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, 2007

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	52-1399362
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)	(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 o     Accelerated filer þ     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 30, 2007 was $678,436,755, based on the closing price of the Common Stock on The NASDAQ Global Market on April 30, 2007.

The number of shares of Common Stock outstanding as of December 20, 2007 was 32,753,648.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant’s Definitive Proxy Statement for its 2008 Annual Meeting of Stockholders (which will be filed with the Commission within 120 days after the end of the Registrant’s 2007 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, 2007

INDEX

PART I
Item 1.	Business	1
Item 1A.	Risk Factors	19
Item 1B.	Unresolved Staff Comments	27
Item 2.	Properties	28
Item 3.	Legal Proceedings	29
Item 4.	Submission of Matters to a Vote of Security Holders	30
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	31
Item 6.	Selected Financial Data	33
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	45
Item 8.	Financial Statements and Supplementary Data	46
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	69
Item 9A.	Controls and Procedures	69
Item 9B.	Other Information	69
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	70
Item 11.	Executive Compensation	70
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	70
Item 13.	Certain Relationships and Related Transactions, and Director Independence	70
Item 14.	Principal Accountant Fees and Services	70
PART IV
Item 15.	Exhibits and Financial Statement Schedules	71
	Signatures	73

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 Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 1. “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 life’sARA™, a vegetarian source of the omega-6 fatty acid ARA (arachidonic acid), for use in infant formula.

NUTRITIONAL PRODUCTS

We have developed production methods and intellectual property for two important fatty acids, DHA and ARA. We sell oils containing these fatty acids under the names life’sDHA™, DHASCO^®, Neuromins^®, ARASCO^® and life’sARA™. 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. Further research is underway to assess the role of supplementation with our DHA on mitigating a variety of health risks.

Adults 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. Pregnant women transfer DHA and ARA through the placenta to the fetus and lactating mothers pass DHA and ARA to infants through breast milk. While there are currently no universally recognized guidelines for daily consumption of DHA, 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. In addition, a workshop sponsored by several groups, including the International Society for the Study of Fatty Acids and Lipids, recommended that adults consume at least 220 mg of DHA daily. The U.S. Department of Health and Human Services indicated that dietary consumption of DHA is well below this level. 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 and various 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 considering 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 United States product introduction in February 2002, supplemented infant formulas manufactured by six 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 brand; PBM Products Inc. under the brand Bright Beginnings™ and under private label brands, including Wal-Mart Parent’s Choice™; Hain Celestial under the brand Earth’s Best ^®; and Nutricia North America under the brand Neocate ^®. These supplemented infant formulas include term, preterm, soy-based, specialty and toddler products. As of October 31, 2007, we estimate that formula supplemented with our oils had penetrated approximately 95% of the U.S. infant formula market.

We have entered into license agreements with 28 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 supplemented with our nutritional oils. Our licensees are now selling infant formula products containing our oils collectively in over 70 countries. Supplemented infant formulas manufactured by Mead Johnson Nutritionals, Abbott Laboratories, PBM Products, Nestle, Hain Celestial and Nutricia North America are currently being sold in the United States. In addition, 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 three years, as well as pregnant and nursing women.

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In addition to the DHA used in infant formula, 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 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 have also received authorization from the Ministry of Health in China (subject to certain conditions) and the Australia New Zealand Food Authority for the use of DHA-S oil in all foods and authorization from the European Commission for the use of our 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 are currently selling DHA-S products into the dietary supplement, food and beverage, pregnancy and nursing and animal feed markets domestically and internationally. Furthermore, we have signed DHA license and supply agreements with several large food and beverage companies, many of whom launched products containing Martek’s DHA in fiscal 2007, and we anticipate additional product launches from certain of these companies during fiscal 2008. Martek’s infant formula DHA and DHA-S are collectively marketed under the brand life’sDHA™.

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.

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. 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 certain fish oils. Our oils do not contain significant quantities of eicosapentaenoic acid (“EPA”), an omega-3 fatty acid found in fish which certain studies indicate 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.

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

• An independent study conducted by Dr. E. Birch and others and published online in January 2007 in Early Human Development reported the results of a comparison between children who were breastfed as infants to both children who as infants used DHA and ARA supplemented formula and children who as infants did not use DHA and ARA supplemented formula. The results indicated that children who received the supplemented formula had visual and verbal IQ scores that did not differ significantly from children who had been breastfed and such scores were better than children who did not receive supplemented formula. Martek’s oils were used in the study. This was a follow up to a study by Dr. E. Birch and others published in 2000 in Developmental Medicine & Child Neurology, which noted the results of a National Institutes of Health (“NIH”)-sponsored study that showed a significant improvement in mental development in term infants given a commercially available infant formula supplemented with Martek DHA™ and ARA compared to infants fed the same formula, but without DHA and ARA. In the double-blind study, infants fed the diet supplemented with our oils showed, at 18 months of age, a mean increase of 7 points on the Mental Development Index (“MDI”) of the Bayley Scales of Infant Development II. Researchers reported

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that “these data support a long-term cognitive advantage of infant dietary DHA supply during the first 4 months of life. The significant correlations...support the hypothesis that early dietary supply of DHA was a significant determinant of improved performance on the MDI.”

• 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. This study used Martek’s oils.

• 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 Dr. B. Koletzko and others published in Journal of Pediatric Gastroenterology and Nutrition in November 2005, in which the International Expert Group, in view of beneficial effects, supported the optional addition of LCPUFA to infant formula. Their guidelines specify that the optional addition of DHA should not exceed 0.5% of total fat; ARA contents should be at least the same concentration as DHA; and the EPA content should not exceed that of DHA.

• Feeding Preterm Infants After Hospital Discharge: A Commentary by the ESPGHAN Committee on Nutrition, authored by Dr. P. Aggett and others published in Journal of Pediatric Gastroenterology and Nutrition in May 2006. The ESPGHAN Committee on Nutrition reviewed available evidence and established recommendations for feeding preterm infants after hospital discharge. The Committee recommends that formula-fed infants born prematurely should receive infant formula which provides long-chain polyunsaturated fatty acids for optimal growth and development. Martek DHA and ARA are long-chain polyunsaturated fatty acids added to preterm and term infant formula in the U.S. and worldwide.

Our sales of nutritional oils for infant formula were approximately $265.6 million, $240.5 million and $189.1 million in fiscal 2007, 2006 and 2005, respectively, which represents 91%, 94% and 93% of total product sales, respectively. Mead Johnson Nutritionals accounted for approximately 42%, 45% and 49% of our total product sales in fiscal 2007, 2006 and 2005, respectively. Abbott Laboratories accounted for approximately 18%, 16% and 17% of our total product sales in fiscal 2007, 2006 and 2005, respectively. Nestle accounted for approximately 11%, 12% and 11% of our total product sales in fiscal 2007, 2006 and 2005, respectively. Wyeth accounted for approximately 9%, 10% and 11% of our total product sales in fiscal 2007, 2006 and 2005, respectively. In addition, due to the success of supplemented 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 three 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”)

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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 DHA consumption: “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.” These recommendations and overall results of the PeriLip project were published in the British Journal of Nutrition (November 2007).

The September 2007 issue of the Journal of the American Dietetic Association included a position statement from the American Dietetic Association and Dietitians of Canada regarding dietary fatty acids. The groups emphasized the importance of DHA during pregnancy, lactation, and infancy and its particular importance for neural development and function. The groups also reviewed the importance of long chain omega-3 fatty acids for health and recommend that adults consume 500mg of long chain omega-3 fatty acids daily.

Supplementation of breastfeeding mothers with DHA has shown to increase the level of DHA found in breast milk. Studies have shown a benefit for breastfed infants of DHA-supplemented mothers as indicated below:

• 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 study published by Dr. J. Cohen and others in November 2005 in the American Journal of Preventive Medicine provided a statistical analysis of many studies which had examined maternal fatty acid intake and effect on infant development. The results of the analysis showed that increases in maternal DHA intake are associated with modest improvements 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 from chickens whose feed contained Martek DHA, 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.

Martek customers are currently selling products containing life’sDHA™ targeted to pregnant and nursing women as follows:

• Mead Johnson Nutritionals’ Expecta™LIPIL^®

• Life Fitness’ Life’s DHA™ Prenatal Multivitamin and DHA (exclusively at CVS/pharmacy and online at CVS.com)

• British Biologicals’ Pro-PL Protein Supplement

• Everett Laboratories’ prescription prenatal supplement Vitafol^® -OB+DHA

• Sciele Pharma, Inc.’s prescription prenatal supplement OptiNate™;

• Mission Pharmacal’s prescription prenatal supplement Citracal^® Prenatal + DHA and Citracal^® Prenatal 90 + DHA

• Vincent Foods, LLC’s Oh Mama! nutrition bars

• NutraBella’s Bellybar™ nutrition bars

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 published studies and papers that highlight the benefits of DHA on neurological health as well as on the risk of Alzheimer’s disease and age-related dementia.

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• An independent study by Dr. R. McNamara and others published in the Society of Biological Psychiatry in July 2007 found a deficit in the total fatty acid composition of the orbitofrontal cortex and found a selective deficit in the level of DHA compared with controls in brain examinations of postmortem patients who had been diagnosed with major depression compared with controls. These findings add to the growing body of evidence showing a correlation between low tissue levels of DHA in neuropsychiatric diseases such as depression.

• A study published by Dr. K. Green and others in The Journal of Neuroscience in April 2007 used a transgenic mouse model of Alzheimer’s disease to show that supplementation with DHA reduced the accumulation of both amyloid-beta and tau, two indicators of the disease in humans. This study used Martek’s DHA oils and funding for the study was provided by Martek.

• 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.

• 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.

• The Agency for Healthcare Research and Quality (“AHRQ”) of the United States Department of Health and Human Services issued in February 2005 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.”

• In September 2004, the results of an animal study conducted by 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.

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 published studies and papers 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. D. Kelley and others in the American Journal of Clinical Nutrition in August 2007 found that DHA is effective in reducing the level of triglycerides in male hypertriglyceridemic patients. In this study, DHA alone was effective without EPA, the other omega-3 commonly found in fish oil, in reducing triglycerides. Hypertriglyceridemia (high triglyceride levels) in men is associated with an increased risk of cardiovascular disease and metabolic syndrome. Martek contributed the DHA supplements and funding for this study.

• An independent study by Dr. H. Theobald and others published in The Journal of Nutrition in April 2007 assessed the effects of low-dose DHA on blood pressure in healthy men and women from the United Kingdom. Compared with placebo, supplementation with Martek’s life’sDHA™ (0.7 g/day for 3 months) significantly reduced diastolic blood pressure by 3.3 mm Hg.

• The results of a study by Dr. L. Keilson and others, which were presented in March 2007 at the American College of Cardiology 56th Annual Scientific Session, showed that supplementation with 2g of Martek DHA daily for six weeks reduced triglycerides by nearly 20%, reduced pulse rate by 5 beats per minute and reduced diastolic blood pressure by 4 mm Hg. The DHA-supplemented group also showed an 8% reduction in total cholesterol and a 5% increase in HDL (good) cholesterol level at six weeks. The study was conducted in men and women with hypertriglyceridemia who were already taking statin medications for the reduction of cholesterol. This study used Martek oils and funding for this study was provided by Martek.

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• An independent study by Dr. L. Schwellenbach and others published in the Journal of the American College of Nutrition in December 2006 compared Martek’s life’sDHA™ (algal oil) to DHA plus EPA (fish oil) for their ability to lower triglycerides in subjects with coronary artery disease and elevated triglycerides, most of whom were undergoing statin therapy. Both supplements significantly lowered triglycerides, but only life’sDHA™ increased high density (“good”) cholesterol. The authors concluded that there was no added benefit provided by EPA for lowering triglycerides at this level. The authors of the study also indicated that life’sDHA™ was better tolerated by the study participants than fish oil, noting that a greater proportion of subjects in the fish oil group reported fishy taste as a problem with their treatment.

• 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 by approximately 21%. 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;

• 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.

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.

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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.

DHA and other human health benefits— Discussed below are the findings of studies that highlight the benefits of DHA on other human applications.

• An independent observational study by Dr. J.M. Norris and others published in the Journal of the American Medical Association (September 2007) was designed to determine whether the intake of omega-3 and omega-6 fatty acids is associated with the development of Type 1 diabetes in children. This study was conducted with a cohort of 1,770 children known to be at genetic risk for developing Type 1 diabetes. Results showed that the omega-3 fatty acid levels were inversely correlated with the risk for developing diabetes in this group of at-risk children. These investigators are further investigating this relationship in an ongoing clinical trial to determine whether DHA, specifically, has a role in Type 1 diabetes prevention.

• A study by Dr. K. Connor and others published in Nature Medicine in July 2007 reported that increasing consumption of long-chain omega-3 fatty acids, including DHA, reduces destructive vascularization in the retina. In this animal study of retinopathy associated with prematurity, the authors summarize a series of experiments demonstrating that long-chain omega-3 fatty acids, and selected metabolites, are effective in reducing retinal vascular disease, which is a leading cause of blindness. A portion of these studies included Martek oils as the source of long-chain fatty acids.

Life’sDHA™ is sold by Martek as an ingredient to supplement manufacturers and is also the brand name of Martek’s consumer supplement product. Martek’s Neuromins^® brand, which contains life’sDHA™, is distributed by the Company and sold under license by several supplement manufacturers and can be found nationwide. We are currently marketing for food and beverage and animal feed applications to both U.S. and international companies. To date, approximately 25 domestic and international companies have launched foods or beverages that contain life’sDHA™ (see “Sales and Marketing” below).

We continue to aggressively pursue further penetration of our DHA oils in the food and beverage market. We are in discussions with many 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 minimum periods of time. We, along with our customers and certain third parties, 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 uses were $22.9 million, $11.5 million and $11.0 million in fiscal 2007, 2006 and 2005, 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, Kingstree personnel have developed an expertise in large-scale fermentation with many different microorganisms, including algae, bacteria, fungi and yeast.

Martek’s Kingstree plant has certain fermentation capacity designated for use in contract manufacturing. 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 $14.3 million, $14.8 million and $14.1 million for fiscal 2007, 2006 and 2005, respectively. During fiscal 2007, we decided to narrow our contract manufacturing services to include only products with reasonable profit margins or those that we expect could have a strategic fit in the future.

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TECHNOLOGY

Martek is a leading innovator in the development of nutritional products that promote health and wellness throughout every stage of life. 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 activities: 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 that have been isolated from nature by Martek’s scientists and those that 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 has invested in extensive lab-scale and large pilot-scale fermentation and product recovery equipment to enable efficient and cost-effective product development and to support on-going product cost reduction efforts.

While we do not utilize genetically-engineered microorganisms in the production of current commercial products, in the future we may use genetic engineering technology for the production of 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 long-chain polyunsaturated fatty acid (“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 that 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 and efficacy of our 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. We are expanding our preclinical and clinical research capabilities in brain development, cognitive function, immune system health and inflammation while continuing research in eye development, eye health and cardiovascular health. 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 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 28 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 supplemented with our nutritional oils. In general, under these agreements, we receive 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 10 to 25 years, contain no future purchase commitments on our part or that of our licensees, and, generally, may be terminated by our licensees upon proper notification, which, in certain cases, only requires short notice periods. In many license agreements, our licensees have the right to buy other sources of DHA and/ or ARA oils; however, if they do so, the licensees 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.

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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 serves 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.

In October 2007, we entered into a long-term supply agreement with Abbott Nutrition, a leading worldwide producer of infant formula products including the Similac^® Advance^® brand. Under the agreement, Martek serves as Abbott’s exclusive worldwide DHA and ARA supplier for all of Abbott’s infant formula products. The agreement provides for a ten-year term with Abbott having the right to terminate the arrangement as of January 1, 2012, provided that Abbott has given twelve months prior written notice. Martek has been supplying DHA and ARA to Abbott for use in infant formula under a 25-year license agreement signed in 2000 which has been incorporated into the new agreement and remains in effect.

In addition to these, we also serve as the exclusive supplier of ARA or ARA and DHA to several other infant formula licensees.

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.

Since fiscal 2005, the Company has entered into several license and supply agreements permitting the use of life’sDHA™ in various foods and beverages. Certain of these agreements are for terms of 15 years and establish Martek, subject to certain exceptions, as the licensees’ exclusive provider of DHA for minimum periods of time. There are no minimum purchase requirements or other financial commitments to Martek under these agreements. Certain other food and beverage license and supply agreements are non-exclusive in nature and the licensee is able to purchase life’sDHA™ on an “as needed” basis, subject to certain limitations. These non-exclusive arrangements generally include product pricing to the licensee that is higher than the pricing to our licensees that have agreed to use Martek’s life’sDHA™ on an exclusive basis.

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, as amended, 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 for non-human applications, including animal feed products as well as for certain limited human applications. 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. This agreement was amended in 2006 and 2007 as discussed below in “Production.”

In December 2003, we entered into a collaboration agreement with a Canadian biotechnology company to co-develop DHA products from plants. In January 2007, an amendment to this agreement was executed, whereby 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 made a license payment of $750,000, subject to minimum royalties of 1.5% of gross margin, as defined, on future sales by us of such plant-based DHA. During the term of the license, we may be required to pay additional royalties of up to 1.0% of gross margin, as defined, on sales of products in the future which utilize certain licensed technologies. The collaboration obligations under the agreement expired in June 2007.

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, 2007, we had no material commitments 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 production facilities located in Winchester, Kentucky, and in Kingstree, South Carolina. 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 favorable ratings by the American Institute of Baking, an independent auditor of food manufacturing facilities. Also, upon inspection of the Winchester facility, the National Oceanic and Atmospheric Administration has granted Martek a health certificate, which is required for import of products into many countries, including China and neighboring countries in the Pacific Rim. In October 2006, we restructured our plant operations following a review of the Company’s production and cost structure. Under the restructuring, a substantial portion of production formerly taking place in Winchester was transferred to Kingstree. The restructuring has reduced manufacturing costs and operating expenses, 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 expected 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.

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Our ARA oils are purchased from DSM as manufactured at its Capua, Italy and Belvidere, New Jersey plants. Because DSM is a third-party manufacturer, we have only limited control over the timing and level of its Capua and Belvidere production volumes.

Under our agreement with DSM, annual ARA unit pricing is calculated utilizing a cost-plus approach that is based on the prior year’s actual costs incurred, adjusted for current year volume and cost expectations. In February 2006, we and DSM entered into an amendment to the original agreement (“the 2006 Amendment”). The 2006 Amendment established 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, 2007, we estimate that 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.

In July 2007, we and DSM entered into a second amendment to the original agreement (“the 2007 Amendment”). The 2007 Amendment finalized ARA pricing to us for calendar 2007 as well as the parameters and methodologies for the establishment of ARA pricing for calendar years 2008, 2009 and, if certain criteria are met, 2010. The 2007 Amendment also established minimum ARA purchase quantities for us during calendar years 2007 and 2008. As of October 31, 2007, the value of the remaining calendar 2007 and full 2008 minimum purchase requirements are approximately $16 million and $97 million, respectively. The minimum purchase quantities for 2007 and 2008 approximate the amounts expected to be purchased by us in the normal course of business during the respective periods.

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 and perinatal market and the food, beverage and dietary supplement market. 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 routine basis and at a commercially acceptable cost. Our success will also be somewhat dependent on our ability to align our production with customer demand, which is inherently uncertain. There can also be no assurance that we will be able to 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.

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

Our research and development focus areas include: (i) improving manufacturing processes; (ii) broadening the scientific evidence supporting the benefits of life’sDHA™ throughout life; (iii) developing new food and beverage applications for life’sDHA™; and (iv) developing new products to expand market offerings. We perform research and development at our Columbia, Maryland and Boulder, Colorado facilities as well as at our Winchester, Kentucky facility. Our research and development expenditures in fiscal 2007 included development activity at the Columbia, Maryland lab directed toward improving the quality, sensory properties and stability of our nutritional oils, developing new ingredient forms and applications technology for DHA-enriched food and beverage products, 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 produce 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 and investigating the feasibility of utilizing our proprietary genes to produce other bioactive compounds with applications in the health and wellness fields. We incurred total research and development expense of approximately $24.9 million, $24.0 million and $19.4 million in fiscal 2007, 2006 and 2005, respectively.

