or whose identity the Executive learned as a result of his employment, to diminish or materially alter its relationship with the Company; (ii) accept or conduct competitive business with any customer or prospective customer of the Company with whom the Executive had business-related contact as a result of his employment or

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whose identity the Executive learned as a result of his employment; or (iii) assist any other person or entity in carrying out any act restricted by this Section 11.2.

          11.3. Non-Competition. The Executive agrees that for the period of the Executive’s employment with the Company, and for the period of twelve (12) months after the later of the date the Executive’s employment with the Company ends for any reason, or the date a court of competent jurisdiction enters an order enforcing this provision and finding that the Executive has breached this Section 11.3, the Executive will not directly or through others: (i) in any capacity similar to the capacity in which he was employed by the Company or otherwise competitive with the Company, become employed by or provide services to any other person or entity that offers products or services competitive with the Company’s products or services within the United States or any other country where the Company provides or offers such products or services, or (ii) on his own behalf or on behalf of any other person or entity, compete with the Company in the sale, service, distribution or licensing of any products or services competitive with the Company’s products or services within the United States or any other country where the Company provides or offers such products or services.

          11.4. Acknowledgments. The Executive acknowledges that the Company’s business is national and international in scope, and, therefore, that the restrictions contained in this Section 11 are reasonable in scope and necessary to protect the best interests of the Company. The Executive further acknowledges that in the course of his employment with the Company, he also has duties involving the Company’s subsidiaries and affiliates, has learned or been exposed to trade secrets and proprietary information relating to such subsidiaries and affiliates and that the obligations of this Section 11 extend to such subsidiaries and affiliates. The parties intend that the covenants contained herein shall be deemed to be a series of separate covenants, one for each and every county of each state of the United States of America and the District of Columbia. If any of the provisions of such covenants shall be held unenforceable because of being excessively broad as to scope or subject, such provisions shall be modified and construed by a court of competent jurisdiction by limiting and reducing it so as to be enforceable to the extent compatible with the applicable law as it shall then appear.

          11.5. Injunctive Relief. In the event of a breach or a threatened or attempted breach of any provision of this Section 11 by the Executive, the Company shall, in addition to other remedies available to it, be entitled to temporary and permanent injunctions to enforce the provisions of this Section 11 without the necessity of showing any actual damages or injury and without posting bond or other security, which the Executive expressly waives. The Company shall further be entitled to an order by a court of competent jurisdiction for expedited discovery and the Executive covenants not to raise any objection to such a request by the Company.

          11.6. Notification of New Company. In the event that the Executive leaves the employ of the Company, the Executive authorizes the Company to provide notice of the Executive’s rights and obligations under this Agreement to the Executive’s subsequent employer and to any other entity or person to whom the Executive provides services.

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     12. Litigation Cooperation. The Executive will cooperate with the Company, during the Term and thereafter (including following the Executive’s termination of employment for any reason), by making himself reasonably available to testify on behalf of the Company in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, and to reasonably assist the Company in any such action, suit, or proceeding by providing information and meeting and consulting with the Board or its representatives or counsel, or representatives or counsel to the Company as reasonably requested. The Company will reimburse the Executive, for all expenses reasonably incurred by him in connection with his provision of testimony or assistance (except with respect to any litigation between the Executive and the Company or any litigation in which the parties are otherwise adverse).

     13. Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Executive:

Mr. Peter A. Nitze

If to the Company:

Martek Biosciences Corporation
6480 Dobbin Road
Columbia, Maryland 21045
Attention: General Counsel

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.

     14. General Provisions.

          14.1. Successors and Assigns. If the Company shall at any time be merged or consolidated into or with another corporation, or if substantially all the assets of the Company are transferred to another corporation, the provisions of this Agreement shall be binding upon and inure to the benefit of the corporation resulting from such merger, consolidation or transfer.

          14.2. Entire Agreement; Modification. This Agreement sets forth the entire understanding with respect to the subject of employment of the Executive and shall not be amended, modified, or rescinded except by a written instrument signed by both parties hereto and approved by the Board. This Agreement specifically supersedes and cancels the Proprietary

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Information, Inventions, and Non-Solicitation Agreement dated October 31, 2005 entered into by the Company and the Executive.

          14.3. Choice of Law and Jurisdiction; Attorney’s Fees. This Agreement shall be governed by and construed under the laws of the State of Maryland, without regard to its conflict of laws doctrine. The Executive expressly consents to the jurisdiction of the state and federal courts serving the State of Maryland for all actions arising out of or relating to this Agreement and expressly waives any defense that such courts lack personal jurisdiction over him. All such claims shall be tried in the federal or state courts serving the State of Maryland to the exclusion of all others and such courts shall have exclusive jurisdiction over such disputes. In the event of any proceeding arising out of or relating to this Agreement in which the Executive is the prevailing party against the Company, the Company shall pay reasonable attorneys’ fees incurred by the Executive in such proceeding.

          14.4. Severability. If any provision of this Agreement or the application thereof is held invalid, the invalidity shall not affect other provisions or applications of this Agreement that can be given effect without the invalid provisions or applications and to this end the provisions of this Agreement are declared to be severable.

          14.5. Waiver of Breach. No waiver of any breach of any term or provision of this Agreement shall be construed to be, nor shall be, a waiver of any other breach of this Agreement. No waiver shall be binding unless in writing and signed by the party waiving the breach.

          14.6. Assignment of Agreement. The Executive acknowledges that his services are unique and personal. Accordingly, the Executive may not assign his rights or delegate his duties or obligations under this Agreement to any person or entity.

          14.7. Representation. The Executive represents that he is knowledgeable and sophisticated as to business matters, including the subject matter of this Agreement, that he has read this Agreement and that he understands its terms. The Executive acknowledges that, prior to assenting to the terms of this Agreement, he has been given a reasonable time to review it, to consult with counsel of his choice, and to negotiate at arm’s-length with the Company as to its contents. The Executive and the Company agree that the language used in this Agreement is the language chosen by the parties to express their mutual intent, and that they have entered into this Agreement freely and voluntarily and without pressure or coercion from anyone.

          14.8. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

[THIS SPACE INTENTIONALLY LEFT BLANK]

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     IN WITNESS WHEREOF, the Company and the Executive, intending to be legally bound, have executed this Agreement on the day and year first above written.

MARTEK BIOSCIENCES CORPORATION

By:

Name:

Title:

Peter A. Nitze

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EX-10.45

Exhibit 10.45

EXECUTIVE EMPLOYMENT AGREEMENT

     THIS EXECUTIVE EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of the 10^th day of November, 2006 (“Effective Date”) by and between MARTEK BIOSCIENCES CORPORATION (“Company,” which term shall include all subsidiaries of the Company as the context may require), a Delaware corporation, and David M. Abramson (“Executive”).

RECITALS

     WHEREAS, the Company desires to employ the Executive and the Executive desires to be employed in accordance with the terms of this Agreement.

     WHEREAS, the Company and the Executive have previously entered into a Proprietary Information, Inventions, and Non-Solicitation Agreement dated October 3, 2003; and

     WHEREAS, both the Company and the Executive believe it to be in their mutual interest to cancel and supersede the aforementioned Proprietary Information, Inventions, and Non-Solicitation Agreement.