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SALES AND MARKETING

Our nutritional oils are marketed and sold primarily to the infant formula, dietary supplement, animal feed 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 28 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 supplemented with our nutritional oils. Due to the success of the supplemented infant formula products, several of our licensees are also selling extension products beyond infant formula, which contain our oils and are targeted to children ages nine months to three years of age. In addition, our customers are currently selling products containing life’sDHA™ targeted to pregnant and nursing women as follows:

• Mead Johnson Nutritionals’ Expecta™LIPIL^®

• Life Fitness’ Life’s DHA™ Prenatal Multivitamin and DHA (exclusively at CVS/pharmacy and online at CVS.com)

• British Biologicals’ Pro-PL Protein Supplement

• Everett Laboratories’ prescription prenatal supplement Vitafol^® -OB+DHA

• Sciele Pharma, Inc.’s prescription prenatal supplement OptiNate™

• Mission Pharmacal’s prescription prenatal supplement Citracal^® Prenatal + DHA and Citracal^® Prenatal 90 + DHA

• Vincent Foods, LLC’s Oh Mama! nutrition bars

• NutraBella’s Bellybar™ nutrition bars (expanded to entire product line)

Life’sDHA™ is sold as an ingredient to supplement manufacturers and is also a branded supplement sold directly by Martek. Neuromins^® is a Martek supplement brand that is distributed and sold nationwide under license by several supplement manufacturers. 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:

• Gold Circle Farms^®’s eggs and liquid eggs (United States and Europe)

• Priégola’s Simbi + Omega-3 yogurt (Spain)

• Odwalla, Inc.’s and Soy Smart™ soymilk drinks (United States)

• Dynamic Confections’ Botticelli Choco-Omeg^® line of nutritional bars (Canada)

• Flora, Inc.’s Udo’s Choice^® DHA Oil Blend (United States)

• Latteria Merano/Milchhof Meran’s Mente Viva™ fortified drinkable yogurt (Italy)

• Centrale Del Latte Di Brescia’s Sprintissimo™ fortified drinkable yogurt (Italy)

• Life Science Nutritionals’ Nutri-Kids Nutrition-to-Go™ ready-to-drink milk product (United States and Canada)

• General Mills’ Yoplait Kids^® yogurt and Yoplait Kids yogurt drink (United States)

• ZenSoy’s Soy on the Go Soymilk (United States)

• FoodTech International’s Veggie Patch™ All Natural California Veggie Burgers (United States)

• NuGo Nutrition’s NuGo Organic™ snack bars (United States)

• Fuji Food Products’ Fujisan sushi products (United States)

• Parmalat Australia’s Vaalia brand yoghurts for infants, toddlers and adults (Australia)

• Danone S.A.’s Danonino Petit Genio children’s drinkable yogurt (Spain)

• Dean Foods Company (including WhiteWave Foods) products:

• WhiteWave Foods’ Horizon Organic^® Milk Plus DHA (United States)

• WhiteWave Foods’ Silk^® Plus Omega-3 DHA Soymilk (United States and Canada)

• WhiteWave Foods’ Rachel’s^® Wickedly Delicious Yogurt (United States)

• Central Lechera Asturiana’s ABC infant yogurt (Spain)

• National Foods’ Pura^® Kids milk product (Australia)

• Stremicks Heritage Foods™ Organic Milk Enriched with Omega-3 DHA (United States)

• Breyers Yogurt Company’s Breyers Smart! Yogurt (United States)

• Minute Maid^® Pomegranate Blueberry Flavored 100% fruit juice blend (United States)

• Beech-Nut^® DHA Plus with life’sDHA™ baby food and cereals (United States)

• British Biologicals’ Kids-Pro Nutrition Drink (India)

• Ricos^® Cheese Sauce (United States)

We continue to aggressively pursue further penetration of our DHA oils in the food and beverage market. We are in discussions with many companies in the food and beverage market to sell products containing our DHA oils for cognitive function, cardiovascular health and other benefits. 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 minimum periods of time. We, along with our customers and certain third parties, 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

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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 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.

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 ingredient 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 the ability to introduce its oils into infant formula in the U.S., under the terms of the agreement executed by Abbott with us in October 2007, Abbott has agreed to purchase its total needs for DHA and ARA from Martek through at least 2011. Furthermore, we are not aware of any plans by any of our other licensees to incorporate this alternative DHA and ARA blend into their infant formulas. The GRAS notification, however, 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 and potentially certain toxins that may limit its usefulness in food and beverage products. Several companies, including BASF AG, DSM and Ocean Nutrition, and a number of other 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, even when microencapsulated, and continues to improve in quality and gain general market acceptance, fish oil presents a substantial competitive threat.

We continue to work to reduce the costs of our products and to improve the sensory and stability characteristics to make it easier for our customers to incorporate our products into their products. 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 due to the presence of large quantities of EPA and other non-DHA omega-3 fatty acids in fish oil.

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

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 impurities that may limit the usefulness of DHA derived from unencapsulated fish oil;

• our oils, in general, are easier to formulate in food and beverage products;

• 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 and 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;

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• our oils are not produced from animal sources and, therefore, should be more desirable for use in food and beverage products as the available market does not exclude consumers who require a vegetable-sourced DHA, unlike fish oil;

• 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 and India 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 may be 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 Nutrition 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, beverage and dietary supplement market in Europe and China, and was actively marketing in the United States. Nutrinova and Lonza are defendants in patent infringement actions involving our DHA patents that we have brought in both the United States and Germany. One of Nutrinova’s customers is also a defendant in these actions in 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 the defendants infringed all the asserted claims of three Martek patents and that these patents were valid. It also found that the defendants willfully infringed one of these patents. In October 2007, the judge upheld the October 2006 jury verdict that the defendants infringed all of the asserted claims of U.S. Patent Nos. 5,340,594 and 6,410,281 (the “‘281 Patent”) and that these patents were not invalid. The judge has granted a permanent injunction against the defendants with respect to those two patents. The judge also upheld the jury verdict that the defendants had acted willfully in their infringement of the ‘281 Patent. It is likely that the defendants will appeal the decision. Regarding the third patent involved in the case, U.S. Patent No. 6,451,567, the judge reversed the jury verdict and found that the asserted claims of this patent were invalid. Martek has requested the judge to reconsider his ruling on the third patent. A hearing in the German case was held in September 2007 and the court issued its decision in October 2007, ruling that Martek’s patent was infringed by the defendants. The defendants have appealed, and the appeal is expected to be heard in early 2009. These lawsuits are further described in Item 3. “Legal Proceedings” of Part I of this Form 10-K.

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 and maintain 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 certain 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 under certain specified conditions and the edible oil made by such process as well as a U.S. patent covering an infant formula comprising an edible DHA-containing oil with certain specified characteristics. In 1996, we received two additional U.S. patents covering our nutritional oils 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.

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We also own patents and applications that cover certain algal 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 2007, 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 supplemented meat, seafood, milk and eggs. Additional patent applications directed to this technology are still pending. From 1994 to 2007, 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. Other U.S. patents have been issued and a number of patents are pending worldwide.

Our success is largely dependent 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 70 U.S. patents, covering various aspects of our technology, which will expire on various dates between 2008 and 2024. Our core infant formula-related U.S. patents expire between 2011 and 2014. Martek has been granted U.S. patents covering food and beverage products containing Martek’s DHA oil which expire between 2008 and 2009, and granted U.S. patents covering certain processes for producing DHA-containing oil that may be used in foods and beverages which expire between 2008 and 2021. In addition, Martek has several pending patents related to DHA, including products and processes, which could offer longer term protection but with uncertain commercial value at this time. We have filed, and intend to file, applications for additional patents covering both our products and processes as appropriate. Currently, we have over 300 issued patents and over 400 pending patent 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. European, United States and Asian 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. Similarly, 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 and ARA oils and these challenges, as well as our lawsuit against others for infringement of our patents, are described in Item 3. “Legal Proceedings “ of Part I of this Form 10-K. Total patent litigation expenditures were approximately $2.3 million and $7.4 million in fiscal 2007 and 2006, respectively, of which approximately $1.4 million and $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, 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. Furthermore, even if our licensees continue to use our oils, direct competition could force us to reduce the price of our products which could materially affect future revenues and product margins.

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.

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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 six of our licensees, Mead Johnson Nutritionals, Abbott Laboratories, PBM Products, Nestle, Hain Celestial and Nutricia North America, have been sold in the United States.

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. In June 2007, we received approval for the use of our DHA-S oil in food and beverages in Mexico. In August 2007, the Ministry of Health in China authorized the use of our life’sDHA™ as a novel food ingredient. This new designation will permit the immediate use of life’sDHA™ in foods, beverages and supplements in China for persons older than twelve months. This initial approval by the Ministry of Health is part of the regulatory process applicable to Chinese novel foods and continues through August 2009. We may then apply for a final novel food certificate.

Other products derived from microalgae and other organisms may be 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 and other organisms, 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.

In connection with the manufacture of certain of our products, we are required to adhere to applicable current “good manufacturing practice” (“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 a 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 foods 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, food and beverage 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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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”) and similar state agencies. In addition, our solvent extraction processes include the use of hexane, which is extremely flammable and subject to emission requirements. 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 or restricted 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. “Legal Proceedings” of Part I of this Form 10-K 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, 2007, we had 515 full-time employees, one of whom is an M.D. and 39 of whom have Ph.D.s. Approximately 118 employees are engaged in research and development activities, 240 are engaged in production or production development related activities and 157 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		54	Chief Executive Officer and Director
David M. Abramson		54	President
Peter L. Buzy		48	Chief Financial Officer, Treasurer and Executive Vice President for Finance and Administration
Barney B. Easterling		62	Senior Vice President, Manufacturing
Tim Fealey, Ph.D.		63	Senior Vice President and Chief Innovation Officer
David M. Feitel		44	Senior Vice President and General Counsel
Peter A. Nitze		49	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. From 1980 to 1994, Mr. Easterling served in various management capacities for Gist-Brocades. He received a B.S. in premedicine from Clemson University.

Dr. Fealey joined Martek in 2007 as Senior Vice President and Chief Innovation Officer. Dr. Fealey has an extensive background in the consumer packaged goods industry in research and product development and in general management. Prior to joining Martek, Dr. Fealey served as Vice President of Corporate Research and Development at The Coca-Cola Company since 2001 where he led the creation of that company’s strategic technology platforms to support newly established global growth objectives. From 1972 to 2001, Dr. Fealey worked for The Procter and Gamble Company where most recently he served as Vice President of Worldwide Strategic Planning, Foods and Beverages. He also held other major domestic and international Procter and Gamble business development and research and development positions. Dr. Fealey attended the University of Hull, in England, where he received his BSc degree in Chemistry, Physics, and Applied Mathematics. He received his Ph.D. in Inorganic-Physical Chemistry from Georgetown University, Washington, D.C., and his MBA from the University of Chicago. Dr. Fealey served as a Visiting Professor of Operations and Production Management for the undergraduate and MBA programs of Indiana State University School of Business during the 2001-2002 academic year. He is the author or co-author of a number of publications based on his research during his tenure as a professor.

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.

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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. “Financial Statements and Supplementary Data,“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 80% of our product sales revenue during the year ended October 31, 2007 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 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.

Our major customers are part of either the pharmaceutical or food and beverage industries. Mergers and acquisitions are prevalent in both industries. If one of our major customers or divisions thereof are acquired, as there are no minimum purchase requirements in our license agreements with them, there is no guarantee that the acquirer will continue purchasing our oils at current levels or continue selling infant formula at all. An acquisition of one of our major customers could have a material effect on future revenues.

Our major customers also employ differing strategies with respect to the timing of their inventory and raw material purchases. To the extent that these strategies change (i.e., further advancements to a “just-in-time” procurement process), our revenues in the quarter of such change could be materially affected by this modification in customer ordering patterns. In addition, our major customers use varying inclusion levels of DHA and ARA in their infant formulas. If significant changes in their market shares occur, we could experience material changes in our infant formula revenues.

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, DSM, Cargill Inc., Suntory Limited, Archer Daniels Midland Company, Lonza Group LTD, Nagase & Co. Ltd. and Ocean Nutrition, 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/or 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.

In addition to the Lonza and Nutrinova matters described below, 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 Limited, 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. and has agreed to purchase its total needs for DHA and ARA from us through at least 2011, and while we are not aware of any plans by our other licensees to do so, the GRAS notification removes a significant regulatory hurdle to the introduction of competitive products in the U.S.

• Reliant Pharmaceuticals, which as recently announced will be acquired by GlaxoSmithKline, is currently selling LOVAZA™, a prescription DHA/ EPA ethyl ester for treatment of hyperlipidemia. LOVAZA™ 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 LOVAZA™. 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 and India 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.

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• 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, beverage and dietary supplement market in Europe and China, and was actively marketing in the United States. Nutrinova and Lonza are defendants in patent infringement actions involving our DHA patents that we have brought in both the United States and Germany. One of Nutrinova’s customers is also a defendant in these actions in Germany. These lawsuits are further described below in the risk factor regarding patent protection and in Item 3. “Legal Proceedings” of Part I of this Form 10-K.

• Other companies, several with greater financial resources than ours, are developing plant-based DHA and other companies may be 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, even when microencapsulated, 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 largely dependent 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 70 U.S. patents, covering various aspects of our technology, which will expire on various dates between 2008 and 2024. Our core infant formula-related U.S. patents expire between 2011 and 2014. We have been granted U.S. patents covering food and beverage products containing Martek’s DHA oil which expire between 2008 and 2009, and granted U.S. patents covering certain processes for producing DHA-containing oil that may be used in foods and beverages which expire between 2008 and 2021. We have filed, and intend to file, applications for additional patents covering both our products and processes as appropriate. Currently, we have over 300 issued patents and over 400 pending patent applications worldwide.

There can be no assurance that (i) any patent applications filed by, assigned to or licensed to us will be granted; (ii) we will develop additional products that are patentable; (iii) any patents issued to or licensed by us will provide us with any competitive advantages or adequate protection for inventions; (iv) any patents issued to or licensed by us will not be challenged, invalidated or circumvented by others; or (v) 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, United States and Asian 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. Similarly, 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.

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 (through patent expiration or otherwise) 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 and future license fees related to sales of infant formula containing these 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. Furthermore, even if our licensees continue to use our oils, direct competition could force us to reduce the price of our products, which could materially affect future revenues and product margins.

A number of other 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 expected to be completed in late 2008 or early 2009. Claim 1 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 were narrower than the claims originally granted. In an effort to broaden the claims of the patent, we appealed the decision. Suntory and BASF also appealed. Friesland Brands B.V. withdrew from the opposition. In April 2007, the EPO granted another patent to Martek for ARA oil made from Martek’s microbial source for use in infant formula. The newly granted divisional patent strengthens Martek’s intellectual property position by providing commercially significant protection through the expiration date of the original patent, January 22, 2012. In light of this newly granted divisional patent, the Company withdrew

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from the appeal it had previously filed related to its original European ARA patent for infant formula that was upheld with narrowed claims by the EPO in April 2005. The original patent will no longer be in force and effect.

• 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 and during the hearing before the Appeal Board of the EPO in February 2007, Martek decided to withdraw its appeal. As a result, the patent was revoked. Martek is pursuing protection for its blended oil technology in Europe through related pending patent applications.

• 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. In a November 2007 hearing, the Opposition Division upheld claims that are narrower than the claims originally granted but broader than the claims that were previously upheld in the December 2000 Opposition Division hearing. In the event of an appeal, the review process is not expected to be completed before 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 expected to be completed in late 2008 or early 2009.

• 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. Lonza Ltd. was added to 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. In October 2007, the judge upheld the October 2006 jury verdict that the defendants infringed all of the asserted claims of U.S. Patent Nos. 5,340,594 and 6,410,281 (the “‘281 Patent”) and that these patents were not invalid. The judge has granted a permanent injunction against the defendants with respect to those two patents. The judge also upheld the jury verdict that the defendants had acted willfully in their infringement of the ‘281 Patent. It is likely that the defendants will appeal the decision. Regarding the third patent involved in the case, U.S. Patent No. 6,451,567, the judge reversed the jury verdict and found that the asserted claims of this patent were invalid. Martek has requested the judge to reconsider his ruling on the third patent.

• We also filed a patent infringement suit involving Nutrinova Nutrition Specialties & Food Ingredients GmbH and Celanese Ventures GmbH in Germany in January 2004. Lonza Ltd. and a customer of Nutrinova have also been added to this lawsuit. The complaint alleges infringement of our European patent relating to DHA-containing oils. A hearing was held in a district court in Dusseldorf in September 2007 and the court issued its decision in October 2007, ruling that Martek’s patent was infringed by the defendants. The defendants have appealed, and the appeal is expected to be heard in early 2009.

• 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 ruled against Martek. Martek appealed. The appeal brief was filed in February 2007 and Suntory responded in August 2007. The Korean Intellectual Property Office ruled against Martek in September 2007, and we appealed to the Patent Court in October 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 ruling against Martek was issued in February 2007. Martek appealed in April 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 or we may be forced to reduce the price of our products, which could also cause decreases in future revenues as well as product margins. Specifically, the revocation of our European DHA patent or ARA 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, 2007, the net book value of our patent assets totaled $16.6 million, which includes approximately $8.4 million of costs related to our patent defenses in the Nutrinova/ Lonza matters discussed above, which will be amortized over a remaining period of approximately 5 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.

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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 our food and beverage customers do not introduce products containing our nutritional oils on a broad scale into the marketplace and consumers do not purchase such products, our sales to the food and beverage market will be limited.

We are continuing to aggressively pursue further penetration of our DHA oils in the food and beverage market. To this end, we have signed license and supply agreements with several consumer food and beverage products companies. Our success in penetrating this market, however, is dependent upon these food and beverage customers introducing products that contain our nutritional oils into the marketplace and is further dependent upon the end consumer purchasing such products. Although some of our customers have launched food or beverage products containing our oils, we cannot control whether our existing customers or potential new customers will continue to do so in the future, nor can we control whether our current or future customers will follow through with their planned launches of products containing our oils. Furthermore, as a broad scale product launch by our customers is likely dependent on actual or perceived consumer demand, which is inherently uncertain, we cannot control whether our customers will broadly distribute such DHA-enriched products or offer them beyond niche products or line extensions. If our food and beverage customers do not introduce products containing our nutritional oils on a broad scale into the marketplace and end consumers do not purchase such products, our sales to the food and beverage market would 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.

Due to the sensitivity of our oils to oxidation, it is possible that the sensory elements of such oils may vary over time. While we believe that the food and beverage market could be a large market for DHA supplementation with our DHA-S oil, the potential in this market would 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. Furthermore, 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 and certain types of nutritional bars for which DHA supplementation 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 and distribution processes, including the packaging, storage and handling of such products. The timing and extent of our sales into the food and beverage market, therefore, are dependent not only on market demand, but also on customer formulation, production and distribution issues over which we have little or no control.

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.

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, 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. 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.

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 that 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 approximately 3% of the total U.S. food sales in 2006; 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.

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

To date, our DHA-S oil has received regulatory approval for inclusion in foods and beverages, with certain country-specific limitations, in Australia, New Zealand, the European Community, the United States, Canada, Mexico and China.

With respect to approvals in Europe, 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 been working to extend approval in Europe 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. 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 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 cardiovascular benefits, then our penetration of the food and beverage market may be limited.

In November 2007, the FDA issued a proposed rule that would prohibit the nutrient content claims for DHA and EPA that had been authorized in three previously submitted Food and Drug Administration Modernization Act (FDAMA) notifications. FDA is proposing to prohibit the DHA and EPA nutrient content claims because the agency does not believe they are based on an authoritative statement. The FDA specifically acknowledged that it did not conduct an independent review of the scientific evidence when evaluating these nutrient content claims. We intend to submit comments in opposition to this proposed rule and it is unclear when the FDA will issue a final rule. In the event the proposed rule becomes final, the potential health benefits of consuming DHA and EPA still may be communicated through the use of a qualified health claim and/or structure/function claims that are made consistent with applicable FDA requirements and/or quantitative claims. Nonetheless, our penetration of the food and beverage market may be limited if this proposed rule is implemented.