TERMS

     NOW, THEREFORE, in consideration of the mutual promises and agreements set forth below, the Company and the Executive hereby agree as follows:

     1. Term of Employment. The Company agrees to employ the Executive and the Executive agrees to accept such employment for an initial term of three (3) years (the “Initial Term”), such Term commencing on the Effective Date and ending on the date that is the third anniversary of the Effective Date. The term of employment shall be automatically extended for an additional consecutive 1-year period (an “Extended Term”) on the third anniversary of the Effective Date and on each subsequent anniversary of the Effective Date, unless and until the Company or the Executive provides written notice to the other party in accordance with Section 13 hereof not less than 60 days before such anniversary date that such party is electing not to extend the Initial Term or the Extended Term, as the case may be (“Non-Renewal”), in which case the term of employment hereunder shall end as of the end of such Initial Term or Extended Term, as the case may be. The Initial Term and any Extended Term(s) are collectively referred to herein as the “Term.” Notwithstanding any other provision of this Agreement, the Executive’s employment, and the Term, may be terminated at any time pursuant to Section 6 hereof. Portions of this Agreement that by their terms provide or imply that they survive the end of the Term, including but not limited to Sections 9, 10, and 11, shall survive the end of the Term.

     2. Duties and Responsibilities.

          2.1. During the Term, the Executive shall be employed as the Company’s President. The Executive shall have such duties, responsibilities, and authority as are

customarily required of employees in the Executive’s position and such other duties and responsibilities commensurate with such position as the Company may assign to the Executive from time to time.

          2.2. During the Term, the Executive shall devote his entire business time, attention and energies to the business and interests of the Company.

          2.3. The Executive agrees that he is subject to and will comply with the policies and procedures of the Company, including but not limited to the Company’s Code of Ethics for Directors, Officers and Employees and policies concerning confidential information, as such policies and procedures may be modified, added to or eliminated from time to time at the sole discretion of the Company, except to the extent any such policy or procedure conflicts with the express terms of this Agreement, in which case the terms of this Agreement shall control.

          2.4. The Executive’s principal place of employment will be Columbia, Maryland or at such other place as may be mutually determined by the Executive and the Company; provided, however, that the Executive will travel to such other locations as may be reasonably necessary and/or required by the Company in its sole discretion in order to discharge his duties.

     3. Outside Activities. Except with the prior written consent of the Company’s Board of Directors, the Executive will not, while employed by the Company, undertake or engage in any other employment, occupation or business enterprise, other than activities in which the Executive is a passive investor. The Executive may serve on outside boards of directors for both for profit and non-profit entities so long as (i) such service does not create a conflict of interest between the Executive and the Company, (ii) such service will not interfere with the Executive’s duties as set forth in this Agreement, and (iii) if the Executive was not already serving on such board on the Effective Date, he receives advance written permission from the Company’s Chief Executive Officer. The Executive may engage in voluntary community activities without written permission from the Company, so long as such service (i) does not create a conflict of interest between the Executive and the Company, and (ii) will not interfere with the Executive’s duties as set forth in this Agreement.

     4. Compensation and Benefits.

          4.1. The Executive shall be paid an annual base salary (a “Base Salary”) of Three Hundred Seventy Thousand Dollars ($370,000), payable in accordance with the Company’s normal payroll practices and schedule. The Executive’s Base Salary shall be reviewed annually, with the granting of any increases subject to the sole discretion of the Company. All payments provided for in this Agreement shall be subject to the deduction of payroll taxes and other withholdings and assessments as required by law or agreed to by the Executive.

          4.2. The Executive is entitled to participate in the benefit programs offered by the Company to employees holding similar positions as the Executive, provided the Executive meets the eligibility criteria for such programs. Such benefit programs currently include: health,

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disability, 401(k), life insurance and the Company’s Management Cash Bonus Incentive Program. These benefit programs may be modified or eliminated at any time in the Company’s sole discretion. The Executive shall be entitled to participate in the Company’s leave, holiday and vacation programs in accordance with the terms of such programs as they may be modified from time to time. The Executive shall be reimbursed for reasonable business expenses in accordance with the Company’s expense reimbursement procedures upon production of sufficient documentation.

          4.3. The Executive shall be eligible to participate in the Company’s stock option and other incentive compensation plans in the sole discretion of the Company’s Board of Directors and in accordance with applicable plans or policies.

     5. Representations Regarding Former Employment.

          5.1. The Executive represents that his performance of all the terms of this Agreement and the performance of his duties for the Company does not and will not breach any agreement or obligation of any kind made prior to his employment by the Company, including agreements or obligations he may have with prior employers or entities for which he has provided services. The Executive has not entered into, and agrees he will not enter into, any agreement or obligation either written or oral in conflict herewith.

          5.2. If, despite the fact that the Executive has made representations in Section 5.1 that he does not have any other agreements that would conflict with his employment herein, the Executive should find that confidential information belonging to any former employer or any other entity might be usable in connection with the Company’s business, the Executive will not disclose to the Company or use on behalf of the Company any confidential information belonging to any of the Executive’s former employers (except in accordance with agreements between the Company and any such former employer); but during the Executive’s employment by the Company he will use in the performance of his duties all information which is generally known and used by persons with training and experience comparable to his own and all information which is common knowledge in the industry or otherwise legally in the public domain.

     6. Termination of Employment and Severance. The Executive’s employment with the Company will terminate on the last day of the Initial Term or any Extended Term, as the case may be, upon Non-Renewal by either party. The parties further acknowledge that the Executive’s employment with the Company may be terminated at any time prior in accordance with this Section 6 and that upon such termination the Executive shall be entitled to (1) accrued but unpaid salary and accrued but unused vacation in accordance with the policy of the Company and (2) any vested stock options or other vested equity-based compensation previously granted but only in accordance with and subject to the terms of any agreements relating thereto executed by the Executive and the Company. Otherwise, the Executive shall be entitled to no compensation or benefits except as set forth in this Section 6.

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          6.1. Termination Without Cause or for Good Reason. The Company shall have the right to terminate the Executive’s employment with the Company at any time on thirty (30) days’ written notice without Cause (as “Cause” is defined in Section 6.2), and the Executive may terminate his employment at any time for Good Reason (as “Good Reason” is defined in Section 6.3). In the event the Executive’s employment is terminated without Cause or for Good Reason, the Company shall pay the Executive in a lump-sum a severance payment equal to twelve (12) months of his then-existing Base Salary and, in the event the Executive is eligible under a bonus plan for a bonus for the year of work in which his employment is terminated, an additional payment equivalent to the prorated portion (the number of business days that the Executive was employed during the year divided by 235) of the Executive’s target bonus for that year (for purposes of this Agreement “target bonus” shall mean either (i) any specific target bonus that may have been established for the Executive or (ii) if no specific target bonus has been established, a percentage of the Executive’s base salary equal to the maximum Potential Bonus Percentage established by the Compensation Committee of the Board for that year’s management bonus pool) (collectively, “Severance Pay”). The Company shall also reimburse the Executive for premiums he pays for health and dental insurance under COBRA, for the same level of coverage that the Executive maintained at the time of his termination, for a period of up to twelve (12) months, provided the Executive elects COBRA coverage (the “COBRA Benefit”). The Company’s reimbursement obligation is conditioned on the Executive’s providing written verification of his premium payments to the Company, and the reimbursement obligation will end immediately if the Executive is eligible to obtain health care insurance from any other employer during the payment period.