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.

If customer demand for our nutritional oils requires us or our major suppliers to increase production beyond current levels, we may experience certain risks associated with the ramp-up of commercial manufacturing that could have a material adverse effect on our business, financial condition, and/ or results of operations.

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.

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 operations 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.

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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. As of October 31, 2007, the Company had $71.8 million of production assets that are currently idle and 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.

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 meet such demand and to ensure the existence of dual-plant manufacturing redundancy. 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 ingredients in 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 supplemented 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 guidelines for minimum levels of DHA and/or ARA for supplementation of infant formula products or the issuance of regulatory guidelines that establish targeted levels of DHA and/or ARA in infant formula that are lower than levels currently being used 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 that 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. While the Codex Alimentarius Commission, the European Union and Australia/ New Zealand all have regulations permitting the optional addition of DHA and ARA in infant formula, there are no existing regulations in any country requiring the addition of DHA and ARA.

Food Standards Australia New Zealand (“FSANZ”) 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 Applicants initially requested the 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. Subsequent to an Initial Assessment by FSANZ, the Applicants modified their original Application so that it now seeks an amendment to require an omega-6 to omega-3 LCPUFA ratio that is not less than one to one. On May 23, 2007, FSANZ issued a Draft Assessment Report proposing that the preferred approach to amend the regulations would be to require an omega-6 to omega-3 LCPFUA ratio that is not less than one to one, should LCPUFAs be added to infant formula.

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 or if the amount of infant formula offered to participants is reduced.

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 50 states and the District of Columbia offer term and 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. Further, in December 2007, the USDA, the federal agency which governs WIC, issued an interim final rule which included a reduction in the amount of infant formula to be offered through WIC. State WIC agencies have until August 2009 to implement this

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change and the USDA is accepting comments on this interim final rule through February 2010. If there is a permanent reduction in the amount of infant formula offered through WIC, then our future infant formula revenues could be materially affected.

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”) 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. As a 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.

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

In connection with our research and development and manufacturing activities, we utilize some hazardous materials and emit regulated pollutants. We are subject to federal, state and local laws and regulations governing the use, storage, handling, discharge, management and disposal of hazardous materials and the emission of regulated pollutants. The cost of compliance with these laws and regulations could be significant, and our ability to comply with certain emission requirements 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 our 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 natural resource damages 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.

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 and 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, 2007, we had approximately $21.6 million in cash, cash equivalents and short-term investments as well as $135 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 may 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

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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.

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, 2007, our common stock traded between $31.00 and $19.64 per share. During the fifty-two week period ending October 31, 2006, our common stock traded between $37.22 and $20.15 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

• announcements of results of clinical trials 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, 2007, we had 32,335,622 shares of common stock outstanding. The average daily trading volume in our common stock during the fifty-two week period ending October 31, 2007 was approximately 500,000 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, 2007, we had 32,335,622 shares of common stock and approximately 300,000 unvested restricted stock units outstanding, as well as stock options outstanding to purchase an aggregate of approximately 3.1 million shares of common stock. Of these options, approximately 2.9 million were exercisable at December 20, 2007, and approximately 1.3 million had exercise prices that were below the market price on this date. The restricted stock units will vest and common stock will issue at various dates beginning in 2008 through 2012. 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.

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Changes in foreign currency exchange rates or interest rates could reduce profitability.

A portion of the ARA we buy from DSM is denominated in euros. We expect that for fiscal 2008, approximately 25% of our ARA received from DSM will be subject to currency risk. 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 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 3.4 million euros at October 31, 2007. We estimate that a 5% change in the exchange rate would impact gross margins of our infant formula products by less than 0.5%.

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

We, our former Chairman and 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.

In December 2007, we announced that we had entered into a tentative settlement of all claims in the class action litigation. If approved by the court, the settlement will result in the dismissal of the claims against all defendants. The proposed settlement of the class action will result in a cash payment to the settlement fund of $6 million, all of which will be paid for out of the proceeds of the Company’s insurance policies. The parties have filed a motion in the federal court asking for approval of the proposed settlement. No assurances can be given that the settlement ultimately will be approved.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

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ITEM 2. PROPERTIES.

We lease an aggregate of approximately 69,000 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 with buildings occupying 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 with buildings occupying approximately 419,000 square feet and holding multiple fermentation vessels totaling 2.8 million liters of capacity. The large majority 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 expected to be completed in late 2008 or early 2009. Claim 1 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 were narrower than the claims originally granted. In an effort to broaden the claims of the patent, we appealed the decision. Suntory and BASF also appealed. Friesland Brands B.V. withdrew from the opposition. In April 2007, the EPO granted another patent to Martek for ARA oil made from Martek’s microbial source for use in infant formula. The newly granted divisional patent strengthens Martek’s intellectual property position by providing commercially significant protection through the expiration date of the original patent, January 22, 2012. In light of this newly granted divisional patent, the Company withdrew from the appeal it had previously filed related to its original European ARA patent for infant formula that was upheld with narrowed claims by the EPO in April 2005. The original patent will no longer be in force and effect.

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 and during the hearing before the Appeal Board of the EPO in February 2007, Martek decided to withdraw its appeal. As a result, the patent was revoked. Martek is pursuing protection for its blended oil technology in Europe through related pending patent applications.

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. In a November 2007 hearing, the Opposition Division upheld claims that are narrower than the claims originally granted but broader than the claims that were previously upheld in the December 2000 Opposition Division hearing. In the event of an appeal, the review process is not expected to be completed before 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 expected to be completed in late 2008 or early 2009.

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. Lonza Ltd. was added to 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. In October 2007, the judge upheld the October 2006 jury verdict that the defendants infringed all of the asserted claims of U.S. Patent Nos. 5,340,594 and 6,410,281 (the “‘281 Patent”) and that these patents were not invalid. The judge has granted a permanent injunction against the defendants with respect to those two patents. The judge also upheld the jury verdict that the defendants had acted willfully in their infringement of the ‘281 Patent. It is likely that the defendants will appeal the decision. Regarding the third patent involved in the case, U.S. Patent No. 6,451,567, the judge reversed the jury verdict and found that the asserted claims of this patent were invalid. Martek has requested the judge to reconsider his ruling on the third patent.

We also filed a patent infringement suit involving Nutrinova Nutrition Specialties & Food Ingredients GmbH and Celanese Ventures GmbH in Germany in January 2004. Lonza Ltd. and a customer of Nutrinova have also been added to this lawsuit. The complaint alleges infringement of our European patent relating to DHA-containing oils. A hearing was held in a district court in Dusseldorf in September 2007 and the court issued its decision in October 2007, ruling that Martek’s patent was infringed by the defendants. The defendants have appealed, and the appeal is expected to be heard in early 2009.

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 ruled against Martek. Martek has appealed. The appeal brief was filed in February 2007 and Suntory responded in August 2007. The Korean Intellectual Property Office ruled against Martek in September 2007, and we appealed to the Patent Court in October 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 ruling against Martek was issued in February 2007. Martek appealed in April 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.

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On October 18, 2004, we filed a Declaratory Judgment Complaint in the United States Court for the District of Maryland against Robert Zuccaro, as stockholder representative of the former security holders of OmegaTech, Inc. related to whether certain milestones under the Agreement and Plan of Merger by which we acquired OmegaTech had been achieved. In October 2007, we entered into a settlement with the former OmegaTech stockholders regarding the disputed contingent consideration associated with these milestones. In connection with the settlement, we issued 340,946 shares of Martek common stock to the former OmegaTech stockholders in December 2007. As consideration for this payment, the litigation has been dismissed and Martek has received a full release and discharge from any and all present and future claims by the former stockholders. The settlement eliminates the potential for any additional shares to be issued to the former OmegaTech stockholders.

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 December 2007, Martek announced that it had entered into a tentative settlement of all claims in the class action litigation. If approved by the court, the settlement will result in the dismissal of the claims against all defendants. The proposed settlement of the class action will include a cash payment to the settlement fund of $6 million, all of which will be paid from the proceeds of the company’s insurance policies. The settlement will require final approval from the court before it becomes effective. No assurances can be given that the settlement ultimately will be approved.

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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

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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 December 20, 2007, there were approximately 291 holders of record of the Company’s common stock. The price of the Company’s common stock was $29.35 on December 20, 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 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

Fiscal 2007	High		Low
November 1, 2006 — January 31, 2007	$	26.83	$	22.45
February 1, 2007 — April 30, 2007	$	24.43	$	19.64
May 1, 2007 — July 31, 2007	$	28.10	$	19.76
August 1, 2007 — October 31, 2007	$	31.00	$	24.33

No repurchases of common stock took place during fiscal 2007.

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Performance Graph

The following graph sets forth the Company’s total cumulative stockholder return as compared to the NASDAQ Stock Market Composite Index and the NASDAQ Biotechnology Index, for the period beginning October 31, 2002 and ending October 31, 2007. Total stockholder return assumes $100 invested at the beginning of the period in the common stock of the Company, the stocks represented in the NASDAQ Composite Index and the NASDAQ Biotechnology Index, respectively. Total return assumes reinvestment of dividends; the Company has paid no dividends on its common stock. Historical price performance should not be relied upon as indicative of future stock performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Martek Biosciences Corporation, The NASDAQ Composite Index
And The NASDAQ Biotechnology Index

*    $100 invested on 10/31/02 in stock or index-including reinvestment of dividends.
  Fiscal year ending October 31.

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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, 2007 and with respect to the consolidated balance sheets as of October 31, 2007 and 2006 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, 2004 and the balance sheet data at October 31, 2005, 2004 and 2003 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	2007			2006			2005		2004			2003
Consolidated Statements of Operations Data
Revenues:
Product sales	$	292,549		$	255,838		$	203,765	$	170,565		$	112,298
Contract manufacturing sales		14,264			14,816			14,087		13,928			2,439
Total revenues		306,813			270,654			217,852		184,493			114,737
Cost of revenues:
Cost of product sales, including idle capacity costs		179,367			158,600			120,865		103,423			66,347
Cost of contract manufacturing sales		13,952			14,676			12,516		11,570			2,192
Total cost of revenues		193,319			173,276			133,381		114,993			68,539
Gross margin		113,494			97,378			84,471		69,500			46,198
Operating expenses:
Research and development		24,853			24,044			19,415		17,794			13,055
Selling, general and administrative		44,855			39,597			31,968		24,739			15,394
Amortization of intangible assets		6,558			2,796			2,489		1,867			980
Restructuring charge		853			4,729			—		—			(250	)
Other operating expenses		1,614			1,158			7,654		4,000			1,943
Total operating expenses		78,733			72,324			61,526		48,400			31,122
Income from operations		34,761			25,054			22,945		21,100			15,076
Interest and other income (expense), net		(1,089	)		(1,528	)		1,125		772			916
Income before income tax provision (benefit)		33,672			23,526			24,070		21,872			15,992
Income tax provision (benefit)		1,659			8,588			8,786		(25,176	)		—
Net income	$	32,013		$	14,938		$	15,284	$	47,048		$	15,992
Net income per share, basic	$	0.99		$	0.47		$	0.49	$	1.62		$	0.63
Net income per share, diluted	$	0.98		$	0.46		$	0.48	$	1.55		$	0.58
Shares used in computing basic earnings per share		32,336			32,113			31,164		29,033			25,510
Shares used in computing diluted earnings per share		32,593			32,343			32,032		30,386			27,417

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	October 31,
	2007			2006			2005			2004			2003
Consolidated Balance Sheets and Other Data
Cash, cash equivalents, short-term investments and marketable securities	$	21,648		$	26,828		$	33,347		$	42,650		$	96,971
Working capital		149,345			128,488			124,208			68,195			106,218
Total assets		596,695			597,973			578,485			501,398			295,523
Long-term debt, notes payable and other long-term obligations		9,310			46,277			66,115			97,175			10,441
Long-term portion of deferred revenue		9,517			9,335			8,959			9,140			8,992
Accumulated deficit		(2,285	)		(34,298	)		(49,236	)		(64,520	)		(111,568	)
Total stockholders’ equity		531,727			492,575			469,205			346,164			243,964
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, operating cash flow 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 future agreements with, and revenues from, companies in the food and beverage, perinatal and nutritional supplement markets;

• 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 purchase volumes and costs 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 maintain and 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 life’sARA™, a vegetarian source of the omega-6 fatty acid ARA (arachidonic acid), for use in infant formula. We sell oils containing these fatty acids as life’sDHA™, DHASCO^®, Neuromins^®, ARASCO^® and life’sARA™. 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, dementia and increased cardiovascular problems. Further research is underway to assess the role of supplementation with our DHA on mitigating a variety of health risks.

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 28 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 supplemented with our nutritional oils. Our licensees are now selling infant formula products containing our oils collectively in over 70 countries. Supplemented infant formulas manufactured by Mead Johnson Nutritionals, Abbott Laboratories, PBM Products, Nestle, Hain Celestial and Nutricia North America are currently being sold in the United States. In addition, 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 three years, as well as pregnant and nursing women.

We are continuing to aggressively pursue further penetration of our DHA oils in the food and beverage market. We are in discussions with many 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 minimum periods of time. We, along with our customers and certain third parties, 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.

We have received authorization from the Ministry of Health in China (subject to certain conditions) and the Australia New Zealand Food Authority for the use of DHA-S oil in all foods and authorization from the European Commission for the use of our 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 several years, new products were launched that contained life’sDHA™, including the following:

Food and Beverage Products

• PBM Products’ beverage containing life’sDHA™ that is formulated for diabetics and people with atypical glucose tolerance (United States)

• GlaxoSmithKline’s Junior Horlicks powdered drink mix (India); GlaxoSmithKline had previously launched an adult DHA beverage

• Gold Circle Farms^®’s eggs and liquid eggs (United States and Europe)

• Priégola’s Simbi + Omega-3 yogurt (Spain)

• Odwalla, Inc.’s and Soy Smart™ soymilk drinks (United States)

• Dynamic Confections’ Botticelli Choco-Omeg^® line of nutritional bars (Canada)

• Flora, Inc.’s Udo’s Choice^® DHA Oil Blend (United States)

• Latteria Merano/Milchhof Meran’s Mente Viva™ fortified drinkable yogurt (Italy)

• Centrale Del Latte Di Brescia’s Sprintissimo™ fortified drinkable yogurt (Italy)

• Life Science Nutritionals’ Nutri-Kids Nutrition-to-Go™ ready-to-drink milk product (United States and Canada)

• General Mills’ Yoplait Kids^® yogurt and Yoplait Kids yogurt drink (United States)

• ZenSoy’s Soy on the Go Soymilk (United States)

• FoodTech International’s Veggie Patch™ All Natural California Veggie Burgers (United States)

• NuGo Nutrition’s NuGo Organic™ snack bars (United States)

• Fuji Food Products’ Fujisan sushi products (United States)

• Parmalat Australia’s Vaalia brand yoghurts for infants, toddlers and adults (Australia)

• Danone S.A.’s Danonino Petit Genio children’s drinkable yogurt (Spain)

• Dean Foods Company (including WhiteWave Foods) products:

• WhiteWave Foods’ Horizon Organic^® Milk Plus DHA (United States)

• WhiteWave Foods’ Silk^® Plus Omega-3 DHA Soymilk (United States and Canada)

• WhiteWave Foods’ Rachel’s^® Wickedly Delicious Yogurt (United States)

• Central Lechera Asturiana’s ABC infant yogurt (Spain)

• National Foods’ Pura^® Kids milk product (Australia)

• Stremicks Heritage Foods™ Organic Milk Enriched with Omega-3 DHA(United States)

• Breyers Yogurt Company’s Breyers Smart! Yogurt (United States)

• Minute Maid^® Pomegranate Blueberry Flavored 100% fruit juice blend (United States)

• Beech-Nut^® DHA Plus with life’sDHA™ baby food and cereals (United States)

• British Biologicals’ Kids-Pro Nutrition Drink (India)

• Ricos^® Cheese Sauce (United States)

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Pregnancy and Nursing Products

• Mead Johnson Nutritionals’ Expecta™ LIPIL^® (United States)

• Sciele Pharma, Inc.’s prescription prenatal supplement OptiNate™ (United States)

• Mission Pharmacal’s prescription prenatal supplements:

• Citracal^® Prenatal + DHA (United States)

• Citracal^® Prenatal 90 + DHA (United States)

• Vincent Foods, LLC’s Oh Mama! nutrition bars (United States)

• NutraBella’s Bellybar™ nutrition bars (United States)

• Everett Laboratories’ prescription prenatal supplement Vitafol^® -OB+DHA (United States)

• Life Fitness’ Life’s DHA™ Prenatal Multivitamin and DHA (United States, exclusively at CVS/pharmacy and online at CVS.com)

• British Biologicals’ Pro-PL Protein Supplement (India)

For the years ended October 31, 2007, 2006 and 2005, we recognized approximately $32.0 million, $14.9 million and $15.3 million of net income, respectively, and as of October 31, 2007, our accumulated deficit was approximately $2.3 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 international infant formula market introductions by our customers;

• the timing of our customers’ ordering patterns;

• the timing and extent of stocking and destocking of inventory by our customers;

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

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

• the continued acceptance, and extent thereof, 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 of our customers to incorporate our oils into various foods and beverages;

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

• 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 95% 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. We currently have exclusive, multi-year supply agreements with customers representing approximately 60% of our total product sales and we are in negotiations with other licensees in an effort to increase this percentage.

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 in this market. We also expect additional launches of products containing life’sDHA™ and increased sales in fiscal 2008 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.

Our gross margin improved in each quarter of fiscal 2007 largely due to improved pricing on ARA purchases and enhancements in our production of DHA, both of which have resulted in lower cost. We believe that this positive trend will continue in fiscal 2008 and expect gross margin to increase gradually throughout fiscal 2008, reaching 41% to 43% by the fourth quarter of 2008 as further DHA production enhancements are implemented.

On an overall basis, for fiscal 2008, we anticipate growing both revenues and profitability over 2007, with profitability growing at a faster rate than revenues primarily due to continued improvements in gross profit margins as noted above. Furthermore, we anticipate significant increases in our cash flow from operations, which in fiscal 2007 generated $46 million.

Although we expect the annual growth noted above, we are likely to experience quarter-to-quarter fluctuations in both infant formula and non-infant formula nutritional revenues due primarily to variability in customer ordering patterns and the timing of product launches.

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PRODUCTION

We manufacture oils rich in DHA at our production facilities located in Winchester, Kentucky and Kingstree, South Carolina. 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 favorable ratings by the American Institute of Baking, an independent auditor of food manufacturing facilities. Also, upon inspection of the Winchester facility, the National Oceanic and Atmospheric Administration has granted Martek a health certificate, which is required for import of products into many countries, including China and neighboring countries in the Pacific Rim. In October 2006, we restructured our plant operations following a review of the Company’s production and cost structure. Under the restructuring, a substantial portion of production formerly taking place in Winchester was transferred to Kingstree. The restructuring has reduced costs and operating expenses, 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. Because DSM is a third-party manufacturer, we have only limited control over the timing and level of its Capua and Belvidere production volumes.

Under our agreement with DSM, annual ARA unit pricing is calculated utilizing a cost-plus approach that is based on the prior year’s actual costs incurred adjusted for current year volume and cost expectations. In February 2006, we and DSM entered into an amendment to the original agreement (“the 2006 Amendment”). The 2006 Amendment established 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, 2007, we estimate that 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.

In July 2007, we and DSM entered into a second amendment to the original agreement (“the 2007 Amendment”). The 2007 Amendment finalized ARA pricing to us for calendar 2007 as well as the parameters and methodologies for the establishment of ARA pricing for calendar years 2008, 2009 and, if certain criteria are met, 2010. The 2007 Amendment also established minimum ARA purchase quantities for us during calendar years 2007 and 2008. As of October 31, 2007, the value of the remaining calendar 2007 and full 2008 minimum purchase requirements are approximately $16 million and $97 million, respectively. The minimum purchase quantities for 2007 and 2008 approximate the amounts expected to be purchased by us in the normal course of business during the respective periods.