          6.2. Termination For Cause. The Company shall have the right to terminate the Executive’s employment with the Company at any time without notice for Cause. “Cause” for termination shall be deemed to exist if any of the following circumstances exist in the reasonable judgment of the Company: (i) the Executive has committed or engaged in intentional misconduct or gross negligence in the exercise of his duties under this Agreement; (ii) the Executive has committed theft, forgery, fraud, misappropriation, embezzlement, or any other act of material misconduct against the Company or any of its affiliates; (iii) the Executive has violated any fiduciary duty owed to the Company; (iv) the Executive is convicted of, or enters a guilty plea or plea of no contest to a felony or any other crime involving moral turpitude; (v) the Executive is unable to competently perform his duties under this Agreement because of his substantial dependence on alcohol or any controlled substance; (vi) the Executive has engaged in any act (including, but not limited to, unlawful discriminatory conduct) that results in substantial injury to the reputation, business or business relationships of the Company or that, in each case, has subjected, or if generally known would subject, the Company to public ridicule or embarrassment; (vii) the Executive has violated a material provision of this Agreement and has failed to cure such breach within ten (10) days of receiving written notice thereof, except that any breach by the Executive of Sections 6.2(i)-(vi) or (viii) shall constitute Cause for termination even in the absence of such written notice; or (viii) the Executive has failed to adequately perform the material duties of his position after having received thirty (30) days written notice specifying the reasons why his performance is inadequate and has not cured, to the satisfaction of the Board of Directors, the inadequate performance within such 30 days. In the event the Executive’s employment is terminated at any time for Cause, the Executive will not receive any

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Severance Pay, the COBRA Benefit, or any other such compensation or benefits, except for accrued but unpaid salary and accrued but unused vacation in accordance with the policy of the Company.

          6.3. Definition of Good Reason. “Good Reason” shall be deemed to exist if (i) without the Executive’s consent the Company effects a material reduction in the nature or scope of the Executive’s duties below those customarily performed by the Executive; (ii) the Company violates a material provision of this Agreement; (iii) without the Executive’s consent the Company reduces the Executive’s Base Salary; (iv) the Company becomes a division or subsidiary of another entity and the Executive’s duties are on behalf of the divisional or subsidiary entity rather than the parent; or (v) the Company relocates its principal office to a location more than fifty (50) miles from its current location at 6480 Dobbin Road, Columbia, Maryland (twenty-five (25) miles if Good Reason is being determined for purposes of Section 6.6 below). Good Reason shall not exist unless and until the Executive provides the Company written notice of the acts alleged to constitute Good Reason and the Company has failed to cure those acts within thirty (30) days of receipt of such notice.

          6.4. Termination Without Good Reason. The Executive may voluntarily terminate his employment with the Company at any time without Good Reason by providing sixty (60) days’ written notice of his intent to do so. In the event the Executive voluntarily terminates his employment without Good Reason, he will not receive any Severance Pay, the COBRA Benefit, or any other such compensation or benefits, except for accrued but unpaid salary and accrued but unused vacation in accordance with the policy of the Company.

          6.5. Termination upon Death or Disability. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. If the Executive becomes Disabled during the Employment Period, the Company may give him written notice in accordance with this Agreement of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Disabled” shall mean the absence of the Executive from the Executive’s duties with the Company on a full-time basis for 180 consecutive business days as a result of accident or incapacity due to mental or physical illness. Until the Disability Effective Date, the Executive shall be entitled to salary, bonus and other benefits to the extent provided for hereunder.

          6.6. Termination following a Change in Control. In the event that the Executive is terminated without Cause or the Executive terminates his employment for Good Reason within twelve (12) months following a Change in Control as defined in Section 6.7, the Company shall, in lieu of the Severance Pay and the COBRA Benefit set forth in Section 6.1, pay the Executive in a lump-sum a severance payment equal to (i) twenty-four (24) months of his then-existing Base Salary and (ii), in the event the Executive is eligible for a bonus under a bonus plan for the year of work in which his employment is terminated, an additional payment equivalent to 100% of the Executive’s “target bonus” for that year (as defined in Section 6.1

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above), without proration, provided that if the Executive did not participate in an executive annual bonus plan in the year prior to termination because the Executive was recently hired, the additional payment under clause (ii) above shall be a percentage of the Executive’s then-existing Base Salary equal to the percentage of the executive bonus pool actually paid in the prior year to then-serving executives. The Company shall also reimburse the Executive for premiums he pays for health and dental insurance under COBRA, for the same level of coverage that the Executive maintained at the time of his termination, for a period of up to eighteen (18) months, provided the Executive elects COBRA coverage. The Company’s reimbursement obligation is conditioned on the Executive’s providing written verification of his premium payments to the Company, and the reimbursement obligation will end immediately if the Executive is eligible to obtain health care insurance from any other employer during the payment period.

          6.7. Definition of Change in Control. For the purpose of this Agreement, a “Change of Control” shall mean:

               (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d) (3) or 14(d) (2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 6.7; or

               (b) Individuals who, as of the Effective Date, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

               (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting

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power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

               (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

          6.8. Payment in Lieu of Notice. Any time that notice of termination is required by any party under this Agreement, the Company may, in its sole discretion and at its option, relieve the Executive of his duties immediately and pay the Executive his regular base salary during the notice period.

          6.9. Outplacement Services. In the event that the Executive’s employment is terminated for any reason other than those set forth in Sections 6.2, 6.4, or 6.5, the Company will reimburse the Executive for payments made by the Executive for executive outplacement services for up to twelve (12) months under a program approved by the Company in the exercise of its reasonable discretion.

          6.10. Non-Renewal. In the event of a Non-Renewal by the Company, the Executive will not be entitled to any compensation or benefits under this Agreement except as follows:

               (a) If the Non-Renewal by the Company results in the Executive’s employment ending within twelve (12) months following a Change in Control, the Company shall provide the Executive the payments and benefits set forth in Section 6.6 (subject to the terms and conditions therein).

               (b) If the Non-Renewal by the Company results in the Executive’s employment ending at any other time, the Company shall provide the Executive (i) in a lump-sum a severance payment equal to twelve (12) months of his then-existing Base Salary; (ii) in the event the Executive is eligible for a bonus under a bonus plan for the year of work in which his employment is terminated, an additional payment equivalent to the prorated portion (the number of business days that the Executive was employed during the year divided by 235) of the

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Executive’s “target bonus” for that year; and (iii) the COBRA Benefit (as that term is defined in Section 6.1 and subject to the same terms and conditions as set forth in Section 6.1).

          6.11 Requirement of a General Release. The Company shall not be obligated to provide the Severance Pay, the COBRA Benefit, or any of the other payments and benefits set forth in Sections 6.1, 6.6, 6.9, or 6.10 above unless and until the Executive executes a general release of all claims against the Company substantially in the form of one of the two releases (whichever is appropriate) attached hereto as Exhibit A and the release becomes effective.