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 routine basis and at a commercially acceptable cost. Our success will also be somewhat dependent on our ability to align our production with customer demand, which is inherently uncertain. There can also be no assurance that we will be able to 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, 2007, these long-lived

38

assets had a total net book value of $363.8 million. Included in these long-lived assets are approximately $71.8 million of production equipment whose use is not currently required based on present customer demand ($87.2 million at October 31, 2006). 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. Most 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”, 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, 2007, our total gross deferred tax asset was $52.9 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, 2007, our deferred tax asset valuation allowance was approximately $1.5 million, which related primarily to certain state 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 tax expense or benefit in the period of change.

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.

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Patent Cost Capitalization We incur certain legal and related costs in connection with patent applications. If a future economic benefit is anticipated from the resulting patent or an alternate future use is available to the Company, such costs are capitalized and amortized over the expected life of the patent. We also capitalize 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,
	2007		2006		2005
Product sales	$	292,549	$	255,838	$	203,765
Contract manufacturing sales		14,264		14,816		14,087
Total revenues	$	306,813	$	270,654	$	217,852

Product sales increased by $36.7 million or 14% in fiscal 2007 as compared to fiscal 2006 and increased by $52.1 million or 26% in fiscal 2006 as compared to fiscal 2005. Product sales were comprised of the following (in thousands):

	Year ended October 31,
	2007		2006		2005
Infant formula market	$	265,563	$	240,497	$	189,143
Food and beverage market		5,483		1,404		328
Pregnancy and nursing, nutritional supplements and animal feeds		17,439		10,121		10,638
Non-nutritional products		4,064		3,816		3,656
Total product sales	$	292,549	$	255,838	$	203,765

Sales to the infant formula market increased in each of fiscal 2007, 2006 and 2005 due to continued strong demand in both the U.S. and international infant formula markets. Launches of new products and the growth of existing products containing life’sDHA™ resulted in higher sales to the food and beverage market in fiscal 2007 compared to prior fiscal years. In addition, sales into the pregnancy and nursing and nutritional supplements markets increased significantly in fiscal 2007 due to an overall expansion of Martek’s customer base in these markets.

Approximately 80%, 83% and 88% of our product sales in fiscal 2007, 2006 and 2005, respectively, were 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%, 60% and 67% of our sales to infant formula licensees for fiscal 2007, 2006 and 2005, 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, 2007, we estimate that formula supplemented with our oils had penetrated approximately 95% of the U.S. infant formula market.

Although we anticipate that annual product sales will continue to grow, our future sales growth is subject to quarter-to-quarter fluctuations and is dependent to a significant degree upon the following factors: (i) the 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 and the success in the marketplace of such launches; (iii) the timing and extent of stocking and destocking of inventory by our customers; (iv) the timing and extent of our customers’ production campaigns and plant maintenance shutdowns; and (v) the availability and use by our customers and others of competitive products.

Contract manufacturing sales revenues, totaling approximately $14.3 million, $14.8 million and $14.1 million in fiscal 2007, 2006 and 2005, respectively, relate to fermentation work performed for various third parties at our Kingstree, South Carolina facility. The decline in contract manufacturing revenue in fiscal 2007 resulted from our decision to narrow contract manufacturing services to include only products with reasonable profit margins or those that we expect could have a strategic fit in the future.

As a result of the above, total revenues increased by $36.2 million or 13% in fiscal 2007 as compared to fiscal 2006 and increased by $52.8 million or 24% in fiscal 2006 as compared to fiscal 2005.

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Cost of Revenues

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

	Year ended October 31,
	2007		2006		2005
Cost of product sales, including idle capacity costs	$	179,367	$	158,600	$	120,865
Cost of contract manufacturing sales		13,952		14,676		12,516
Total cost of revenues	$	193,319	$	173,276	$	133,381

Cost of product sales, including idle capacity costs, as a percentage of product sales decreased to 61% in fiscal 2007 from 62% in fiscal 2006. The decrease was due primarily to the economies of scale and margin benefits derived from the October 2006 plant restructuring and production consolidation (2%) and DHA productivity improvements (1%), offset by increases in our ARA costs (2%). Idle capacity costs were $6.9 million and $14.1 million in fiscal 2007 and 2006, respectively. Idle capacity costs represent certain fixed period costs associated with underutilized manufacturing capacity.

Cost of product sales, including idle capacity costs, as a percentage of product sales increased to 62% in fiscal 2006 from 59% in fiscal 2005. The increase was due to idle capacity charges (6%), partially offset by DHA productivity improvements (1%) and decreases in our overall cost of ARA (2%).

Cost of contract manufacturing sales, totaling $14.0 million, $14.7 million and $12.5 million in fiscal 2007, 2006 and 2005, respectively, are the costs related to the fermentation work performed for various third parties at our Kingstree, South Carolina facility. Our contract manufacturing margins vary between periods primarily due to contract mix and volume. Our contract manufacturing sales achieve significantly lower gross margins than our product sales but contribute to the recovery of our fixed overhead costs. In order to improve such margins in the future, management has narrowed the scope of these services to include only products with reasonable profit margins or those that we expect could have a strategic fit in the future.

See “Management Outlook” for discussion of expected overall profit margins for fiscal 2008.

Operating Expenses

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

	Year ended October 31,
	2007		2006		2005
Research and development	$	24,853	$	24,044	$	19,415
Selling, general and administrative		44,855		39,597		31,968
Amortization of intangible assets		6,558		2,796		2,489
Restructuring charge		853		4,729		—
Other operating expenses		1,614		1,158		7,654
Total operating expenses	$	78,733	$	72,324	$	61,526

Research and Development Our research and development costs increased by $800,000 or 3% in fiscal 2007 as compared to fiscal 2006 due primarily to increased staffing and services to support product development. Our research and development efforts continue to focus on: (i) developing new food and beverage applications for life’sDHA™; (ii) broadening the scientific evidence supporting the benefits of life’sDHA™ throughout life; (iii) improving manufacturing processes; and (iv) developing new products to expand our market offerings.

Our research and development costs increased by $4.6 million or 24% in fiscal 2006 as compared to fiscal 2005. The increase was primarily due to additional costs incurred on clinical studies focusing on the cognitive benefits of DHA. Research and development expenses also included $1.2 million of non-cash equity-based compensation charges in fiscal 2006.

Selling, General and Administrative Our selling, general and administrative costs increased by $5.3 million or 13% in fiscal 2007 as compared to fiscal 2006. This increase resulted primarily from additional resources invested in our sales and marketing initiatives designed to grow our sales to infant formula customers overseas and to grow DHA markets outside of infant formula. Increased expenditures were made to expand our sales, customer support and marketing personnel (increase of $1.5 million) as well as to broaden the scope of our advertising and public relations campaigns (increase of $4.0 million).

Our selling, general and administrative costs increased by $7.6 million or 24% 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 included $2.1 million of non-cash equity-based compensation charges in fiscal 2006.

Amortization of Intangible Assets We capitalize patent application and patent defense costs in addition to certain other external costs related to our intellectual property portfolio to the extent that we anticipate a future economic benefit or an alternate future use is available to the Company from such expenditures. We amortize these costs over the expected life of the respective assets. We recorded amortization expense related to our intangible assets of $6.6 million, $2.8 million and $2.5 million during fiscal 2007, 2006 and 2005, respectively. The increase from fiscal 2006 to fiscal 2007 resulted primarily from the amortization of the costs incurred in late fiscal 2006 related to the Nutrinova and Lonza patent infringement suits. See “Legal Proceedings” for further discussion.

41

Restructuring Charge We recognized a charge of $900,000 in fiscal 2007 and $4.7 million in fiscal 2006 resulting from the October 2006 plant restructuring. This charge primarily includes outplacement-related professional services fees and relocation costs in fiscal 2007 and employee separation costs and a write-down of certain assets supporting production in Winchester in fiscal 2006. No future costs associated with the restructuring are expected. See Note 11 to the consolidated financial statements for further discussion of this matter.

Other Operating Expenses We incurred other operating expenses of $1.6 million, $1.2 million and $7.7 million in fiscal 2007, 2006 and 2005, respectively. These costs in fiscal 2007 primarily include contract manufacturing production trials and other start-up costs. These costs were significantly lower in fiscal 2007 and 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 related primarily to production start-up costs associated with the expansion at our Kingstree facility, which included training expenses and costs related to the scale-up and validation of new equipment and production processes.

Interest and Other Income, Net

Interest and other income, net, decreased by $300,000 in fiscal 2007 as compared to fiscal 2006 and increased by $100,000 in fiscal 2006 as compared to fiscal 2005, due primarily to varying levels of cash, cash equivalents and short-term investments and changes in interest rates.

Interest Expense

Interest expense decreased by $800,000 in fiscal 2007 as compared to fiscal 2006 and increased by $2.7 million in fiscal 2006 as compared to fiscal 2005, due to varying levels of debt outstanding under our revolving credit facility and associated variable rate interest costs. As of the end of fiscal 2007, we had fully repaid our revolving credit facility. In addition, in fiscal 2006, capitalization of interest costs had largely ceased with the completion of the Kingstree expansion in fiscal 2005. See “Liquidity and Capital Resources” for further discussion.

Income Tax Provision (Benefit)

The provision for income taxes totaled $1.7 million, $8.6 million and $8.8 million in fiscal 2007, 2006 and 2005, respectively, and has been recorded based upon our effective tax rate of 36.1% in fiscal 2007 and 36.5% in fiscal 2006 and 2005.

Realization of total deferred tax assets is contingent upon the generation of future taxable income. During fiscal 2007, it was determined that certain net operating loss carryforwards, whose related deferred tax asset had previously been fully reserved, were more likely than not to be realized through the generation of future taxable income. This valuation allowance reversal resulted in an income tax benefit of $10.8 million and a decrease to goodwill of $7.4 million related to net operating loss carryforwards acquired by the Company in connection with our purchase of OmegaTech in 2002. As of October 31, 2007, the deferred tax asset valuation allowance of approximately $1.5 million relates to certain state net operating loss carryforwards whose realizability is uncertain. Should realization of these deferred tax assets become more likely than not, the resulting valuation allowance reversal would primarily be reflected as a decrease to goodwill. As of October 31, 2007, the net recorded value of our deferred tax asset was approximately $51.3 million. Realization of deferred tax assets is contingent upon the generation of future taxable income. As such, the realization of this $51.3 million asset will require the generation of approximately $150 million of future taxable income.

As of October 31, 2007, we had net operating loss carryforwards for Federal income tax purposes of approximately $160 million, which expire at various dates between 2012 and 2025. The timing and manner in which U.S. net operating loss carryforwards may be utilized may be limited if we incur a change in ownership as defined under Section 382 of the Internal Revenue Code. Although we have net operating losses available to offset future taxable income, we may be subject to Federal alternative minimum taxes.

Net Income

As a result of the foregoing, net income was $32.0 million in fiscal 2007 as compared to net income of $14.9 million in fiscal 2006 and net income of $15.3 million in fiscal 2005.

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, 2007, there was $5.3 million of total unrecognized compensation cost related primarily to unvested restricted stock units and unvested stock options granted under our equity-based compensation plans. The cost is expected to be recognized through fiscal 2012 with a weighted average recognition period of approximately two years.

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.

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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 do not expect the adoption of FIN 48 to have a material impact on our consolidated financial statements.

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.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards that require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, such as debt issuance costs. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 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 159 will have on our consolidated financial position and results of operations.

In June 2007, the FASB ratified EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. EITF 07-3 is effective, on a prospective basis, for financial statements issued for fiscal years beginning after December 15, 2007. We do not expect the adoption of EITF 07-3 to have a material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. We are currently evaluating the potential impact, if any, of the adoption of SFAS 141R 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, 2007, our primary sources of liquidity were our cash, cash equivalents and short-term investments totaling $21.6 million as well as the $135 million available portion of our revolving credit facility. Cash, cash equivalents and short-term investments decreased $5.2 million from October 31, 2006. During fiscal 2007, we generated $45.9 million in cash from operating activities; however, this was offset by capital expenditures of $12.2 million and repayments of $36 million on our revolving credit facility. 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 $15 million.

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, 2007.

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The following table sets forth our future minimum payments under contractual obligations at October 31, 2007:

			Less than		1-3		3-5		More than
In thousands	Total		1 year		years		years		5 years
Notes payable(1)	$	10,196	$	1,138	$	8,126	$	280	$	652
Borrowings under revolving credit facility		—		—		—		—		—
Operating lease obligations		3,566		1,054		1,904		307		301
Unconditional purchase obligations(2)		139,773		100,771		39,002		—		—
Total contractual cash obligations	$	153,535	$	102,963	$	49,032	$	587	$	953

(1)	Minimum payments above include interest and principal due under these notes.
(2)	Primarily includes future inventory purchases from DSM pursuant to minimum purchase commitment (see Note 4 to Consolidated Financial Statements) and guarantee described below in “Off-Balance Sheet Arrangements.”

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. Principal is amortized utilizing a 20-year period, with the outstanding principal due at the maturity date of December 31, 2008.

We have a $135 million secured revolving credit facility that 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 7.1%, 6.4% and 4.9% for the years ended October 31, 2007, 2006 and 2005, respectively, and the weighted average commitment fee rate on unused amounts was approximately 0.1%, 0.2% 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, 2007, we were in compliance with all of these debt covenants and had no outstanding borrowings under the revolving credit facility.

We believe that the revolving credit facility, when combined with our cash, cash equivalents and short-term investments of $21.6 million on-hand at October 31, 2007, 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 any 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.

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 $3.6 million over the remaining lease terms, which expire through 2011.

In February 2006, we and DSM entered into an amendment to the original agreement (“the 2006 Amendment”). The 2006 Amendment established 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, 2007, we estimate that 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.

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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.

A portion of the ARA we buy from DSM is denominated in euros, which exposes us to risks related to changes in exchange rates between the U.S. dollar and the euro. We expect that for fiscal 2008, approximately 25% of our ARA received from DSM will be subject to currency risk. As part of the  2007 Amendment between us and DSM, a mechanism was established by which both parties will share in the economic risks associated with exchange rate fluctuations between the U.S. dollar and the euro. In addition, 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, 2007, we had unrealized gains on such hedge instruments totaling $203,000, net of income tax provision. Fluctuations between the U.S. dollar and the euro will impact our cost of ARA oil and gross margins. We estimate that a 5% change in the exchange rate would impact gross margins of our infant formula products by less than 0.5%.

We are subject to risk from adverse changes in interest rates, primarily relating to variable-rate borrowings used to maintain liquidity; however, at October 31, 2007, there was no variable-rate debt outstanding.

45

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS	PAGE
Management’s Report on Internal Control Over Financial Reporting	47
Report of Ernst &Young LLP, Independent Registered Public Accounting Firm	48
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Internal Control Over Financial Reporting	49
Consolidated Balance Sheets as of October 31, 2007 and 2006	50
Consolidated Statements of Income for the years ended October 31, 2007, 2006 and 2005	51
Consolidated Statements of Stockholders’ Equity for the years ended October 31, 2007, 2006 and 2005	52
Consolidated Statements of Cash Flows for the years ended October 31, 2007, 2006 and 2005	53
Notes to Consolidated Financial Statements	54

46

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, 2007 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. The effectiveness of Martek’s internal control over financial reporting as of October 31, 2007 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	/s/ Peter L. Buzy Peter L. Buzy
Chief Executive Officer and Director December 21, 2007	Chief Financial Officer, Treasurer and Executive Vice President for Finance and Administration
	December 21, 2007

47

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, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended October 31, 2007. 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, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 31, 2007, 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.

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”.

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, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated December 21, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

December 21, 2007
McLean, Virginia

48

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 Martek Biosciences Corporation’s internal control over financial reporting as of October 31, 2007, 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 included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

In our opinion, Martek Biosciences Corporation maintained, in all material respects, effective internal control over financial reporting as of October 31, 2007, 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, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended October 31, 2007 of Martek Biosciences Corporation, and our report dated December 21, 2007, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

McLean, Virginia
December 21, 2007

49

MARTEK BIOSCIENCES CORPORATION

CONSOLIDATED BALANCE SHEETS

	October 31,
In thousands, except share and per share data	2007			2006
Assets
Current assets
Cash and cash equivalents	$	16,973		$	15,578
Short-term investments and marketable securities		4,675			11,250
Accounts receivable, net		41,643			32,746
Inventories, net		109,409			100,320
Deferred tax asset		14,549			9,487
Other current assets		8,237			8,893
Total current assets		195,486			178,274
Property, plant and equipment, net		277,915			286,922
Deferred tax asset		36,757			33,313
Goodwill		51,564			48,603
Other intangible assets, net		34,320			36,828
Other assets, net		653			14,033
Total assets	$	596,695		$	597,973
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	18,118		$	21,663
Accrued liabilities		25,154			24,098
Current portion of notes payable and other long-term obligations		1,012			1,231
Current portion of deferred revenue		1,857			2,794
Total current liabilities		46,141			49,786
Long-term debt under revolving credit facility		—			36,000
Notes payable and other long-term obligations		9,310			10,277
Long-term portion of deferred revenue		9,517			9,335
Total liabilities		64,968			105,398
Commitments
Stockholders’ equity
Preferred stock, $.01 par value, 4,700,000 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; 32,335,622 and 32,156,162 shares issued and outstanding, respectively		3,234			3,216
Additional paid-in capital		530,575			523,486
Accumulated other comprehensive income		203			171
Accumulated deficit		(2,285	)		(34,298	)
Total stockholders’ equity		531,727			492,575
Total liabilities and stockholders’ equity	$	596,695		$	597,973

See accompanying notes.

50

MARTEK BIOSCIENCES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

	Year ended October 31,
In thousands, except share and per share data	2007			2006			2005
Revenues:
Product sales	$	292,549		$	255,838		$	203,765
Contract manufacturing sales		14,264			14,816			14,087
Total revenues		306,813			270,654			217,852
Cost of revenues:
Cost of product sales, including idle capacity costs		179,367			158,600			120,865
Cost of contract manufacturing sales		13,952			14,676			12,516
Total cost of revenues		193,319			173,276			133,381
Gross margin		113,494			97,378			84,471
Operating expenses:
Research and development		24,853			24,044			19,415
Selling, general and administrative		44,855			39,597			31,968
Amortization of intangible assets		6,558			2,796			2,489
Restructuring charge		853			4,729			—
Other operating expenses		1,614			1,158			7,654
Total operating expenses		78,733			72,324			61,526
Income from operations		34,761			25,054			22,945
Interest and other income, net		1,144			1,490			1,428
Interest expense		(2,233	)		(3,018	)		(303	)
Income before income tax provision		33,672			23,526			24,070
Income tax provision		1,659			8,588			8,786
Net income	$	32,013		$	14,938		$	15,284
Net income per share
Basic	$	0.99		$	0.47		$	0.49
Diluted	$	0.98		$	0.46		$	0.48
Weighted average common shares outstanding
Basic		32,336,314			32,113,301			31,164,149
Diluted		32,593,125			32,343,015			32,031,503

See accompanying notes.

51

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, 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:
Change in unrealized gain 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		—		—		—		—			14,938			14,938
Other comprehensive income:
Change in unrealized gain on exchange rate forward contract, net of tax of $102		—		—		—		170			—			170
Comprehensive income														15,108
Balance at October 31, 2006		32,156,162		3,216		523,486		171			(34,298	)		492,575
Exercise of stock options		179,460		18		2,747		—			—			2,765
Equity-based compensation		—		—		2,710		—			—			2,710
Tax benefit of exercise of non-qualified stock options		—		—		1,632		—			—			1,632
Net income		—		—		—		—			32,013			32,013
Other comprehensive income:
Change in unrealized gain on exchange rate forward contract, net of tax of $18		—		—		—		32			—			32
Comprehensive income														32,045
Balance at October 31, 2007		32,335,622	$	3,234	$	530,575	$	203		$	(2,285	)	$	531,727

See accompanying notes.