          6.12. Section 409A. Notwithstanding anything to the contrary contained herein, in the event that the Company determines that one or more payments under this Section 6, if payable, are subject to Section 409A of the Code: (i) such payment(s) under this Section 6 shall not commence until six (6) months after the Executive’s last day of employment (or, if earlier, the date Executive dies) to the extent necessary to avoid the imposition of the excise tax under Section 409A of the Code, and (ii) the Company may unilaterally amend this Agreement to the minimum extent necessary to avoid the imposition of the excise tax under Section 409A of the Code.

     7. Certain Additional Payment Contingencies.

          7.1. Notwithstanding anything in this Agreement to the contrary and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section) (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 7.1, if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Executive, after taking into account the Payments and the Gross-Up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to the Executive resulting from an elimination of the Gross-Up Payment and a reduction of the Payments, in the aggregate, to an amount (the “Reduced Amount”) such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount.

          7.2. Subject to the provisions of Section 7.3, all determinations required to be made under this Section 7, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such

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determination, shall be made by Ernst & Young LLP or such other certified public accounting firm as may be designated by the Executive (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 7, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 7.3, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

          7.3. The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

               (a) give the Company any information reasonably requested by the Company relating to such claim,

               (b) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

               (c) cooperate with the Company in good faith in order effectively to contest such claim, and

               (d) permit the Company to participate in any proceedings relating to such claim;

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provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 7.3, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

          7.4. If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7.3, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company’s complying with the requirements of Section 7.3) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7.3, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

     8. Indemnification. The Company will, to the fullest extent permitted by Delaware General Corporation Law, as amended, indemnify the Executive for all liabilities and expenses that may be incurred in connection with the Executive’s service on behalf of the Company.

     9. Proprietary Information.

          9.1. Proprietary Information Defined. The term “Proprietary Information” shall mean any and all confidential and/or proprietary knowledge, data or information of the Company. By way of illustration but not limitation, “Proprietary Information” includes (i) trade secrets, inventions, mask works, ideas, processes, formulas, source and object codes, data,

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programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques (hereinafter collectively referred to as “Inventions”); (ii) information regarding plans for research, development, new products or services, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and (iii) information regarding the skills and compensation of other employees of the Company.

          9.2. Non-Disclosure. At all times during the Executive’s employment and thereafter, the Executive agrees to hold in strictest confidence and will not disclose, use, lecture upon or publish any of the Company’s Proprietary Information, except as such disclosure, use or publication may be required in connection with the Executive’s work for the Company, or unless the Company expressly authorizes such in writing. The Executive will obtain the Company’s written approval before publishing or submitting for publication any material (written, verbal, or otherwise) that relates to the Executive’s work at the Company and/or incorporates any Proprietary Information. The Executive hereby assigns to the Company any rights the Executive may have or acquire in such Proprietary Information and recognizes that all Proprietary Information shall be the sole property of the Company and its assigns. The Executive has been informed and acknowledges that the unauthorized taking of the Company’s trade secrets will constitute Cause for termination and may subject the Executive to civil and/or criminal penalties.

          9.3. Own Knowledge. Subject to the foregoing non-disclosure obligations, it is understood that, at all such times, the Executive is free personally to use information which is generally known in the trade or industry, which is not gained as result of a breach of this Agreement, and which is gained through the Executive’s own, skill, knowledge, and experience.

     10. Assignment of Inventions.

          10.1. Proprietary Rights. The term “Proprietary Rights” shall mean all trade secret, patent, copyright, mask work and other intellectual property rights or “moral rights” throughout the world. “Moral rights” refers to any rights to claim authorship of an Invention or to object to or prevent the modification of any Invention, or to withdraw from circulation or control the publication or distribution of any Invention, and any similar right, existing under judicial or statutory law of any country in the world, or under any treaty, regardless of whether or not such right is denominated or generally referred to as a “moral right.”

          10.2. Prior Inventions. Inventions, if any, patented or unpatented, which the Executive made prior to the commencement of the Executive’s employment with the Company are excluded from the scope of this Agreement. To preclude any possible uncertainty, the Executive agrees to set forth on Exhibit B (Previous Inventions) attached hereto a complete list of all Inventions that the Executive has, alone or jointly with others, conceived, developed or reduced to practice or caused to be conceived, developed or reduced to practice prior to the commencement of the Executive’s employment with the Company, that the Executive considers to be his property or the property of third parties and that the Executive wishes to have excluded from the scope of this Agreement (collectively referred to as “Prior Inventions”). If disclosure of any such Prior Invention would cause the Executive to violate any prior confidentiality

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agreement, the Executive understands that he is not to list such Prior Inventions in Exhibit B but is only to disclose a cursory name for each such invention, a listing of the party(ies) to whom it belongs and the fact that full disclosure as to such inventions has not been made for that reason. A space is provided on Exhibit B for such purpose. If no such disclosure is attached, the Executive represents that there are no Prior Inventions. If, in the course of the Executive’s employment with the Company, the Executive incorporates a Prior Invention into a Company product, process or machine, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with rights to sublicense through multiple tiers of sublicensees) to make, have made, modify, use and sell such Prior Invention. Notwithstanding the foregoing, the Executive agrees that he will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions without the Company’s prior written consent.

          10.3. Assignment of Inventions. The Executive hereby assigns and agrees to assign in the future (when any such Inventions or Proprietary Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to the Company all his right, title and interest in and to any and all Inventions (and all Proprietary Rights with respect thereto) whether or not patentable or registrable under copyright or similar statutes, made or conceived or reduced to practice or learned by the Executive, either alone or jointly with others, during the period of his employment with the Company. Inventions assigned to the Company, or to a third party as directed by the Company pursuant to this Section 10, are hereinafter referred to as “Company Inventions.”

          10.4. Unassigned Inventions. The Company acknowledges that this Agreement will not be deemed to require assignment of any invention that was developed entirely on the Executive’s own time without using the Company’s equipment, supplies, facilities, or trade secrets and neither related to the Company’s actual or anticipated business, research or development, nor resulted from work performed by the Executive for the Company.

          10.5. Government or Third Party. The Executive also agrees to assign all his right, title and interest in and to any particular Company Invention to a third party, including without limitation the United States, as directed by the Company.

          10.6. Works for Hire. The Executive acknowledges that all original works of authorship which are made by him (solely or jointly with others) within the scope of Executive’s employment and which are protectable by copyright are “works made for hire,” pursuant to United States Copyright Act (17 U.S.C., Section 101).

          10.7. Enforcement of Proprietary Rights. The Executive agrees to assist the Company in every proper way to obtain, and from time to time enforce, United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end the Executive agrees to execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, the Executive will execute, verify and deliver assignments of

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such Proprietary Rights to the Company or its designee. The Executive’s obligation to assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries shall continue beyond the termination of his employment, but the Company shall compensate the Executive at a reasonable rate after the Executive’s termination for the time actually spent by the Executive at the Company’s request on such assistance.