52

MARTEK BIOSCIENCES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended October 31,
In thousands	2007			2006			2005
Operating activities
Net income	$	32,013		$	14,938		$	15,284
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		26,466			21,672			16,494
Provision for inventory obsolescence		900			500			2,000
Deferred tax provision		1,009			8,588			8,786
Equity-based compensation expense		2,384			3,272			—
Incremental tax benefit from exercise of non-qualified stock options		(507	)		(1,587	)		—
Loss from disposal and write-down of assets and other		1,104			2,845			1,131
Changes in operating assets and liabilities:
Accounts receivable		(9,129	)		(5,143	)		9,689
Inventories		2,336			(20,804	)		(63,156	)
Other assets		1,438			(4,393	)		1,413
Accounts payable		(3,545	)		5,002			(10,303	)
Accrued liabilities		(7,642	)		8,527			2,947
Deferred revenue and other liabilities		(967	)		2,205			(1,429	)
Net cash provided by (used in) operating activities		45,860			35,622			(17,144	)
Investing activities
Sale (purchase) of short-term investments and marketable securities, net		6,575			11,050			(9,095	)
Expenditures for property, plant and equipment		(8,279	)		(10,902	)		(57,181	)
Proceeds from sale of fluorescent detection products business		900			—			—
(Repurchase) proceeds from sale-leaseback transaction and other		(3,910	)		(6,877	)		4,272
Capitalization of intangible and other assets		(6,010	)		(6,862	)		(4,989	)
Net cash used in investing activities		(10,724	)		(13,591	)		(66,993	)
Financing activities
Repayments of notes payable and other long-term obligations		(1,013	)		(3,009	)		(4,875	)
Repayments under revolving credit facility, net		(36,000	)		(19,000	)		(30,000	)
Proceeds from the issuance of common stock, net of issuance costs		—			—			81,444
Proceeds from the exercise of stock options and warrants		2,765			2,922			18,670
Incremental tax benefit from exercise of non-qualified stock options		507			1,587			—
Other		—			—			500
Net cash (used in) provided by financing activities		(33,741	)		(17,500	)		65,739
Net increase (decrease) in cash and cash equivalents		1,395			4,531			(18,398	)
Cash and cash equivalents, beginning of year		15,578			11,047			29,445
Cash and cash equivalents, end of year	$	16,973		$	15,578		$	11,047
Supplemental cash flow disclosures:
Interest paid	$	2,478		$	3,625		$	3,528
Income taxes paid	$	530		$	280		$	—
Notes payable issued in acquisition of land	$	—		$	—		$	800
Accrual of contingent purchase price to be settled in shares of Martek common stock	$	10,167		$	—		$	—

See accompanying notes.

53

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 is a leading innovator in the development of nutritional products that promote health and wellness through every stage of life. The Company’s products and services include: (1) specialty, nutritional oils for infant formula, dietary supplements and foods and beverages and (2) contract manufacturing.

Martek’s nutritional oils are comprised of fatty acid components, primarily docosahexaenoic acid, commonly known as DHA, and arachidonic acid, commonly known as ARA. 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 also been linked to a variety of health risks, including cardiovascular problems, Alzheimer’s disease and dementia. Further research is underway to assess the role of supplementation with the Company’s DHA on mitigating a variety of health risks.

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”), 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. Most 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”, 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 $2.4 million, $3.6 million and $2.4 million in fiscal 2007, 2006 and 2005, 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. Shipping and handling costs were $1.6 million, $1.0 million and $900,000 in fiscal 2007, 2006 and 2005, respectively.

54

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 purchases of ARA from DSM Food Specialties B.V. (“DSM”), a portion of which are denominated in euros.

The Company periodically enters 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.” Consequently, the resulting unrealized gains and losses are recorded as a component of other comprehensive income until exercise of the forward contracts, at which time realized gains or losses are recorded as a component of inventory until the related product is sold. As of October 31, 2007, outstanding forward contracts had notional values aggregating approximately 3.4 million euros (equivalent to $4.9 million at October 31, 2007). The resulting unrealized gains and losses are recorded as a component of other comprehensive income until exercise of the forward contracts, at which time realized gains or losses are recorded as a component of inventory until the related product is sold.

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

Advertising Advertising costs are expensed as incurred. Advertising costs, including print and internet-based advertising, were approximately $2.7 million in fiscal 2007 and $1.0 million in each of fiscal 2006 and 2005.

Other Operating Expenses Other operating expenses relate primarily to contract manufacturing and internal production start-up costs, including materials, training and other such costs, incurred in connection with the expansion of the Company’s internal manufacturing operations and costs incurred in connection with qualification of certain third-party manufacturers. 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. Compensation cost recognized in fiscal 2007 and 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. The Company utilizes the “straight-line” method for allocating compensation cost by period.

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, restricted stock units and warrants using the treasury stock method.

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 from date of purchase 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.

55

At October 31, 2007 and 2006, 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 30 years. Despite the 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, 2007 and 2006.

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 $60,000 and $40,000 as of October 31, 2007 and 2006, 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 80%, 83% and 88% of the Company’s product sales in fiscal 2007, 2006 and 2005, respectively. At October 31, 2007 and 2006, four customers accounted for approximately 77% and 70%, respectively, of the Company’s outstanding accounts receivable balance. Included in these amounts is one of the Company’s customers that accounted for approximately 42%, 45% and 49% of total product sales in fiscal 2007, 2006 and 2005, respectively, and represented 43% of the Company’s outstanding accounts receivable balance at both October 31, 2007 and 2006. Approximately 60%, 60% and 67% of the Company’s sales were to domestic customers in fiscal 2007, 2006 and 2005, respectively.

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 available for commercial use by applying 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. 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. Certain external legal and related costs are incurred in connection with patent applications. If a future economic benefit is anticipated from the resulting patent or an alternate future use is available to the Company, such costs are capitalized and amortized over the expected life of the patent. The Company also capitalizes 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. The Company’s intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally ten to seventeen years.

56

Impairment of Long-Lived Assets In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, 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 does not expect the adoption of FIN 48 to have a material impact on its consolidated financial statements.

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.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards that require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, such as debt issuance costs. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 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 159 will have on its consolidated financial position and results of operations.

In June 2007, the FASB ratified EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. EITF 07-3 is effective, on a prospective basis, for financial statements issued for fiscal years beginning after December 15, 2007. The Company does not expect the adoption of EITF 07-3 to have a material impact on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 141R on its consolidated financial position and results of operations.

Reclassification Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year presentation. Amortization of intangible assets that was previously reported in prior periods as selling, general and administrative expense and research and development expense within operating expenses is now included as a separate line item of amortization of intangible assets. See Note 8 for discussion of intangible assets.

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. Compensation cost recognized in fiscal 2007 and 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. The Company utilizes the “straight-line” method for allocating compensation cost by period. 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, 2007 were $2.4 million and $1.5 million lower, respectively, and 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, 2007 were each $0.05 lower and 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 year ended October 31, 2005. The reported and pro forma net income and net income per share for the years ended October 31, 2007 and 2006 are the same because equity-based compensation is calculated under the provisions of SFAS 123R. The amounts for the years ended October 31, 2007 and 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 year ended October 31, 2005 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,
	2007		2006		2005
Net income, as reported	$	32,013	$	14,938	$	15,284
Deduct: Total equity-based employee compensation expense determined under fair value-based methods for all awards		—		—		(58,349	)
Pro forma net income (loss)	$	32,013	$	14,938	$	(43,065	)
Net income (loss) per share:
Basic — as reported	$	0.99	$	0.47	$	0.49
Basic — pro forma	$	0.99	$	0.47	$	(1.38	)
Diluted — as reported	$	0.98	$	0.46	$	0.48
Diluted — pro forma	$	0.98	$	0.46	$	(1.38	)

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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 granted 281,395 restricted stock units during year ended October 31, 2007, which generally vest over periods of up to 62 months from the date of grant. The fair value of the restricted stock units granted was based on fair market value on the date of grant.

The Company did not grant any stock options during the year ended October 31, 2007. The Company has utilized the Black-Scholes-Merton valuation model for estimating the fair value of the stock options granted 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 and 2005, and a discussion of the Company’s methodology for developing each of the assumptions used:

	Year ended October 31,
	2006			2005
Expected volatility		61.1	%		62.7	%
Risk-free interest rate		4.7	%		3.9	%
Expected life of options	5 years			5 years
Expected dividend yield		0	%		0	%
Forfeiture rate		1	%		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. From fiscal 2001 through fiscal 2006, 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 and 2005 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, 2007, the Company had several equity-based compensation plans, which are described below. The Company recognized $2.4 million in the year ended October 31, 2007 in compensation cost related to stock options and restricted stock units. The Company recognized $3.3 million in the year ended October 31, 2006 in compensation cost related to stock options. The total income tax benefit recognized in the income statement for equity-based compensation arrangements was approximately $900,000 and $1.2 million in the years ended October 31, 2007 and 2006, respectively. Compensation cost capitalized as part of inventory during the years ended October 31, 2007 and 2006 was approximately $300,000 and $500,000, respectively.

Equity-Based Compensation Plans

As of October 31, 2007, the Company had stock options and restricted stock units outstanding that were previously granted under the Company’s 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 “Equity-Based Compensation Plans.” With exception of the 1994 Directors’ Option Plan, option awards under the Equity-Based Compensation 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. Restricted stock units granted generally vest over periods of up to 62 months from the date of grant. At October 31, 2007, approximately 1.5 million shares of common stock were available for future grants under the Equity-Based Compensation 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

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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 activity under the Equity-Based Compensation Plans as of October 31, 2007 and changes during the three years then ended are as follows (shares and intrinsic value in thousands):

Restricted Stock Units

Restricted stock units represent rights to receive common shares at a future date. There is no exercise price and no monetary payment is required for receipt of restricted stock units or the shares issued in settlement of the award. The fair market value at the time of the grant is amortized to expense on a straight-line basis over the period of vesting. The fair market value is determined based on the number of restricted stock units granted and the market value of the Company’s shares on the grant date. Pre-vesting forfeitures were estimated to be approximately 5%. A summary of the Company’s restricted stock units as of October 31, 2007 is presented below:

				Weighted Average
	Number of			Grant Date Fair
	Shares			Value /Share
Restricted stock units at October 31, 2006		—		$	—
Granted		281		$	22.69
Vested		—		$	—
Cancelled		(17	)	$	22.54
Restricted stock units at October 31, 2007		264		$	22.70

As of October 31, 2007, there was $4.6 million remaining in unrecognized compensation cost related to these awards. The cost is expected to be recognized through fiscal 2012 with a weighted average recognition period of approximately two years.

Stock Options

								Weighted Average
								Remaining
	Number of			Weighted Average		Aggregate		Contractual
	Shares			Price/Share		Intrinsic Value		Term (years)
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
Options exercisable at October 31, 2006		3,466		$	39.32
Granted		—		$	—
Exercised		(179	)	$	15.34
Cancelled		(458	)	$	44.72
Options outstanding at October 31, 2007		3,077		$	38.99	$	12,060		5.5
Options exercisable at October 31, 2007		3,009		$	39.17	$	11,688		5.5

The weighted average fair market value of the options at the date of grant for options granted during the years ended October 31, 2006 and 2005 was $17.84 and $28.59, respectively. The total intrinsic value of stock options exercised during the years ended October 31, 2007 and 2006 was approximately $1.6 million and $600,000, respectively.

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As of October 31, 2007, there was $700,000 of unrecognized compensation cost related to unvested stock options. 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 provided 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. Under the agreement, annual ARA unit pricing is calculated utilizing a cost-plus approach that is based on the prior year’s actual costs incurred adjusted for current year volume and cost expectations.

In February 2006, the Company and DSM entered into an amendment to the original agreement (“the 2006 Amendment”). The 2006 Amendment established 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 Martek in excess of specified minimum thresholds. As of October 31, 2007, the Company estimates that 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.

In July 2007, the companies entered into a second amendment to the original agreement (“the 2007 Amendment”). The 2007 Amendment finalized ARA pricing to Martek for calendar 2007 as well as the parameters and methodologies for the establishment of ARA pricing for calendar years 2008, 2009 and, if certain criteria are met, 2010. The 2007 Amendment also established minimum ARA purchase quantities for Martek during calendar years 2007 and 2008. As of October 31, 2007, the value of the remaining calendar 2007 and full 2008 minimum purchase requirements are approximately $16 million and $97 million, respectively. The minimum purchase quantities for 2007 and 2008 approximate the amounts expected to be purchased by Martek in the normal course of business during the respective periods.

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 $4.7 million and $11.3 million as of October 31, 2007 and October 31, 2006, respectively. There were no unrealized holding gains or losses or realized gains or losses during the years ended October 31, 2007, 2006 and 2005.

6. INVENTORIES

Inventories consist of the following (in thousands):

	October 31,
	2007		2006
Finished goods	$	57,852	$	42,328
Work in process		48,721		66,968
Raw materials		2,836		3,024
Total inventories, net		109,409		112,320
Less: long-term portion		—		(12,000	)
Inventories, net	$	109,409	$	100,320

Idle capacity costs totaled $6.9 million and $14.1 million for the years ended October 31, 2007 and 2006, respectively, and relate to certain fixed costs associated with the underutilized portion of the Company’s production plants.

Inventory levels are evaluated by management based upon product demand, shelf-life, future marketing plans and other factors, and reserves for obsolete and slow-moving inventories are recorded for amounts that may not be realizable. Based on the Company’s projected DHA sales, of the Company’s non-infant formula DHA inventory on-hand, $12 million of work-in-process inventory was classified as long-term as of October 31, 2006. As of October 31, 2007, all inventory was classified as current.

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7. PROPERTY, PLANT AND EQUIPMENT

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

	October 31,
	2007			2006
Land	$	2,320		$	2,320
Building and improvements		63,892			61,855
Machinery and equipment		256,739			248,107
Furniture and fixtures		3,143			2,716
Computer hardware and software		13,929			11,413
		340,023			326,411
Less: accumulated depreciation and amortization		(70,459	)		(50,473	)
		269,564			275,938
Construction in progress		8,351			10,984
Property, plant and equipment, net	$	277,915		$	286,922

Depreciation and amortization expense on property, plant and equipment totaled approximately $20.6 million, $18.9 million and $14.0 million for the years ended October 31, 2007, 2006 and 2005, respectively.

Assets available for commercial use that were not in productive service had a net book value of $71.8 million and $87.2 million at October 31, 2007 and 2006, respectively.

8. GOODWILL AND OTHER INTANGIBLE ASSETS

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

	October 31, 2007							October 31, 2006
			Accumulated							Accumulated
Intangible Asset	Gross		Amortization			Net		Gross		Amortization			Net
Trademarks	$	2,098	$	(691	)	$	1,407	$	2,053	$	(545	)	$	1,508
Patents		22,226		(5,594	)		16,632		19,233		(1,835	)		17,398
Core technology		1,708		(569	)		1,139		1,708		(455	)		1,253
Current products		10,676		(3,940	)		6,736		10,676		(3,228	)		7,448
Licenses		10,996		(2,590	)		8,406		11,091		(1,870	)		9,221
Goodwill		51,564		—			51,564		48,603		—			48,603
	$	99,268	$	(13,384	)	$	85,884	$	93,364	$	(7,933	)	$	85,431

The changes in the carrying amount of goodwill for the year ended October 31, 2007 relate to the final allocation of purchase price of the OmegaTech acquisition earn-out contingencies and the reversal of valuation allowance associated with certain acquired net operating loss carryforwards of OmegaTech that the Company believes are more likely than not to be realized.

Core technology and current products relate to the value assigned to the products purchased as part of the OmegaTech acquisition in fiscal 2002. All amortization associated with the Company’s intangible assets is reflected in amortization of intangible assets in the accompanying consolidated statements of income. Included in amortization of intangible assets is approximately $5.0 million, $1.9 million and $1.4 million in the years ended October 31, 2007, 2006 and 2005, respectively, related to assets supporting the Company’s commercial products and approximately $1.2 million, $800,000 and $1.1 million related to assets supporting the Company’s research and development initiatives. Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for fiscal 2008 will be approximately $5.8 million and for each of the succeeding four years thereafter will be approximately $3.5 million. As of October 31, 2007, the weighted average remaining useful lives of the Company’s patents, current products and licenses are 8 years, 10 years and 12 years, respectively.

The Company recorded patent amortization expense of approximately $4.2 million, $1.1 million and $800,000 in the years ended October 31, 2007, 2006 and 2005, respectively.

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9. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):

	October 31,
	2007		2006
Salaries and employee benefits	$	9,398	$	12,328
OmegaTech contingent share issuance		10,167		—
Inventory receipt obligations		—		3,094
Other		5,589		8,676
	$	25,154		24,098

See Note 12 for discussion of the OmegaTech contingent share issuance.

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 7.1%, 6.4% and 4.9% for the years ended October 31, 2007, 2006 and 2005, respectively. The weighted average commitment fee rate on unused amounts was approximately 0.1%, 0.2% and 0.3% for the years ended October 31, 2007, 2006 and 2005, 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, 2007, the Company was in compliance with all of these debt covenants and had no outstanding borrowings under the revolving credit facility.

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. The note has a stated interest rate of 5% and principal is amortized utilizing a 20-year period with the outstanding principal due at the maturity date of December 31, 2008.

The annual maturities of the Company’s notes payable and long-term debt at October 31, 2007 are summarized as follows (in thousands):

Fiscal Year
2008	$	678
2009		7,777
2010		183
2011		100
2012		105
Thereafter		521
	$	9,364

During the years ended October 31, 2007, 2006 and 2005, the Company incurred interest on borrowings of approximately $2.4 million, $3.6 million and $3.5 million, respectively, and recorded amortization of related deferred financing fees of approximately $200,000, $200,000 and $300,000, 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, 2007, 2006 and 2005, approximately $300,000, $700,000 and $3.5 million of interest was capitalized.

The carrying amounts of notes payable and long-term debt under the revolving credit facility at October 31, 2007 and 2006 approximate their fair values based on instruments of similar terms available to the Company.

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11. RESTRUCTURING CHARGE

In October 2006, the Company restructured its plant operations. Under the restructuring, a substantial portion of production capacity at the Winchester, Kentucky manufacturing facility was idled and production was transferred to the Kingstree, South Carolina manufacturing facility.

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 continuation, severance, medical and other benefits. The recorded asset write-down relates primarily to certain assets that formerly supported Winchester production.

Expenses associated with the restructuring totaled approximately $900,000 in fiscal 2007. These expenses are comprised primarily of outplacement-related professional services fees and personnel-related costs. No future costs associated with the restructuring are expected. The Company incurred $5.6 million in cumulative expenses associated with the restructuring.

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
Costs incurred		—			—			853			853
Cash payments		(1,946	)		—			(927	)		(2,873	)
Adjustments		(26	)		—			—			(26	)
Liability for restructuring costs at October 31, 2007	$	—		$	—		$	—		$	—

12. COMMITMENTS AND CONTINGENCIES

Leases The Company leases its Columbia, Maryland premises under an operating lease. In fiscal 2006 and 2007, the Company expanded its Columbia leased space by an additional 30%. The leases expire in January 2011. The terms of the lease include annual rent escalations of 2.5% to 3.0%.

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 $1.9 million, $5.0 million and $4.0 million for the years ended October 31, 2007, 2006 and 2005, respectively.

Future minimum lease payments under operating leases at October 31, 2007 are as follows (in thousands):

Fiscal Year
2008	$	1,054
2009		951
2010		953
2011		267
2012		40
Thereafter		301
	$	3,566

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 2007, 2006 and 2005 in royalties under such agreements pertaining to the Company’s fluorescent detection products.

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In December 2003, the Company entered into a collaboration agreement with a Canadian biotechnology company to co-develop DHA products from plants. In January 2007, an amendment to this agreement was executed, whereby 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 made a license payment of $750,000, subject to minimum royalties of 1.5% of gross margin, as defined, on future sales by Martek of such plant-based DHA. During the term of the license, the Company may be required to pay additional royalties of up to approximately 1.0% of gross margin, as defined, on sales of products in the future that utilize certain licensed technologies. The collaboration obligations under the agreement expired in June 2007.