          10.8. Appointment of Attorney in Fact. In the event the Company is unable for any reason, after reasonable effort, to secure the Executive’s signature on any document needed in connection with the actions specified in this Section 10, the Executive hereby irrevocably designates and appoints the Company and any of its duly authorized officers and agents as his agent and attorney in fact, which appointment is coupled with an interest, to act for and in the Executive’s behalf to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by the Executive. The Executive hereby waives and quitclaims to the Company any and all claims, of any nature whatsoever, which the Executive now or may hereafter have for infringement of any Proprietary Rights assigned hereunder to the Company.

     11. Restrictive Covenants. In consideration of the Executive’s employment or continued employment by the Company, and the compensation now and hereafter paid to Executive, the Executive hereby agrees to the following:

          11.1. Non-Solicitation of Employees. The Executive agrees that for the period of the Executive’s employment by the Company and for twelve (12) months after the date the Executive’s employment by the Company ends for any reason, the Executive will not, either directly or through others, except during the performance of his duties on behalf of the Company: (i) solicit for hire, or hire, any employee of the Company or otherwise encourage any employee of the Company to end his relationship with the Company; (ii) solicit or otherwise encourage any employee of the Company to accept employment with any other person or business entity; or (iii) assist any other person or entity in carrying out any act restricted by this Section 11.1. For purposes of this Section 11.1, an employee of the Company shall be any person who, at the time of the solicitation or encouragement prohibited by this Section, is employed by the Company or was employed by the Company at any time within the prior six (6) months.

          11.2. Business Restrictions with Customers, Contractors and Consultants. The Executive agrees that for the period of the Executive’s employment by the Company and for twelve (12) months after the date the Executive’s employment by the Company ends for any reason, the Executive will not, either directly or through others, except during the performance of his duties on behalf of the Company: (i) solicit or otherwise encourage any consultant, contractor, customer or prospective customer of the Company, with whom the Executive had business-related contact as a result of his employment or whose identity the Executive learned as a result of his employment, to diminish or materially alter its relationship with the Company; (ii) accept or conduct competitive business with any customer or prospective customer of the Company with whom the Executive had business-related contact as a result of his employment or

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whose identity the Executive learned as a result of his employment; or (iii) assist any other person or entity in carrying out any act restricted by this Section 11.2.

          11.3. Non-Competition. The Executive agrees that for the period of the Executive’s employment with the Company, and for the period of twelve (12) months after the later of the date the Executive’s employment with the Company ends for any reason, or the date a court of competent jurisdiction enters an order enforcing this provision and finding that the Executive has breached this Section 11.3, the Executive will not directly or through others: (i) in any capacity similar to the capacity in which he was employed by the Company or otherwise competitive with the Company, become employed by or provide services to any other person or entity that offers products or services competitive with the Company’s products or services within the United States or any other country where the Company provides or offers such products or services, or (ii) on his own behalf or on behalf of any other person or entity, compete with the Company in the sale, service, distribution or licensing of any products or services competitive with the Company’s products or services within the United States or any other country where the Company provides or offers such products or services.

          11.4. Acknowledgments. The Executive acknowledges that the Company’s business is national and international in scope, and, therefore, that the restrictions contained in this Section 11 are reasonable in scope and necessary to protect the best interests of the Company. The Executive further acknowledges that in the course of his employment with the Company, he also has duties involving the Company’s subsidiaries and affiliates, has learned or been exposed to trade secrets and proprietary information relating to such subsidiaries and affiliates and that the obligations of this Section 11 extend to such subsidiaries and affiliates. The parties intend that the covenants contained herein shall be deemed to be a series of separate covenants, one for each and every county of each state of the United States of America and the District of Columbia. If any of the provisions of such covenants shall be held unenforceable because of being excessively broad as to scope or subject, such provisions shall be modified and construed by a court of competent jurisdiction by limiting and reducing it so as to be enforceable to the extent compatible with the applicable law as it shall then appear.

          11.5. Injunctive Relief. In the event of a breach or a threatened or attempted breach of any provision of this Section 11 by the Executive, the Company shall, in addition to other remedies available to it, be entitled to temporary and permanent injunctions to enforce the provisions of this Section 11 without the necessity of showing any actual damages or injury and without posting bond or other security, which the Executive expressly waives. The Company shall further be entitled to an order by a court of competent jurisdiction for expedited discovery and the Executive covenants not to raise any objection to such a request by the Company.

          11.6. Notification of New Company. In the event that the Executive leaves the employ of the Company, the Executive authorizes the Company to provide notice of the Executive’s rights and obligations under this Agreement to the Executive’s subsequent employer and to any other entity or person to whom the Executive provides services.

14

     12. Litigation Cooperation. The Executive will cooperate with the Company, during the Term and thereafter (including following the Executive’s termination of employment for any reason), by making himself reasonably available to testify on behalf of the Company in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, and to reasonably assist the Company in any such action, suit, or proceeding by providing information and meeting and consulting with the Board or its representatives or counsel, or representatives or counsel to the Company as reasonably requested. The Company will reimburse the Executive, for all expenses reasonably incurred by him in connection with his provision of testimony or assistance (except with respect to any litigation between the Executive and the Company or any litigation in which the parties are otherwise adverse).

     13. Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Executive:

Mr. David M. Abramson

If to the Company:

Martek Biosciences Corporation
6480 Dobbin Road
Columbia, Maryland 21045
Attention: General Counsel

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.

     14. General Provisions.

          14.1. Successors and Assigns. If the Company shall at any time be merged or consolidated into or with another corporation, or if substantially all the assets of the Company are transferred to another corporation, the provisions of this Agreement shall be binding upon and inure to the benefit of the corporation resulting from such merger, consolidation or transfer.

          14.2. Entire Agreement; Modification. This Agreement sets forth the entire understanding with respect to the subject of employment of the Executive and shall not be amended, modified, or rescinded except by a written instrument signed by both parties hereto and approved by the Board. This Agreement specifically supersedes and cancels the Proprietary

15

Information, Inventions, and Non-Solicitation Agreement dated October 3, 2003 entered into by the Company and the Executive.

          14.3. Choice of Law and Jurisdiction; Attorney’s Fees. This Agreement shall be governed by and construed under the laws of the State of Maryland, without regard to its conflict of laws doctrine. The Executive expressly consents to the jurisdiction of the state and federal courts serving the State of Maryland for all actions arising out of or relating to this Agreement and expressly waives any defense that such courts lack personal jurisdiction over him. All such claims shall be tried in the federal or state courts serving the State of Maryland to the exclusion of all others and such courts shall have exclusive jurisdiction over such disputes. In the event of any proceeding arising out of or relating to this Agreement in which the Executive is the prevailing party against the Company, the Company shall pay reasonable attorneys’ fees incurred by the Executive in such proceeding.

          14.4. Severability. If any provision of this Agreement or the application thereof is held invalid, the invalidity shall not affect other provisions or applications of this Agreement that can be given effect without the invalid provisions or applications and to this end the provisions of this Agreement are declared to be severable.

          14.5. Waiver of Breach. No waiver of any breach of any term or provision of this Agreement shall be construed to be, nor shall be, a waiver of any other breach of this Agreement. No waiver shall be binding unless in writing and signed by the party waiving the breach.

          14.6. Assignment of Agreement. The Executive acknowledges that his services are unique and personal. Accordingly, the Executive may not assign his rights or delegate his duties or obligations under this Agreement to any person or entity.

          14.7. Representation. The Executive represents that he is knowledgeable and sophisticated as to business matters, including the subject matter of this Agreement, that he has read this Agreement and that he understands its terms. The Executive acknowledges that, prior to assenting to the terms of this Agreement, he has been given a reasonable time to review it, to consult with counsel of his choice, and to negotiate at arm’s-length with the Company as to its contents. The Executive and the Company agree that the language used in this Agreement is the language chosen by the parties to express their mutual intent, and that they have entered into this Agreement freely and voluntarily and without pressure or coercion from anyone.

          14.8. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

[THIS SPACE INTENTIONALLY LEFT BLANK]

16

     IN WITNESS WHEREOF, the Company and the Executive, intending to be legally bound, have executed this Agreement on the day and year first above written.

MARTEK BIOSCIENCES CORPORATION

By:

Name:

Title:

David M. Abramson

17

EX-10.46

Exhibit 10.46

MARTEK BIOSCIENCES CORPORATION
AMENDED AND RESTATED 2004 STOCK INCENTIVE PLAN
RESTRICTED STOCK UNIT AGREEMENT

     Martek Biosciences Corporation (the “Company”), hereby grants restricted stock units relating to shares of its common stock (the “Stock”), to the individual named below as the Grantee, subject to the vesting conditions set forth in the attachment. Additional terms and conditions of the grant are set forth in this cover sheet, in the attachment and in the Company’s Amended and Restated 2004 Stock Incentive Plan (the “Plan”).

Grant Date: ______ ___, 200_

Name of Grantee: _______________     State of Residence:_______________

Grantee’s Social Security Number: ___-___-___

Number of Restricted Stock Units (RSUs) Covered by Grant: _________

Vesting Schedule:

	Number of RSUs that vest, as
Vesting Date	a percent of the number of RSUs granted
The 14-month anniversary of the Grant Date		20	%
The 26-month anniversary of the Grant Date		20	%
The 38-month anniversary of the Grant Date		20	%
The 50-month anniversary of the Grant Date		20	%
The 62-month anniversary of the Grant Date		20	%

     You agree to all of the terms and conditions described in this Agreement and in the Plan (a copy of which will be provided on request) unless you deliver a notice in writing within 30 days of receipt of this award agreement to the Vice President of Administration and Human Resources stating that you do not accept the terms and conditions described in this Agreement and in the Plan. You acknowledge that you have carefully reviewed the Plan and agree that the Plan will control in the event any provision of this Agreement should appear to be inconsistent with the terms of the Plan.

This is not a stock certificate or a negotiable instrument.

MARTEK BIOSCIENCES CORPORATION
AMENDED AND RESTATED 2004 STOCK INCENTIVE PLAN
RESTRICTED STOCK UNIT AGREEMENT

Restricted Stock Unit Transferability	This grant is an award of stock units in the number of units set forth on the cover sheet, subject to the vesting conditions described below (“Restricted Stock Units”). Your Restricted Stock Units may not be transferred, assigned, pledged or hypothecated, whether by operation of law or otherwise, nor may the Restricted Stock Units be made subject to execution, attachment or similar process.
Definitions	Capitalized terms not defined in this Agreement are defined in the Plan, and have the meaning set forth in the Plan. The following additional terms have the meanings provided below:
	“Service” means service by you as an employee, officer, director or consultant to the Company or an Affiliate. A change in your position or duties will not result in interrupted or terminated Service so long as you continue to be an employee, officer, director of the Company or an Affiliate. If on termination of your Service as an employee, officer or director the Company retains you as a consultant, the Company may, in its sole discretion, provide that your Service continues for purposes of vesting in the Restricted Stock Units.
Vesting	Your Restricted Stock Unit grant vests as to the number of Stock Units indicated in the vesting schedule on the cover sheet, on the Vesting Dates shown on the cover sheet, provided you are in Service on the Vesting Date. No additional Stock Units will vest after your Service has terminated for any reason.
Book Entry of Stock Pursuant to Vested Units	If you have not made an election to defer delivery of your vested shares, a book entry for the vested shares of Stock represented by the Restricted Stock Units will be made for you and the shares will be credited to your account with the plan administrator by the Company within three (3) days of the applicable Vesting Date; provided that, if such Vesting Date occurs during a period in which you are (i) subject to a lock-up agreement restricting your ability to sell Stock in the open market or (ii) are restricted from selling Stock in the open market because a trading window is not available, transfer of such vested shares will be delayed until the date immediately following the expiration of the lock-up

2

	agreement or the opening of a trading window but in no event beyond 21/2 months after the end of the calendar year in which the shares would have been otherwise transferred.
Forfeiture of Unvested Units	In the event that your Service terminates for any reason, other than death or Disability, then unless otherwise provided in an applicable employment agreement between you and the Company or an Affiliate or other plan or agreement, you will forfeit all of the Restricted Stock Units that have not yet vested.
Death	If your Service terminates because of your death, then your Restricted Stock Units shall become 100% vested.
Disability	If your Service terminates because of your Disability, then your Restricted Stock Units shall become 100% vested.
Leaves of Absence	For purposes of this grant of Restricted Stock Units, your Service does not terminate when you go on a bona fide employee leave of absence that was approved by the Company in writing, if the terms of the leave provide for continued Service crediting, or when continued Service crediting is required by applicable law. However, your Service will be treated as terminating 30 days after you went on employee leave, unless your right to return to active work is guaranteed by law or by a contract. Your Service terminates in any event when the approved leave ends unless you immediately return to active employee work.
	The Company determines, in its sole discretion, which leaves count for this purpose, and when your Service terminates for all purposes under the Plan.
Withholding Taxes	You agree, as a condition of this grant, that you will make acceptable arrangements, which must be consistent with and permitted by the rules and regulations established by the Company and the plan administrator, to pay any withholding or other taxes that may be due as a result of vesting in Restricted Stock Units or your acquisition of Stock under this grant. In the event that the Company determines that any federal, state, local or foreign tax or withholding payment is required relating to this grant, the Company will have the right to:
	(i) require that you arrange such payments to the Company, or (ii) cause an immediate forfeiture of shares of Stock subject to the Restricted Units granted pursuant to this Agreement in an amount equal to the withholding or other taxes due. In addition, in the Company’s sole discretion and