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, 2007, the Company’s remaining obligation was approximately $3.9 million. See also Note 4 for discussion of purchase commitments to DSM.

OmegaTech Contingent Purchase Price In April 2002, the Company completed its acquisition of 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.

Since 2004, disputes have existed and litigation has been ongoing between the Company and the representative of the former OmegaTech stockholders related to whether certain of the other milestones had been achieved. In October 2007, the Company entered into a settlement with the former OmegaTech stockholders regarding the disputed contingent consideration associated with these milestones. In connection with the settlement, Martek issued 340,946 shares of Martek common stock to the former OmegaTech stockholders in December 2007. The shares issued to the former OmegaTech stockholders resulted in the recognition of approximately $10 million of additional purchase price consideration which has been recorded as goodwill by the Company. The settlement eliminates the potential for any additional shares to be issued to the former OmegaTech stockholders.

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 the defendants infringed all the asserted claims of three Martek patents and that these patents were valid. It also found that the defendants willfully infringed one of these patents. In October 2007, the judge upheld the October 2006 jury verdict that the defendants infringed all of the asserted claims of U.S. Patent Nos. 5,340,594 and 6,410,281 (the “‘281 Patent”) and that these patents were not invalid. The judge has granted a permanent injunction against the defendants with respect to those two patents. The judge also upheld the jury verdict that the defendants had acted willfully in their infringement of the ‘281 Patent. It is likely that the defendants will appeal the decision. Regarding the third patent involved in the case, U.S. Patent No. 6,451,567, the judge reversed the jury verdict and found that the asserted claims of this patent were invalid. Martek has requested the judge to reconsider his ruling on the third patent.

In January 2004, the Company filed a patent infringement lawsuit in Germany against Nutrinova and Celanese Ventures GmbH. Lonza Ltd. and a customer of Nutrinova have also been added to this lawsuit. The complaint alleges infringement of Martek’s European patent relating to DHA-containing oils. A hearing was held in a district court in Dusseldorf in September 2007 and the court issued its decision in October 2007, ruling that Martek’s patent was infringed by the defendants. The defendants have appealed, and the appeal is expected to be heard in early 2009.

In connection with these patent lawsuits, the Company has incurred and capitalized significant external legal costs. As of October 31, 2007, the patents being defended had a net book value of approximately $8.4 million, which will be amortized over a remaining period of approximately five years.

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 pursuing as a class action. 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. In December 2007, the Company announced that it has entered into a tentative settlement of all claims in the class action litigation. If approved by the court, the settlement will result in the dismissal of the claims against all defendants. The proposed settlement of the class action will result in a cash payment to the settlement fund of $6 million, all of which will be paid for out of the proceeds of the Company’s insurance policies. The parties have filed a motion in the federal court asking for approval of the proposed settlement. No assurances can be given that the settlement ultimately will be approved.

These lawsuits are further described in Item 3. “Legal Proceedings” of Part I of this Form 10-K.

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.

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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 as license revenue in each of the years ended October 31, 2007, 2006 and 2005. The balance of these license fees and prepaid product purchases remaining in deferred revenue was approximately $11.4 million and $12.1 million at October 31, 2007 and 2006, respectively.

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, restricted stock units 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,
	2007		2006		2005
Net income	$	32,013	$	14,938	$	15,284
Weighted average shares outstanding, basic		32,336		32,113		31,164
Effect of dilutive potential common shares:
Stock options		223		230		849
Restricted stock units		34		—		—
Warrants		—		—		19
Total dilutive potential common shares		257		230		868
Weighted average shares outstanding, diluted		32,593		32,343		32,032
Net income per share, basic	$	0.99	$	0.47	$	0.49
Net income per share, diluted	$	0.98	$	0.46	$	0.48

Stock options to purchase approximately 2.3 million, 2.7 million and 1.7 million shares were outstanding but were not included in the computation of diluted net income per share for the years ended October 31, 2007, 2006 and 2005, 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.

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.

65

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.

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 income tax provision consisted of the following (in thousands):

	Year ended October 31,
	2007		2006		2005
Current provision:
Federal	$	530	$	280	$	—
State		43		11		8
Deferred provision:
Federal		850		8,098		8,503
State		236		199		275
Income tax provision	$	1,659	$	8,588	$	8,786

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,
	2007			2006		2005
Federal income tax expense at 35%	$	11,785		$	8,234	$	8,425
State taxes, net of Federal benefit		351			210		283
Change in valuation allowance		(10,841	)		—		—
Other		364			144		78
Income tax provision	$	1,659		$	8,588	$	8,786

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):

66

	October 31,
	2007			2006
Deferred tax assets:
Accruals and reserves	$	1,546		$	1,815
Patents and trademarks		—			309
Net operating loss carryforwards		61,484			66,437
Deferred revenue		4,064			4,271
Equity-based compensation		2,100			1,306
Other		318			79
Total assets		69,512			74,217
Deferred tax liabilities:
Property, plant and equipment		(11,476	)		(8,863	)
Patents and trademarks		(1,257	)		—
Acquired intangibles		(2,813	)		(3,051	)
Goodwill		(1,096	)		(816	)
Other		(14	)		(101	)
Total liabilities		(16,656	)		(12,831	)
Total deferred tax asset		52,856			61,386
Valuation allowance		(1,550	)		(18,586	)
Deferred tax asset, net of valuation allowance		51,306			42,800
Less: current deferred tax asset		(14,549	)		(9,487	)
Long-term deferred tax asset	$	36,757		$	33,313

Realization of total deferred tax assets is contingent upon the generation of future taxable income. During fiscal 2007, it was determined that certain net operating loss carryforwards, whose related deferred tax asset had previously been fully reserved, were more likely than not to be realized through the generation of future taxable income. This valuation allowance reversal resulted in an income tax benefit of $10.8 million and a decrease to goodwill of $7.4 million related to net operating loss carryforwards acquired by the Company in connection with its purchase of OmegaTech in 2002. As of October 31, 2007, the deferred tax asset valuation allowance of approximately $1.5 million relates to certain state net operating loss carryforwards whose realizability is uncertain. Should realization of these deferred tax assets become more likely than not, the resulting valuation allowance reversal would primarily be reflected as a decrease to goodwill.

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. The Company recorded increases to additional paid-in capital of approximately $1.6 million and $4.9 million in fiscal 2007 and fiscal 2006, respectively, which related to the realization of the excess tax deduction associated with exercises of non-qualified stock options. In accordance with SFAS 123R, deferred tax assets associated with these deductions are only recognized to the extent that they reduce current taxes payable. To the extent these stock option deductions do not reduce taxes payable, the unrecognized benefit is not reflected within the Company’s consolidated balance sheets. As of October 31, 2007, the Company has approximately $400,000 of unrecognized benefits from stock options related to net operating loss carryforwards that is available for utilization in future periods.

As of October 31, 2007, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $160 million, which expire at various dates between 2012 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. Although the Company has net operating losses available to offset future taxable income, the Company may be subject to Federal alternative minimum taxes.

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, $900,000 and $800,000 for the years ended October 31, 2007, 2006 and 2005, respectively.

67

18. QUARTERLY FINANCIAL INFORMATION (unaudited)

Quarterly financial information for fiscal 2007 and 2006 is presented in the following table (in thousands, except per share data):

	1st		2nd		3rd		4th
	Quarter		Quarter		Quarter		Quarter
2007
Total revenues	$	70,261	$	76,686	$	77,846	$	82,020
Cost of revenues		46,392		50,009		47,898		49,020
Income from operations		4,758		8,077		9,905		12,021
Net income		2,750		4,869		6,126		18,268	(1)
Net income per share, basic		0.09		0.15		0.19		0.56	(1)
Net income per share, diluted		0.08		0.15		0.19		0.55	(1)
2006
Total revenues	$	62,892	$	70,218	$	70,358	$	67,186
Cost of revenues		39,489		44,293		44,952		44,542
Income (loss) from operations		8,015		8,962		7,640		437	(2)
Net income (loss)		4,770		5,451		4,615		102	(2)
Net income (loss) per share, basic		0.15		0.17		0.14		0.00
Net income (loss) per share, diluted		0.15		0.17		0.14		0.00

(1)	In the fourth quarter of fiscal 2007, Martek recognized an income tax benefit of $10.8 million related to the reversal of valuation allowance (see Note 16).
(2)	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).

68

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. “Financial Statements and Supplementary Data” of this Annual Report on 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. “Financial Statements and Supplementary Data” of this Annual Report on 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.

ITEM 9B. OTHER INFORMATION.

               Not applicable.

69

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

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 2008 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 2008 Definitive Proxy Statement, which sections are hereby incorporated by reference:

Directors Compensation
Executive 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 2008 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, AND DIRECTOR INDEPENDENCE.

The information required by this item will be contained in the following sections of our 2008 Definitive Proxy Statement, which section is hereby incorporated by reference:

Transactions with Related Persons
Director Independence

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by this item will be contained in the following sections of our 2008 Definitive Proxy Statement, which section is hereby incorporated by reference:

Independent Auditors

70

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, 2007 and 2006 72

Other financial statement schedules for the years ended October 31, 2007 and 2006 and financial statement schedules for the year ended October 31, 2005 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.

71

SCHEDULE II

MARTEK BIOSCIENCES CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED OCTOBER 31, 2007 AND 2006

In thousands	Balance at
	Beginning of							Balance at End of
Description	Year		Additions		Deductions			Year
Year ended October 31, 2007:
Deferred tax valuation allowance	$	18,586	$	—	$	(17,036	)	$	1,550
Reserve for inventory obsolescence	$	1,600	$	900	$	(1,200	)	$	1,300
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

72

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 December 28, 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)	December 28, 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)	December 28, 2007
/s/ James R. Beery  James R. Beery	Director	December 28, 2007
/s/ Harry J. D’Andrea  Harry J. D’Andrea	Director	December 28, 2007
/s/ Robert J. Flanagan  Robert J. Flanagan	Director	December 28, 2007
/s/ Polly B. Kawalek  Polly B. Kawalek	Director	December 28, 2007
/s/ Jerome C. Keller  Jerome C. Keller	Director	December 28, 2007

73

Signatures	Title	Date
/s/ Douglas J. MacMaster, Jr.  Douglas J. MacMaster, Jr.	Director	December 28, 2007
/s/ Eugene H. Rotberg  Eugene H. Rotberg	Director	December 28, 2007

74

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, File No. 333-74092, filed on November 28, 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).

2

EXHIBIT
NUMBER#	DESCRIPTION
10.25	Martek Biosciences Corporation 2002 Stock Incentive Plan (filed as Exhibit 1 to the Company’s Definitive Proxy, Schedule 14A, File No. 0-22354, 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 April 30, 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 Nonqualified 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 Nonqualified 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, File No. 0-22354, 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 10.03 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 10.1A to the Company’s current report on Form 8-K, File No. 0-22354, filed on October 6, 2005 and incorporated by reference herein).

3

EXHIBIT
NUMBER#	DESCRIPTION
10.37B	Form of Guaranty Agreement (filed as Exhibit 10.1B 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 10.1C 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 10.1D 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 10.1E 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 (filed as Exhibit 10.42 to the Company’s annual report on Form 10-K, File No. 0-22354, for the year ended October 31, 2006, and incorporated by reference herein). +
10.43	Form of Employment Agreement between the Company and Steve Dubin dated December 21, 2006. (filed as Exhibit 10.43 to the Company’s annual report on Form 10-K, File No. 0-22354, for the year ended October 31, 2006, and incorporated by reference herein). +
10.44	Form of Employment Agreement between the Company and Peter A. Nitze dated November 10, 2006 (filed as Exhibit 10.44 to the Company’s annual report on Form 10-K, File No. 0-22354, for the year ended October 31, 2006, and incorporated by reference herein). +
10.45	Form of Employment Agreement between the Company and David Abramson dated November 10, 2006 (filed as Exhibit 10.45 to the Company’s annual report on Form 10-K, File No. 0-22354, for the year ended October 31, 2006, and incorporated by reference herein). +
10.46	Form of Restricted Stock Unit Agreement for executives under the Martek Bioscience Corporation Amended and Restated 2004 Stock Incentive Plan (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, 2007, and incorporated by reference herein). +
10.47	Form of Restricted Stock Unit Agreement for directors under the Martek Bioscience Corporation Amended and Restated 2004 Stock Incentive Plan (filed as Exhibit 10.02 to the Company’s quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended January 31, 2007, and incorporated by reference herein). +
10.48	Second Amendment to the ARA Alliance, Purchase, and Production Agreement by and between DSM Food Specialties B.V. and the Company (filed as Exhibit 10.01 to the Company’s quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended July 31, 2007, and incorporated by reference herein).*
10.49	Supply Agreement, executed October 5, 2007 and effective January 1, 2007, by and between Abbott Nutrition, a division of Abbott Laboratories, and the Company.** ^
10.50	Settlement Agreement and Release, dated October 15, 2007, by and between the Company, Robert Zuccaro, on his own behalf and as Stockholders’ Representative of certain former interest holders of OmegaTech, Inc.**

4

EXHIBIT
NUMBER#	DESCRIPTION
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.**

*	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.
^	Confidential treatment was requested for certain portions of this agreement. The confidential portions were filed separately with the Commission.
#	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.

5

EX-10.49

EXHIBIT 10.49

SUPPLY AGREEMENT

     THIS SUPPLY AGREEMENT (the “Agreement”) is made as of January 1, 2007 (the “Effective Date”), by and between Abbott Nutrition, a division of Abbott Laboratories, a corporation organized under the laws of Illinois with offices located at 625 Cleveland Avenue, Columbus, OH 43215 (including predecessor and successor entities, subsidiaries, divisions and Affiliates, “PURCHASER”), and Martek Biosciences Corporation, a Delaware corporation with offices located at 6480 Dobbin Road, Columbia, Maryland 21045 (“SELLER”).

WITNESSETH THAT:

     WHEREAS, PURCHASER and SELLER entered into a License Agreement dated as of March 31^st, 2000, which License Agreement is amended by this Agreement solely to the extent expressly provided for herein (as so amended, the “License Agreement”), wherein SELLER has granted to PURCHASER in the Territory (as defined therein) certain rights under Licensed Patents (as defined therein) and Technology (as defined therein) (A) to produce the Licensee Product (as defined therein), (B) to use and make the Martek Products (as defined therein) for purposes of making and having made the Licensee Product and (C) to use, market and distribute the Licensee Product, in each case as further specified in the License Agreement; and

     WHEREAS, PURCHASER wishes to purchase the Martek Products from SELLER; and

     WHEREAS, SELLER is willing to supply the Martek Products for use by PURCHASER to manufacture, use, market and distribute the Licensee Product in accordance with the terms of the License Agreement and as otherwise set forth herein; and

     WHEREAS, such purchase and supply of the Martek Products shall be subject to the terms and conditions set forth in this Agreement.

     NOW, THEREFORE, in consideration of the foregoing premises and of the mutual undertakings herein contained, the parties agree as follows:

ARTICLE 1. DEFINITIONS

     Unless defined herein, all capitalized terms will have the meaning stated in the License Agreement, as amended hereby. References herein to SELLER and PURCHASER shall also be deemed as references to Licensor and Licensee, respectively, for purposes of the License Agreement.

     1.1 * shall mean * as set forth in Exhibit F attached hereto, as such Exhibit may be modified by written agreement of the parties.

     1.2 * shall mean* as such * may be modified by written agreement of the parties.

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 1–

     1.3 “ARA” shall mean arachidonic acid.

     1.4 “DHA” shall mean docosahexaenoic acid.

     1.5 “Growing Up Milk” shall mean nutritionally enhanced milk and soy-milk based products marketed to and intended for use by children from twelve (12) through thirty-six (36) months of age.

     1.6 “Martek Product Specifications” shall mean the specifications for the Martek Products to be supplied hereunder, as set forth in Exhibit C attached hereto, as such Exhibit may be modified by written agreement of the parties.

     1.7 “Unit of the Martek Product” shall mean that quantity of Martek Products containing one (1) kilogram of DHA, one (1) kilogram of ARA, or one (1) kilogram of ARA and DHA in the aggregate.

ARTICLE 2. PURCHASE AND SUPPLY OF COMPOUNDS

     2.1 Purchase.

     2.1.1 Notwithstanding PURCHASER’s right to make and have made DHA and ARA as provided in the License Agreement, during the Term and subject to the terms of this Agreement including without limitation Section 2.7, PURCHASER shall purchase, and/or shall direct the Designee(s) (as defined in Exhibit B hereto) to purchase, from SELLER, PURCHASER’s total requirements of DHA and ARA as required by PURCHASER for use in the manufacture of Infant Formula Products in the Territory in accordance with the terms of the License Agreement and as otherwise set forth herein; provided, however, that such total requirements shall not include PURCHASER’s requirements of DHA and/or ARA for research and development purposes, or * to the extent not prohibited by this Agreement or the License Agreement. For purposes hereof, * includes the * of each formulation of each Licensee Product using * reasonably prior to * as part of reasonable efforts to * following *.

All quantities of the Martek Products purchased by PURCHASER or any Designee under this Agreement shall be used solely for purposes of manufacture and production of Licensee Products, or for research and development purposes related to Infant Formula Products or Growing Up Milk.

     2.1.2 PURCHASER agrees that, unless otherwise expressly provided herein, from and after the Effective Date, the provisions of Sections 2.4(i) and 4.1(vi) of the License Agreement shall be deleted and of no further force or effect, and shall be replaced by the following provisions, which shall survive termination of this Agreement until any later termination or expiration of the License Agreement:

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 2–

(i)

SELLER agrees that (A) the price per Unit of Martek Products and the corresponding price per kilogram, for the same volume of Martek Products for use in Infant Formula Products, charged to PURCHASER have been, since the effective date of the License Agreement, * for Martek Products for use in Infant Formula Products, and (B) the per unit and corresponding per kilogram price for Martek Products for use in Infant Formula Products charged to PURCHASER shall, unless consented to in writing by PURCHASER or * to PURCHASER, *, continue to be *.

(ii)

SELLER shall not enter into * that includes any *, with another company having * greater than * of the * (such * as measured on * basis by * or a mutually agreed replacement therefor), for DHA and/or ARA for use in Infant Formula Products, with an * unless SELLER pays to PURCHASER*; provided, however, that the foregoing provision shall not apply with respect to any company that is an * with respect to Infant Formula Products operating in * as of the Effective Date, or to any company that has received a written offer of * within thirty-six (36) months prior to the Effective Date.

     2.2 Forecasts and Orders.

     2.2.1 On the Effective Date of this Agreement, PURCHASER shall give SELLER written notice of the quantity of Martek Products that PURCHASER estimates in good faith it will order or direct the Designees to order from SELLER during the remainder of the current calendar year. Not later than September 30 of each calendar year during the Term, PURCHASER shall give SELLER written notice of the quantity of Martek Products that PURCHASER estimates in good faith it will order or direct the Designees to order from SELLER during the next calendar year. In addition to the foregoing, one (1) month before the commencement of each calendar quarter during the Term, PURCHASER shall provide SELLER with a forecast (a “Rolling Forecast”) of PURCHASER’s requirements for the Martek Products for each of the succeeding four (4) quarters, specifying quantities and requested delivery dates. These forecasts will be PURCHASER’s good-faith estimate of requirements and shall not be considered a commitment or other obligation of PURCHASER or its Designees to purchase such Martek Products.

     2.2.2 PURCHASER and/or its Designees shall issue formal purchase orders (“Purchase Orders”) at least sixty (60) but no more than ninety (90) days in advance of the date on which PURCHASER or the Designee requests that SELLER deliver the Martek Products pursuant to Section 2.4.1 below. SELLER shall accept and fulfill Purchase Orders from PURCHASER and its Designees made in accordance with the terms of this Agreement for up to * of the relevant volumes specified in the Rolling Forecasts provided by PURCHASER pursuant to Section 2.2.1 above. Purchase Orders for additional amounts shall be accepted and filled by SELLER as is commercially reasonable.

     2.2.3 Purchase Orders submitted in accordance with this Agreement, which have been acknowledged in writing by SELLER, shall be considered as firm and binding orders (subject to the provisions of this Agreement) and shall only be canceled or amended by mutual written agreement of

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 3–

the parties. SELLER shall acknowledge all Purchase Orders submitted in accordance with this Agreement within five (5) business days of SELLER’s receipt of such Purchase Orders.

     2.3 Payment Terms.

     2.3.1 Price. During the Term, PURCHASER or its Designee(s), as applicable based on who placed the Purchase Order, shall pay for the Martek Products that it orders and receives delivery of in accordance with the terms of this Agreement, at the prices determined in accordance with Exhibit A attached hereto (the “Purchase Price”). Since the Purchase Price per Unit of Martek Product is based on an annual volume purchase level, the Purchase Price invoiced for Martek Products purchased hereunder during a given calendar year shall be set using the annual forecasts submitted to SELLER by PURCHASER on September 30^th of the prior calendar year in accordance with Section 2.2.1, subject to adjustments, if applicable, as provided in Section 2.3.2. Notwithstanding the foregoing, if PURCHASER’s relevant September 30 forecast indicates an annual volume that is * below the volume required for the next lower pricing tier, such lower price will be utilized for the invoiced Purchase Price for the relevant calendar year, subject to adjustments, if applicable, as provided in Section 2.3.2.

     2.3.2 Adjustments. If the quantity used to determine the invoiced Purchase Price as provided in Section 2.3.1 is greater than the quantity actually purchased during the relevant calendar year, and, as a result, the Purchase Price paid per Unit of Martek Product should have been higher in accordance with Exhibit A, then SELLER shall invoice PURCHASER within thirty (30) days after the end of such calendar year for an amount equal to the difference, if any, between the total Purchase Price paid and the total Purchase Price payable for the quantity of Martek Products actually purchased from SELLER as specified in Exhibit A. Alternatively, if the quantity actually purchased during the relevant calendar year exceeds the quantity used to determine the invoiced Purchase Price as provided in Section 2.3.1 for such calendar year, and, as a result, the Purchase Price paid per Unit of Martek Product should have been lower in accordance with Exhibit A, then SELLER shall credit against future purchases of the Martek Products by PURCHASER from SELLER an amount equal to the difference, if any, between the total Purchase Price payable for the quantity actually purchased as specified in Exhibit A and the total Purchase Price paid by PURCHASER. Any credit due to PURCHASER shall be made available within thirty (30) days after the end of such calendar year. In the event this Agreement terminates or is cancelled prior to the end of a calendar year, then the payments or, in lieu of credits for future purchases, reimbursements required to effectuate the foregoing shall be made within thirty (30) days of the date following such termination or cancellation.

     2.3.3 Collaboration. In each calendar year (or prorated portion thereof) during the Term, SELLER agrees to provide, as requested by PURCHASER, up to* man hours (or prorated portion thereof in the event of less than a full calendar year) of reasonable assistance to PURCHASER in PURCHASER’s efforts to identify efficiencies in PURCHASER’s shipping and handling of the Martek Products and in other areas as mutually agreed. As to any efficiencies in shipping and handling that may be attained pursuant to the foregoing sentence, * of any resulting savings shall accrue to PURCHASER, and, as to any other efficiencies, the parties shall mutually negotiate and agree in good faith on an apportionment of any savings resulting therefrom prior to undertaking such collaborative efforts.

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 4–

     2.3.4 Taxes. The Purchase Price for the Martek Products is exclusive of any and all national, state or local sales, use, value added or other similar taxes, customs duties and similar tariffs and fees which SELLER or its Affiliates may be required to pay or collect upon the delivery of the Martek Products, or otherwise. Should any such tax or levy be made, PURCHASER agrees to pay such tax or levy and indemnify SELLER for any claim for such tax or levy demanded. In no event, however, shall PURCHASER be responsible for any taxes based on SELLER’s income or similar measures.

     2.3.5 Terms. PURCHASER or the Designee, as applicable, shall pay all correct invoices for amounts due in accordance with Section 2.3.1 above in the United States in U.S. dollars within * from the date of SELLER’s invoice, which invoice shall be dated as of the date of delivery of the invoiced Martek Products in accordance with Section 2.4.1 below. Invoices to Designees shall not reference any Martek Product other than that being delivered for the benefit of PURCHASER hereunder. For any invoices containing invoicing errors, payment shall not be due with respect to the incorrect portions of the invoice only until the invoicing errors are corrected and a new invoice, with respect to the incorrect portions on the original invoice, is received by PURCHASER. In order to induce SELLER to fill orders for the Martek Products placed by the Designees, PURCHASER hereby agrees to * to ensure the timely payment of, and to assist in the collection of, amounts due from the Designees following receipt from SELLER of written notice of nonpayment of correctly invoiced amounts due hereunder from a Designee. Notwithstanding any other provision of this Agreement or the License Agreement, SELLER, at its reasonable discretion, shall have the right to revoke its approval of a particular Designee on sixty (60) days prior written notice to PURCHASER due to SELLER’s reasonable dissatisfaction with the performance of such Designee.

     2.3.6 Sample Request. SELLER may request, up to two (2) times per year, and PURCHASER shall provide following each such request, samples for up to six (6) SKUs of the Licensee Products from PURCHASER’s international markets. Reasonable expenses of filling any such requests shall be borne by SELLER. SELLER shall not resell or distribute such Licensee Products and shall use them only for purposes of display or evaluating their content of Martek Products.

     2.4 Order and Delivery Terms.

     2.4.1 Martek Products shall be delivered ExWorks SELLER’s place of shipment to PURCHASER or its Designee, as specified in the applicable Purchase Order.

     2.4.2 Title to and risk of loss of the Martek Products shall be transferred to PURCHASER or its Designee in accordance with Section 2.4.1 above.

     2.4.3 SELLER shall comply with the Martek Product Specifications, as set forth in Exhibit C attached hereto, and *, with respect to all Martek Product delivered hereunder.

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 5–

     2.4.4 In connection with ordering and delivering the Martek Products hereunder, SELLER and PURCHASER and/or its Designees may employ their standard forms, but nothing in such forms shall be construed to bind SELLER or PURCHASER or its Designees or to modify or amend the terms of this Agreement, and, in case of conflict herewith, this Agreement shall control.

     2.5 Product Recall/Complaints.

     2.5.1 Product Recall. Should the parties’ actions or any governmental action require the recall, destruction or withholding from market of any Martek Product or Licensee Product sold hereunder or pursuant hereto (a “Recall”), then SELLER shall bear the costs and expenses of such Recall to the extent such Recall is the result of the fault or omission of SELLER or its agents or subcontractors, including, by way of example only and not limitation, supplying Martek Product that is not in compliance with the Martek Product Specifications *, and PURCHASER shall bear the costs and expenses of such Recall to the extent such Recall is the result of the fault or omission of PURCHASER or its agents or subcontractors.

     2.5.2 Product Complaints. If SELLER receives a complaint from any Third Party, or if SELLER’s quality assurance group, infant formula business unit managers, or senior management otherwise become aware of a complaint or issue, about Martek Product involving safety concerns, SELLER shall notify PURCHASER in writing (Attn: Quality Assurance), including providing a copy of the complaint, within twenty-four (24) hours.

     2.6 Capacity and Supply.

     2.6.1 SELLER shall manage its manufacturing capacity through process improvement, capital expansion, and/or subcontracting with a Third Party to ensure it has the necessary capacity to manufacture and deliver Martek Product as ordered by PURCHASER in accordance with this Agreement.

     2.6.2 In the event that SELLER subcontracts the manufacture of Martek Product to a Third Party (a “SELLER TPM”), then SELLER shall (i) give PURCHASER at least three (3) months written notice prior to contracting with a SELLER TPM, (ii) disclose the identity and manufacturing location of the SELLER TPM, (iii) ensure that the SELLER TPM is bound to perform the relevant obligations of SELLER set forth pursuant to this Agreement, and (iv) before use of such SELLER TPM to supply Martek Product to PURCHASER, the SELLER TPM must be qualified pursuant to PURCHASER’s reasonable qualification process, which process PURCHASER shall conduct in a timely manner.

     2.6.3 The parties shall cooperate in order to help ensure a continuous supply of Martek Product. In order to help achieve this goal, SELLER shall use reasonable commercial efforts to provide, within six (6) months after the Effective Date, contingency plans for the manufacture by SELLER and/or its SELLER TPMs of Martek Product.

     2.6.4 If SELLER’s management does not reasonably believe that it will be able to supply all of the volumes of Martek Product specified in a Rolling Forecast or any outstanding Purchase

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 6–

Order, then within * of SELLER’s receipt of the relevant Rolling Forecast pursuant to Section 2.2.1, or the occurrence of the event (e.g., a force majeure event or some other event that may interrupt SELLER’s operations) causing such supply concern, SELLER shall in good faith notify PURCHASER in writing of the quantity and timing of any expected shortfall, but any such notification shall not be deemed to be considered a firm commitment or result in any liability or obligation on the part of SELLER except as otherwise expressly set forth in this Agreement.

     2.7 Failure to Supply. In the event that SELLER (a) indicates pursuant to Section 2.6.4 that it is unable to satisfy PURCHASER’s requirements for Martek Product, or (b) fails to supply all of PURCHASER’s requirements for Martek Product pursuant to Purchase Orders accepted and acknowledged in accordance with Sections 2.2.2 and 2.2.3 (a “Shortfall Situation”), then Section 2.7.1 shall apply and, provided that PURCHASER is then in material compliance with the terms of this Agreement, PURCHASER shall be released from the obligation to purchase all of its requirements of Martek Product from SELLER, pursuant to Section 2.1.1, to the extent expressly provided below.

     2.7.1 In any Shortfall Situation, SELLER shall supply the portion of Martek Product that SELLER is capable of supplying, provided that SELLER may allocate Martek Product among its customers so long as SELLER treats PURCHASER*, and in no event shall PURCHASER receive, pursuant to Purchase Orders placed in accordance with the terms of this Agreement, less than that percentage share of available supply capacity that is directly proportionate to PURCHASER’s average percentage of SELLER’s capacity used to supply PURCHASER and its Designees during the prior twelve (12) months. SELLER shall use all commercially reasonable efforts to implement appropriate contingency plans established or subsequently developed by the parties that are designed with the objective of ensuring the continuity of uninterrupted supply of Martek Products as ordered by PURCHASER and its Designees and to otherwise overcome as soon as possible the cause for the inability of SELLER to fulfill PURCHASER’s and its Designees’ purchase orders for Martek Product. SELLER shall work collaboratively with PURCHASER to consider and pursue all other reasonable contingency options and plans.

     2.7.2 If a failure to supply occurs during any * of the Term such that SELLER fails to supply at least * of the amount of Martek Product ordered by PURCHASER and its Designees in the aggregate, or if a Shortfall Situation as described in Section 2.7(a) shall exist, then, as elected by PURCHASER, (y) PURCHASER may itself manufacture up to the Shortfall Quantity (as defined below) of DHA and/or ARA, as relevant, and/or (z) PURCHASER may obtain any remaining Shortfall Quantity of DHA and/or ARA, as relevant, from other sources by utilizing PURCHASER’s license and sublicensing rights as set forth in the License Agreement.

(a) PURCHASER may obtain ARA and/or DHA via the foregoing rights for such period of time as is reasonably necessary for PURCHASER to obtain reasonable cover for SELLER’s failure to provide quantities of the Martek Products ordered hereunder by PURCHASER and its Designees, and to the extent otherwise consistent with PURCHASER’s rights under the License Agreement and this Agreement, but without an obligation to pay a Royalty. For purposes hereof, the “Shortfall Quantity” shall mean a monthly quantity that is * of (A) the maximum monthly shortfall amount

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 7–

reasonably specified by SELLER in any relevant notice given pursuant to Section 2.6.4, or (B) the maximum amount actually ordered by PURCHASER and its Designees pursuant to Purchase Orders placed in accordance with the terms of this Agreement which is not delivered by SELLER in any of the * prior to PURCHASER becoming eligible to exercise its rights under this Section 2.7.2, as relevant.

(b) Notwithstanding the foregoing subpart (a),

(i)

In negotiating any such contract for cover, PURCHASER shall reasonably consult with SELLER as to terms being offered and cooperate in good faith with SELLER in SELLER’s reasonable efforts to ensure it can resume its supply of PURCHASER’s total requirements of Martek Product hereunder upon SELLER’s resumption of its ability to supply such requirements. In any event, PURCHASER shall ensure that any contract for cover can be unilaterally terminated by PURCHASER on no more than * notice, unless otherwise agreed in writing by SELLER, such agreement to not be unreasonably withheld.

(ii)

PURCHASER will use commercially reasonable efforts to minimize the volume requirements and duration of any contract with a Third Party reasonably entered into to obtain cover as permitted herein. In connection with the foregoing sentence, provided SELLER agrees in writing to * PURCHASER for any difference in the price necessary to obtain lesser volumes, a shorter term, and/or a shorter notice period for a unilateral right to terminate early without cause, as applicable, as compared to a lower price that has been offered to PURCHASER in writing by a Third Party for other commercially reasonable terms consistent with PURCHASER’s rights to cover herein, PURCHASER shall agree to accept such higher price in exchange for such obligation of SELLER.

In the event that it is necessary for PURCHASER to contract for more than the Shortfall Quantity in order to obtain cover hereunder pursuant to reasonable commercial terms, PURCHASER shall, following written notice to SELLER of such event, be permitted, subject to the above provisions in this Section 2.7.2, to contract for a reasonable amount in addition to such Shortfall Quantity, provided that, notwithstanding any other provision of this Agreement, PURCHASER shall be required to pay to SELLER the Royalty as provided in the License Agreement (prior to any amendment made hereunder) on Infant Formula Product derived from any such quantity in excess of the Shortfall Quantity. For clarity, if any Shortfall Situation only relates to DHA or ARA, and not both, the rights as provided herein shall only relate to DHA or ARA, as relevant.

     2.7.3 In the event PURCHASER exercises any of its rights above in this Section 2.7 (including due to the force majeure provision in this Agreement), any amounts obtained by PURCHASER in accordance with this Section 2.7 in order to cover for SELLER’s failure to supply hereunder shall be credited to the volumes in the pricing tiers set forth in Exhibit A for the relevant year(s), solely for the purpose of making any adjustments pursuant to Section 2.3.2.

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 8–

     2.7.4 PURCHASER’s exercise of the rights granted in this Section 2.7 shall not be a breach of this Agreement by PURCHASER, and SELLER shall not pursue patent infringement actions against PURCHASER or any Third Party suppliers to the extent their actions are consistent with PURCHASER’s rights under this Section 2.7 and the License Agreement.

ARTICLE 3. WARRANTY AND DISCLAIMER

     3.1 SELLER’s Warranties. SELLER represents and warrants that:

     3.1.1 All Martek Products will be manufactured in accordance with current good manufacturing practices and in accordance with the characteristics, composition, stability and other requirements included in the Martek Product Specifications set forth in Exhibit C and *.

     3.1.2 All Martek Products manufactured and delivered to PURCHASER or any Designee pursuant to this Agreement will, at the time of such delivery, not be adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act, as amended (the “Act”) or within the meaning of any applicable state or municipal law in which the definitions of adulteration and misbranding are substantially the same as those contained in the Act, as such Act and such laws are constituted and effective at the time of delivery and will not be an article that may not be introduced into interstate commerce.

     3.1.3 If any Martek Products fail to conform to the warranties set forth in Sections 3.1.1 and 3.1.2 above, SELLER, *, shall either replace the nonconforming Martek Products or refund to PURCHASER or its Designee, as applicable, the Purchase Price paid by PURCHASER or its Designee, as applicable, for the nonconforming Martek Products (including duty, freight, insurance charges, and other similar related expenses).

     3.1.4 To the knowledge of any of SELLER’s senior management (which includes SELLER’s General Counsel), as of the signing of this Agreement, there are no valid and enforceable Third Party patents that are infringed by SELLER’s manufacture or sale, in the Territory, of the Martek Products.

     3.2 SELLER’s Disclaimers.

     3.2.1 EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, SELLER HEREBY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS AND IMPLIED, INCLUDING WITHOUT LIMITATION ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, RELATING TO THE TECHNOLOGY OR THE MARTEK PRODUCTS. SELLER MAKES NO REPRESENTATIONS OR WARRANTIES AND HAS NO DUTY TO ENSURE THAT THE TECHNOLOGY OR THE MARTEK PRODUCTS ARE USABLE WITH THE LICENSEE PRODUCT OR CAN BE INCORPORATED SAFELY INTO THE LICENSEE PRODUCT. IT IS HEREBY ACKNOWLEDGED AND AGREED THAT IT SHALL BE PURCHASER’S RIGHT AND OBLIGATION TO DETERMINE THE SAFETY AND UTILITY OF THE USE OF THE

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 9–

MARTEK PRODUCTS WITH EACH LICENSEE PRODUCT; PROVIDED, HOWEVER, THAT THIS PROVISION DOES NOT SERVE TO RELIEVE MARTEK OF ITS OBLIGATIONS AS OTHERWISE SET FORTH IN THIS AGREEMENT.

     3.2.2 EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, SELLER FURTHER DISCLAIMS ANY WARRANTY RELATING TO THE PATENTABILITY OF, OR THE VALIDITY OF ANY PATENTS RELATING TO, THE TECHNOLOGY, OR THE MARTEK PRODUCTS AND MAKES NO REPRESENTATIONS WHATSOEVER WITH REGARD TO THE SCOPE OF ANY LICENSED PATENTS OR THAT ANY LICENSED PATENTS MAY BE COMMERCIALLY EXPLOITED WITHOUT INFRINGING OTHER PATENTS.

     3.3 Mutual Warranties. SELLER and PURCHASER, as to its respective self, each represents and warrants to the other as follows:

     3.3.1 That its execution and delivery of this Agreement and its performance of the transactions contemplated hereby have been duly authorized by all necessary corporate actions.

     3.3.2 That its performance of any of the terms and conditions of this Agreement will not constitute a breach or violation of any other agreement or understanding, written or oral, to which it or its Affiliates is a party.

     3.3.3 To the best of its knowledge after the exercise of reasonable diligence, as of the Effective Date, no actions have been threatened in writing or are pending before any court or governmental agency or other tribunal that would affect its ability to perform its obligations under this Agreement.

ARTICLE 4. TERM; TERMINATION

     4.1 Term. This Agreement shall commence on the Effective Date and, subject to possible earlier termination of this Agreement in accordance with the terms hereof, shall terminate on the tenth (10^th) anniversary of the Effective Date (the “Term”).

     4.2 Termination.

     4.2.1 Termination in Case of Material Breach; Opportunity to Cure. Either party to this Agreement may terminate this Agreement upon thirty (30) days prior written notice if the other party shall commit a material breach of this Agreement and shall not cure such breach within such thirty (30) day period. Any such written notice to terminate shall include a detailed statement as to the notifying party’s claimed material breach by the notified party.

     4.2.2 Termination in Case of Infringement. PURCHASER shall have the right to terminate this Agreement in a particular jurisdiction within the Territory if a court or other tribunal of competent jurisdiction determines by final order that the Technology or the Martek Products infringe upon the patent or other proprietary rights of any Third Party in such jurisdiction; provided, however, that if, prior to any such termination, SELLER develops a non-infringing

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 10–

alternative or obtains a license from such Third Party, such that PURCHASER could lawfully use the Technology and/or the Martek Products (as the case may be) in a commercially reasonable manner as permitted in this Agreement or the License Agreement in connection with the Licensee Products at no additional cost or expense to PURCHASER beyond that expressly provided in this Agreement, PURCHASER shall not terminate this Agreement pursuant to this Section 4.2.2. *.

     4.2.3 Termination in Case of Insolvency; Change of Control.

(i)

Notwithstanding any other provisions of this Agreement, either party to this Agreement may terminate this Agreement upon giving notice to the other, should the other commit an act of bankruptcy, declare bankruptcy, be declared bankrupt, enter into an arrangement for benefit of creditors, enter into a procedure of winding up or dissolution, or should a trustee or receiver be appointed for the other or upon the expropriation, takeover or nationalization of the other party or a majority portion of its assets by governmental action.