3

	consistent with the Company’s rules and regulations, the Company may permit you to pay the withholding or other taxes due as a result of the vesting of your Restricted Stock Units by delivery (on a form acceptable to the Board) of an irrevocable direction to a licensed securities broker selected by the Company to sell shares of Stock and to deliver all or part of the sales proceeds to the Company in payment of the withholding taxes.
Corporate Transaction	Notwithstanding the vesting schedule set forth above, upon the consummation of a Corporate Transaction, the Restricted Stock Units will become 100% vested (i) if the Restricted Stock Units are not assumed, or equivalent restricted securities are not substituted for the Restricted Stock Units, by the Company or its successor, or (ii) upon your Involuntary Termination within the 24-month period following the consummation of the Corporate Transaction.
	“Involuntary Termination” means termination of your Service by reason of (i) your involuntary dismissal by the Company for reasons other than Cause; or (ii) your voluntary resignation following (a) a change in your position with the Company which materially reduces your duties and responsibilities or the level of management to which you report, (b) a material reduction in your level of compensation (including base salary, fringe benefits and target bonus) or (c) a relocation of your place of employment by more than twenty five (25) miles, provided and only if such change, reduction or relation is brought about by the Company without your consent.
Retention Rights	This Agreement does not give you the right to be retained or employed by the Company (or any Affiliates) in any capacity. The Company (and any Affiliate) reserve the right to terminate your Service at any time and for any reason.
Shareholder Rights	You do not have any of the rights of a shareholder with respect to the Restricted Stock Units unless and until the Stock relating to the Restricted Stock Units has been transferred to you. In the event of a cash dividend on outstanding Stock, you will, not be entitled to receive, a cash payment for each Restricted Stock Unit.
Adjustments	In the event of a stock split, a stock dividend or a similar change in the Company stock, the number of Restricted Stock Units covered by this grant will be adjusted (and rounded down to the nearest whole number) in accordance with the terms of the Plan.

4

Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Maryland, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to the information provided in this Agreement and any changes thereto, other appropriate personal and financial data about you such as home address and business addresses and other contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan.
	By accepting these Restricted Stock Units, you give explicit consent to the Company to process any such personal data. You also give explicit consent to the Company to transfer any such personal data outside the country in which you are employed, including, with respect to non-U.S. resident grantees, to the United States, to transferees who shall include the Company and other persons who are designated by the Company to administer the Plan.
Consent to Electronic Delivery	The Company may choose to deliver certain statutory materials relating to the Plan in electronic form. By accepting this grant you agree that the Company may deliver the Plan prospectus and the Company’s annual report to you in an electronic format. If at any time you would prefer to receive paper copies of these documents, as you are entitled to receive, the Company would be pleased to provide copies. Please contact Investor Relations, tel. no. 410-740-0081, to request paper copies of these documents.
The Plan	The text of the Plan is incorporated in this Agreement by reference. This Agreement, the Plan, and an applicable employment agreement with the Company, if any, constitute the entire understanding between you and the Company regarding this grant of Restricted Stock Units. Any prior agreements, commitments or negotiations concerning this grant are superseded. The Plan will control in the event any provision of this Agreement should appear to be inconsistent with the terms of the Plan.

5

EX-10.47

Exhibit 10.47

MARTEK BIOSCIENCES CORPORATION
AMENDED AND RESTATED 2004 STOCK INCENTIVE PLAN
RESTRICTED STOCK UNIT AGREEMENT

     Martek Biosciences Corporation (the “Company”), hereby grants restricted stock units relating to shares of its common stock (the “Stock”), to the individual named below as the Grantee, subject to the vesting conditions set forth in the attachment. Additional terms and conditions of the grant are set forth in this cover sheet, in the attachment and in the Company’s Amended and Restated 2004 Stock Incentive Plan (the “Plan”).

Grant Date: ___________ __, 200_

Name of Grantee: __________________      State of Residence: ____________________________

Grantee’s Social Security Number: ____-___-_____

Number of Restricted Stock Units (RSUs) Covered by Grant:                     

Vesting Schedule:

	Number of RSUs that vest, as
	a percent of the number of
Vesting Date	RSUs granted
The earlier of 12 months or the first annual meeting after the Grant Date		100	%

     You agree to all of the terms and conditions described in this Agreement and in the Plan (a copy of which will be provided on request) unless you deliver a notice in writing within 30 days of receipt of this award agreement to the Vice President of Administration and Human Resources stating that you do not accept the terms and conditions described in this Agreement and in the Plan. You acknowledge that you have carefully reviewed the Plan and agree that the Plan will control in the event any provision of this Agreement should appear to be inconsistent with the terms of the Plan.

This is not a stock certificate or a negotiable instrument.

MARTEK BIOSCIENCES CORPORATION
AMENDED AND RESTATED 2004 STOCK INCENTIVE PLAN
RESTRICTED STOCK UNIT AGREEMENT

Restricted Stock Unit Transferability	This grant is an award of stock units in the number of units set forth on the cover sheet, subject to the vesting conditions described below (“Restricted Stock Units”). Your Restricted Stock Units may not be transferred, assigned, pledged or hypothecated, whether by operation of law or otherwise, nor may the Restricted Stock Units be made subject to execution, attachment or similar process.
Definitions	Capitalized terms not defined in this Agreement are defined in the Plan, and have the meaning set forth in the Plan. The following additional terms have the meanings provided below:
	“Service” means service by you as an employee, officer, director or consultant to the Company or an Affiliate. A change in your position or duties will not result in interrupted or terminated Service so long as you continue to be an employee, officer, director of the Company or an Affiliate. If on termination of your Service as an employee, officer or director the Company retains you as a consultant, the Company may, in its sole discretion, provide that your Service continues for purposes of vesting in the Restricted Stock Units.
Vesting	Your Restricted Stock Unit grant vests as to the number of Stock Units indicated in the vesting schedule on the cover sheet, on the Vesting Dates shown on the cover sheet, provided you are in Service on the Vesting Date. No additional Stock Units will vest after your Service has terminated for any reason.
Book Entry of Stock Pursuant to Vested Units	A book entry for the vested shares of Stock represented by the Restricted Stock Units will be made for you and the shares will be credited to your account with the plan administrator by the Company within three (3) days of the applicable Vesting Date; provided that, if such Vesting Date occurs during a period in which you are (i) subject to a lock-up agreement restricting your ability to sell Stock in the open market or (ii) are restricted from selling Stock in the open market because a trading window is not available, transfer of such vested shares will be delayed until the date immediately following the expiration of the lock-up agreement or the opening of a trading window but in no event beyond 21/2 months after the end of the calendar year in which the shares would have been otherwise transferred.

2

Forfeiture of Unvested Units	In the event that your Service terminates for any reason, other than death or Disability, then unless otherwise provided in an applicable employment agreement between you and the Company or an Affiliate or other plan or agreement, you will forfeit all of the Restricted Stock Units that have not yet vested.
Death	If your Service terminates because of your death, then your Restricted Stock Units shall become 100% vested.
Disability	If your Service terminates because of your Disability, then your Restricted Stock Units shall become 100% vested.
Corporate Transaction	Notwithstanding the vesting schedule set forth above, upon the consummation of a Corporate Transaction, the Restricted Stock Units will become 100% vested.
Retention Rights	This Agreement does not give you the right to be retained or employed by the Company (or any Affiliates) in any capacity. The Company (and any Affiliate) reserve the right to terminate your Service at any time and for any reason.
Shareholder Rights	You do not have any of the rights of a shareholder with respect to the Restricted Stock Units unless and until the Stock relating to the Restricted Stock Units has been transferred to you. In the event of a cash dividend on outstanding Stock, you will not be entitled to receive a cash payment for each Restricted Stock Unit.
Adjustments	In the event of a stock split, a stock dividend or a similar change in the Company stock, the number of Restricted Stock Units covered by this grant will be adjusted (and rounded down to the nearest whole number) in accordance with the terms of the Plan.
Applicable Law	This Agreement will be interpreted and enforced under the laws of the State of Maryland, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
Data Privacy	In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to the information provided in this Agreement and any changes thereto, other appropriate personal and financial

3

	data about you such as home address and business addresses and other contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan.
	By accepting these Restricted Stock Units, you give explicit consent to the Company to process any such personal data. You also give explicit consent to the Company to transfer any such personal data outside the country in which you reside, including, with respect to non-U.S. resident grantees, to the United States, to transferees who shall include the Company and other persons who are designated by the Company to administer the Plan.
Consent to Electronic Delivery	The Company may choose to deliver certain statutory materials relating to the Plan in electronic form. By accepting this grant you agree that the Company may deliver the Plan prospectus and the Company’s annual report to you in an electronic format. If at any time you would prefer to receive paper copies of these documents, as you are entitled to receive, the Company would be pleased to provide copies. Please contact Investor Relations, tel. no. 410-740-0081, to request paper copies of these documents.
The Plan	The text of the Plan is incorporated in this Agreement by reference. This Agreement, the Plan, and an applicable employment agreement with the Company, if any, constitute the entire understanding between you and the Company regarding this grant of Restricted Stock Units. Any prior agreements, commitments or negotiations concerning this grant are superseded. The Plan will control in the event any provision of this Agreement should appear to be inconsistent with the terms of the Plan.

4

EX-21.01

EXHIBIT 21.01

Subsidiaries of the Registrant

Subsidiary	State of Incorporation
Martek Biosciences Boulder Corporation Martek Biosciences Kingstree Corporation	Delaware Delaware

EX-23.01

EXHIBIT 23.01

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the inclusion in this Annual Report (Form 10-K) of Martek Biosciences Corporation of our report dated January 9, 2007, with respect to the consolidated financial statements of Martek Biosciences Corporation.

Our audits also included the financial statement schedule of Martek Biosciences Corporation listed in Item 15(a)(2). This schedule is the responsibility of Martek Biosciences Corporation’s management. Our responsibility is to express an opinion based on our audits. In our opinion, as to which the date is January 9, 2007, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We consent to the incorporation by reference in the following Registration Statements:

(1)	Registration Statement (Form S-3 No. 33-93580) of Martek Biosciences Corporation,
(2)	Registration Statement (Form S-3 No. 333-34460) of Martek Biosciences Corporation,
(3)	Registration Statement (Form S-3 No. 333-57176) of Martek Biosciences Corporation,
(4)	Registration Statement (Form S-3 No. 333-76750) of Martek Biosciences Corporation,
(5)	Registration Statement (Form S-3 No. 333-87934) of Martek Biosciences Corporation,
(6)	Registration Statement (Form S-3 No. 333-106953) of Martek Biosciences Corporation,
(7)	Registration Statement (Form S-3 No. 333-108825) of Martek Biosciences Corporation,
(8)	Registration Statement (Form S-3 No. 333-115706) of Martek Biosciences Corporation,
(9)	Registration Statement (Form S-8 Nos. 33-79222) pertaining to the Martek Biosciences Corporation Stock Option Plan, Martek Biosciences Corporation Directors’ Stock Option Plan and Martek Biosciences Corporation 401(k) Retirement Savings Plan,
(10)	Registration Statement (Form S-8 No. 333-46949) pertaining to the Martek Biosciences Corporation 1997 Employee Stock Option Plan,
(11)	Registration Statement (Form S-8 No. 333-27671) pertaining to the Martek Biosciences Corporation 1997 Stock Option Plan,
(12)	Registration Statement (Form S-8 No. 333-84317) pertaining to the Martek Biosciences Corporation 1997 Stock Option Plan, as amended,
(13)	Registration Statement (Form S-8 No. 333-52298) pertaining to the Martek Biosciences Corporation 1997 Stock Option Plan, as amended,
(14)	Registration Statement (Form S-8 No. 333-74092) pertaining to the Martek Biosciences Corporation 2001 Stock Option Plan,
(15)	Registration Statement (Form S-8 No. 333-85856) pertaining to the Martek Biosciences Corporation 2002 Stock Incentive Plan,
(16)	Registration Statement (Form S-8 No. 333-87016) pertaining to the OmegaTech, Inc. 1996 Stock Option Plan and a Non Statutory Stock Option Agreement between OmegaTech, Inc. and Mark Braman,
(17)	Registration Statement (Form S-8 No. 333-105555) pertaining to the Martek Biosciences Corporation 2002 Stock Incentive Plan, as amended,
(18)	Registration Statement (Form S-8 No. 333-117671) pertaining to the Martek Biosciences Corporation 2004 Stock Incentive Plan and the Martek Biosciences Corporation 2003 New Employee Stock Option Plan,
(19)	Registration Statement (Form S-8 No. 333-125802) pertaining to the Martek Biosciences Corporation Amended and Restated 2004 Stock Incentive Plan, and
(20)	Registration Statement (Form S-8 No. 333-137633) pertaining to the Martek Biosciences Corporation Amended and Restated 2004 Stock Incentive Plan

of our report dated January 9, 2007, with respect to the consolidated financial statements of Martek Biosciences Corporation included herein, our report dated January 9, 2007, with respect to Martek Biosciences Corporation management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting of Martek Biosciences Corporation, included herein, and our report included in the preceding paragraph with respect to the financial statement schedule of Martek Biosciences Corporation included in this Annual Report (Form 10-K) of Martek Biosciences Corporation.

/s/ Ernst & Young LLP

McLean, Virginia
January 12, 2007

EX-31.01

EXHIBIT 31.01

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a)/15d-14(a)

I, Steve Dubin, certify that:

1.	I have reviewed this annual report of Martek Biosciences Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 16, 2007

By	/s/ Steve Dubin
	Steve Dubin
	Chief Executive Officer

EX-31.02

EXHIBIT 31.02

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a)/15d-14(a)

I, Peter L. Buzy, certify that:

1. I have reviewed this annual report of Martek Biosciences Corporation;

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

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

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

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

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

Date: January 16, 2007

By	/s/ Peter L. Buzy
	Peter L. Buzy
	Chief Financial Officer

EX-32.01

EXHIBIT 32.01

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

     The undersigned, the Chief Executive Officer of Martek Biosciences Corporation (“the Company”), hereby certifies that, to his knowledge, on the date hereof:

a)	The annual report on Form 10-K of the Company for the period ended October 31, 2006 filed on the date hereof with the Securities and Exchange Commission (“the Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
b)	Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: January 16, 2007

By	/s/ Steve Dubin
	Steve Dubin
	Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Martek Biosciences Corporation and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.02

EXHIBIT 32.02

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

     The undersigned, the Chief Financial Officer of Martek Biosciences Corporation (“the Company”), hereby certifies that, to his knowledge, on the date hereof:

a)	The annual report on Form 10-K of the Company for the period ended October 31, 2006 filed on the date hereof with the Securities and Exchange Commission (“the Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
b)	Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: January 16, 2007

By	/s/ Peter L. Buzy
	Peter L. Buzy
	Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Martek Biosciences Corporation and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.