(ii)

In the event of any assignment of this Agreement pursuant to Section 9.7 by SELLER to any of the following entities, including to any acquirer, successor, assign, or person controlling, or under the common control of, any such named entity, and any other entity carrying on an infant formula business substantially similar to the businesses on an equivalent or greater scale to that carried on by any of such named entities, PURCHASER shall be entitled to terminate this Agreement by providing written notice of such intent to SELLER and to SELLER’s assignee at any time within sixty (60) days of receipt by PURCHASER of such notice of assignment: *. The date on which PURCHASER desires any such termination to become effective shall be indicated in its notice hereunder, and shall in no event be more than three hundred sixty-five (365) days after the date of PURCHASER’s notice.

     4.2.4 Early Termination. PURCHASER, with or without cause, unilaterally may terminate this Agreement effective as of or after the fifth (5^th) anniversary of the Effective Date of the Agreement, provided that written notice thereof is provided to SELLER at least twelve (12) months prior to the intended effective termination date.

     4.3 Effect of Termination. Upon termination of this Agreement, PURCHASER and its Affiliates and Designees may continue, for a period of up to six (6) months, to manufacture and produce Licensee Products containing the Martek Products purchased hereunder, and to thereafter use, market, offer for sale, sell, promote and distribute, to the extent lawful, any such Licensee Products. Upon termination of this Agreement on account of SELLER’s breach of this Agreement, PURCHASER shall have the right, but not the obligation, to request SELLER to purchase from PURCHASER and its Affiliates and Designees, at the cost paid for such Martek Products, PURCHASER’s unused inventories of the Martek Products, and upon such a request SELLER shall purchase such Martek Products.

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 11–

     4.4 Effect on License Agreement. Except to the extent specified in the second sentence of this Section 4.4, the provisions of this Agreement, including without limitation the provisions of Exhibit A and Exhibit B attached hereto, expressly amend Article I and Sections 1.2, 2.1, 2.3, 2.4, 3.4, 4.1(iii), 4.1(iv), 4.1(v), 4.1(vi), 4.4, 6.1, 6.2 and 6.3 of the License Agreement, and such amendments shall survive any termination of this Agreement, and the parties hereby ratify the terms of the License Agreement as amended by this Agreement. Upon termination of this Agreement, notwithstanding any other provision hereof, the License Agreement shall continue in accordance with the terms in effect as amended by this Agreement, except that (a) the amendments in this Agreement to Sections 4.1(iii) through 4.1(vi) of the License Agreement, and (b) the amendment to the License Agreement that is in Section 6 of Exhibit B to this Agreement, shall each be of no further force or effect from and after the effective date of termination.

ARTICLE 5. COVENANTS

     5.1 License Agreement. During the Term, Sections 6.1, 6.2 and 6.3 of the License Agreement shall be deemed deleted in their entirety and replaced with Sections 5.3, 5.4 and 5.5 below.

     5.2 Licensed Patents. It shall be solely SELLER’s responsibility to prosecute, defend, and maintain the Licensed Patents.

     5.3 Compliance with Law; Regulatory Approval; Manufacturing Audits.

     5.3.1 Each of SELLER and PURCHASER (itself and on behalf of its Affiliates) covenants and agrees that it shall conduct all of its operations dealing with the Technology, the Martek Products and the Licensee Product, in material compliance with all applicable laws, regulations and other requirements which may be in effect from time to time, of all national governmental authorities, and of all states, municipalities and other political subdivisions and agencies thereof, including, without limiting the generality of the foregoing, the Federal Food, Drug, and Cosmetic Act, the regulations and other requirements of the United States Food and Drug Administration, similar state laws and regulations or similar laws and other requirements in the Territory, including any and all amendments, as may be applicable in any jurisdiction in the Territory in which any Martek Products, or Licensee Product, as applicable, is sold.

     5.3.2 It shall be PURCHASER’s, and not SELLER’s, responsibility to secure any regulatory approvals for Licensee Products in the Territory that may be necessary in connection with exercise by PURCHASER of the rights granted to it under this Agreement; provided, however, that PURCHASER shall not be obligated to take any specific action or measure to seek regulatory approval for or to market Licensee Products. In connection with the immediately foregoing sentence, PURCHASER shall not intentionally impair SELLER’s ability to obtain any regulatory approval of the Martek Products by the competent governmental authorities in any Territory and for any product that SELLER may elect to pursue, and SELLER shall not intentionally impair PURCHASER’s ability to obtain any regulatory approval of the Licensee Product by the competent governmental authorities in any Territory and for any Licensee Product that PURCHASER may elect to pursue.

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 12–

     5.3.3 PURCHASER may, with reasonable notice, inspect and/or conduct audits, including, without limitation, Compliance Audits of any SELLER plants used for the manufacture of Martek Product hereunder (“Plants”). In connection therewith, PURCHASER and/or its designated representatives shall have the right to (i) enter those Plants where the Martek Products are manufactured, tested, packaged, stored, handled, or shipped, (ii) examine such facilities and the manufacture and quality control records relating to Martek Products, and (iii) inspect and audit the ingredients, work in process, inventories, premises, documentation, manufacturing methods, testing practices and results, packaging procedures, and all other matters associated with the manufacture and packaging of Martek Product or otherwise related to SELLER’s performance under this Agreement, in each case to the extent reasonably related to ensuring SELLER’s compliance with its obligations hereunder. Such inspections and/or audits shall be held during normal business hours and shall be conducted in accordance with SELLER’s reasonable directions and health and safety and other protocols as applicable at the relevant Plant or other facility.

For the purposes of this Agreement, the term “Compliance Audit” shall mean a review by appropriate representatives of PURCHASER of those portions of each Plant at which the manufacture, packaging, and/or storage of Martek Product being purchased by PURCHASER has been or is then being conducted, for purposes of reasonably reviewing SELLER’s procedures and processes used in the manufacture, packaging, and/or storage of Martek Product, including, but not limited to, production and quality control records and investigations of quality specifically relating to Martek Product. A SELLER representative shall accompany any of PURCHASER’s representatives, including PURCHASER’s employees, while such individuals are on the premises of SELLER or its Affiliates. In connection with any such audit, PURCHASER and its representatives shall comply with those site procedures, instructions of SELLER’s representatives, and instructions applicable to employees of SELLER of which PURCHASER shall be reasonably notified. SELLER shall cooperate with and provide reasonable assistance to PURCHASER during such audit. All Compliance Audits shall be at PURCHASER’s expense. Visits by PURCHASER representatives to SELLER’s facilities may involve the transfer of Confidential Information and shall be subject to the terms of Article 8 hereof. The results of such audits and inspections shall also be considered Confidential Information under Article 8.

PURCHASER shall submit to SELLER a written report outlining its findings, observations, and items PURCHASER believes require corrective action from any such Compliance Audit. Within thirty (30) days after receipt of any such report from PURCHASER, SELLER shall respond to PURCHASER in writing, which response shall include a detailed corrective and preventative action plan along with a timetable, reasonably acceptable to PURCHASER for resolution of any matters either identified by PURCHASER as or otherwise deemed to be a material finding. If the parties are unable to agree on the terms of any corrective and/or preventive actions (including whether or not any is required), or resolve any such matters identified pursuant to this section, such terms or matters shall be shall be resolved in accordance with the Alternative Dispute Resolution process in Exhibit D.

SELLER shall use commercially reasonable efforts to obtain similar audit rights for PURCHASER with respect to any SELLER TPM, as defined in Section 2.6.2.

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 13–

     5.4 Performance and Product Quality. PURCHASER covenants and agrees that it and its Affiliates shall exercise a reasonable standard of care and quality control in the testing, manufacturing, marketing, packaging, distribution and sale of each Licensee Product. PURCHASER further covenants and agrees that it and its Affiliates shall maintain quality control, provide adequate tests of materials, provide quality workmanship, and do such other things as are reasonably required to help assure high quality production of such Licensee Products.

     5.5 Audit Rights.

     5.5.1 SELLER covenants and agrees that SELLER shall keep true and accurate records as is reasonably necessary to allow PURCHASER to verify SELLER’s compliance with * this Agreement. Such records shall be made available during business hours upon prior written request by PURCHASER, which request shall be made no more than once in any calendar year, for inspection by a Third Party independent accountant who is not the auditor of record for PURCHASER and who is reasonably acceptable to SELLER and who shall be bound by a confidentiality agreement with SELLER. Such inspection shall be limited to the extent necessary for the determination of compliance with such provisions. Such records shall be retained for a period of three (3) years following the year to which they relate. Such records shall be limited to those records reasonably necessary to verify SELLER’s compliance with Section 2.1.2 of this Agreement. The accountant shall provide PURCHASER with a report containing the accountant’s conclusions, but not the inspected records nor the information contained therein, and shall concurrently provide SELLER with such report. In the event the Third Party independent accountant shows non-compliance with Section 2.1.2 and the parties cannot agree on a resolution, then the arbitration provisions of Exhibit D will apply. PURCHASER shall bear the full cost of any such audit: provided that if the audit, as reasonably agreed by SELLER or as determined via the arbitration provisions of Exhibit D, shows an overpayment by PURCHASER of * or greater of the amounts audited, and in any event an overpayment of at least *, SELLER shall bear the reasonable out-of-pocket costs paid by PURCHASER to the Third Party accountant for the audit.

     5.5.2 PURCHASER covenants and agrees that PURCHASER shall keep true and accurate records regarding PURCHASER’s compliance with the terms of Section 2.1.1 of this Agreement. Such records shall be made available during business hours upon prior written request by SELLER, which request shall be made no more than once in any calendar year, for inspection by a Third Party independent accountant who is not the auditor of record for SELLER and who is reasonably acceptable to PURCHASER and who shall be bound by a confidentiality agreement with PURCHASER. Such inspection shall be limited to the extent necessary for the determination of compliance with such provision. Such records shall be retained for a period of three (3) years following the year to which they relate. Such records shall be limited to those records reasonably necessary to verify PURCHASER’s compliance with Section 2.1.1 of this Agreement. The accountant shall provide SELLER with a report containing the audit’s conclusions, but not the inspected records nor the information contained therein, and shall concurrently provide PURCHASER with such report. In the event the Third Party independent accountant shows

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 14–

non-compliance with Section 2.1.1 and the parties cannot agree on a resolution, then the arbitration provisions of Exhibit D will apply.

ARTICLE 6. LIMITATION OF LIABILITY

     6.1 Indirect Damages. EXCEPT AS SET FORTH IN ARTICLE 7, OR UNLESS ARISING FROM THE WILLFUL OR INTENTIONAL MISCONDUCT OR GROSS NEGLIGENCE OF A PARTY, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL, OR SIMILAR DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS OR BUSINESS OPPORTUNITY, WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE) OR ANY OTHER THEORY UPON WHICH ONE PARTY MAY SEEK REMEDIES AGAINST THE OTHER (“INDIRECT DAMAGES”). EXCEPT AS SET FORTH IN ARTICLE 7, IN NO EVENT SHALL A PARTY BE RESPONSIBLE FOR PUNITIVE OR EXEMPLARY DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT.

     6.2 Maximum Aggregate Liability. EXCEPT FOR LIABILITY WHICH IS THE SUBJECT OF INDEMNIFICATION AS SET FORTH IN ARTICLE 7, OR UNLESS ARISING FROM THE WILLFUL OR INTENTIONAL MISCONDUCT OR GROSS NEGLIGENCE OF A PARTY, NEITHER PARTY’S TOTAL LIABILITY TO THE OTHER PARTY DURING ANY CALENDAR YEAR AND ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, WHETHER BASED ON BREACH OF CONTRACT OR TORT (INCLUDING NEGLIGENCE), SHALL EXCEED THE GREATER OF (I) THE TOTAL PURCHASE PRICE OF MARTEK PRODUCT SOLD TO PURCHASER AND ITS DESIGNEES UNDER THIS AGREEMENT DURING THE PRIOR CALENDAR YEAR AND (II) *.

ARTICLE 7. INDEMNIFICATION

     7.1 Indemnity by SELLER. Except to the extent of Losses for which PURCHASER has agreed to indemnify SELLER pursuant to Section 7.2(ii) and (iii) below, SELLER shall indemnify, defend, and hold harmless PURCHASER, PURCHASER’s Affiliates, and PURCHASER’s and PURCHASER’s Affiliates’ directors, officers, employees, and agents from and against all costs, expenses, damages, losses and liabilities (“Losses”) asserted by a Third Party against PURCHASER, PURCHASER’s Affiliates, or PURCHASER’s or PURCHASER’s Affiliates’ directors, officers, employees, or agents for which any of them may become liable or incur or be compelled to pay to the extent such Losses result from: (i) SELLER’s or its Affiliates’ breach of any of its obligations, representations or warranties under this Agreement; (ii) a failure of the Martek Product to conform to the Martek Product Specifications * or a defect in the Martek Product existing as of delivery of such Martek Product pursuant to Section 2.4.1 (including latent defects); or (iii) any negligence, gross negligence, or willful or intentional misconduct of SELLER or any of its Affiliates.

     7.2 Indemnity by PURCHASER. Except to the extent of Losses for which SELLER has agreed to indemnify PURCHASER pursuant to Section 7.1 above, PURCHASER shall indemnify, defend, and hold harmless SELLER, SELLER’s Affiliates, and SELLER’s and

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 15–

SELLER’s Affiliates’ directors, officers, employees, and agents from and against all Losses asserted by a Third Party against SELLER, SELLER’s Affiliates, or SELLER’s or SELLER’s Affiliates’ directors, officers, employees, or agents for which any of them may become liable or incur or be compelled to pay to the extent such Losses result from: (i) the production, manufacture, use, importation, distribution or sale of Licensee Products, including, without limitation, product liability claims; (ii) PURCHASER’s or its Affiliates’ breach of any obligations, representations or warranties under this Agreement; or (iii) any negligence, gross negligence, or willful or intentional misconduct of PURCHASER or any of its Affiliates.

     7.3 Condition to Indemnification. If either party expects to seek indemnification under this Article 7, it shall promptly give notice to the indemnifying party of the basis for such claim of indemnification. If indemnification is sought as a result of any Third Party claim or suit, such notice to the indemnifying party shall be given within fifteen (15) days after receipt by the other party of such claim or suit; provided, however, that the failure to give notice within such time period shall not relieve the indemnifying party of its obligation to indemnify except to the extent that it shall be materially prejudiced by the failure. Each party shall fully cooperate with the other party in the defense of all such claims or suits. The indemnifying party shall have sole authority to defend and/or settle such claim or suit; provided, however, that the indemnified party shall have the right to participate in its defense at its own expense, and no offer of settlement, settlement or compromise shall be binding on a party hereto without its prior written consent (which consent shall not be unreasonably withheld) unless such settlement fully releases such party without any liability, loss, cost, or obligation to such party.

     7.4 Survival of Indemnity Obligation. The indemnification obligations provided in this Agreement shall survive the expiration or termination of this Agreement, whether occasioned by the Agreement’s expiration pursuant to Section 4.1 above or earlier termination pursuant to the other Sections of Article 4 above.

ARTICLE 8. CONFIDENTIALITY

     8.1 Disclosure of Information. All the Technology and all other information provided hereunder by the parties pursuant to and in execution of their obligations and in exercise of their rights under this Agreement, including, without limitation, the terms of this Agreement, the Martek Product Specifications, and *, shall be deemed confidential (“Confidential Information”). SELLER and PURCHASER acknowledge and agree that the value of the Technology, the Martek Products, and the Licensee Products is based, to a large extent, on maintaining the confidentiality of the Technology, the Martek Products, and the Licensee Products and preventing any unauthorized dissemination to or use by Third Parties of Confidential Information relating to the Technology, the Martek Products, or the Licensee Products. Confidential Information hereunder shall be safeguarded by the recipient and shall not be disclosed to Third Parties and shall be made available only to the receiving party’s employees, agents or permitted subcontractors who have a need to know such information for purposes of performing the party’s obligations, or for purposes of exercising the party’s rights, under this Agreement, and such employees, agents or permitted subcontractors shall have a legal obligation to the party hereunder from whom they receive Confidential Information not to disclose such information to Third Parties and not to use it in any

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 16–

manner other than as permitted herein. Each party shall treat, and PURCHASER shall ensure that its Affiliates treat, any and all such Confidential Information in a reasonable manner, and in any event with no less than the same level of protection as such party maintains its own Confidential Information. These mutual obligations of confidentiality shall not apply to any information to the extent that such information: (i) is or later becomes generally available to the public, such as by publication or otherwise, through no fault of the receiving party; (ii) is obtained from a Third Party having the legal right to make such a disclosure without obligations of confidentiality; (iii) is independently developed by a party without access to the Confidential Information, as evidenced by written records; or (iv) is known to the receiving party before receipt thereof under this Agreement or the License Agreement, as evidenced by the receiving party’s written records. SELLER, PURCHASER or PURCHASER’s Affiliates shall not remove from any communications or other documents delivered by a disclosing party any proprietary notices affixed thereto by the disclosing party.

     Notwithstanding the foregoing, (y) SELLER may issue the press release set forth in attached Exhibit E upon final execution of this Agreement and (z) SELLER and PURCHASER may disclose (including but not limited to disclosure in response to questions, interrogatories, requests for information or documents in legal proceedings, subpoenas, civil investigative demand or other similar process) or announce to any Third Person, disclose in any filings under applicable securities laws or regulations or otherwise make any public disclosure or issue a press release concerning (a) the fact and the nature of this Agreement and the transactions to be performed pursuant hereto; or (b) any Confidential Information of the other party, as and to the extent required by applicable law or government agency of the United States and the countries of the Territory, including, but not limited to, any applicable disclosure requirements under the federal securities laws or regulations thereunder, provided that in the case of each such disclosure, announcement or press release, the disclosing party, upon the advice of outside counsel, in good faith deems the disclosure necessary to comply with the foregoing and to the extent practicable and consistent with applicable laws, gives reasonable prior written notice to the other party and gives the other party such assistance as the other party may reasonably request, in accordance with applicable law, in order to prevent, challenge, modify or protect such disclosure. In addition, SELLER and PURCHASER may disclose the fact and the terms of this Agreement to its attorneys and accountants without notice to the other party, and PURCHASER may deliver a copy of this Agreement to any Affiliate, so long as any such recipient has undertaken, in writing, an obligation to maintain the terms of this Agreement in confidence.

     8.2 Post-Termination Obligations. The mutual confidentiality obligations of the parties under the provisions of this Article 8 shall survive the expiration or termination of this Agreement for a period of ten (10) years from the date thereof. Upon expiration or termination of this Agreement, each party shall promptly return to the other all Confidential Information disclosed or delivered to such party pursuant to this Agreement and then in existence, subject to the retention by such party of one (1) copy thereof for archival purposes only.

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 17–

ARTICLE 9. GENERAL PROVISIONS

     9.1 Dispute Resolution. SELLER and PURCHASER covenant and agree to use their diligent efforts to resolve any disputes that arise between them in the future and are related to this Agreement through negotiation and mutual agreement and, if good faith efforts to so negotiate and mutually agree are unavailing, through binding arbitration under the procedures set forth herein. When either party determines that there is a dispute subject to arbitration under this Agreement, it shall promptly send written notice of the dispute to the other party. The parties agree that for a period of thirty (30) days from the sending of such written notice, they shall in good faith negotiate to resolve the dispute. Subject to the foregoing, any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled pursuant to a binding dispute resolution procedure as set forth on the attached Exhibit D. Notwithstanding the foregoing, the parties acknowledge and agree that each of them shall have the right to seek immediate injunctive and other equitable relief through the courts in the event of any material breach of this Agreement by the other party that would cause the non-breaching party irreparable injury for which there would be no adequate remedy at law.

     9.2 Information Exchange. During the Term, the parties shall promptly notify each other of any report of an adverse event associated with the use of Martek Products in any Licensee Product. PURCHASER shall have sole discretion in determining what action, if any, is to be taken by PURCHASER in connection with any adverse event relating to a Licensee Product. In addition, PURCHASER may, in its sole discretion, on a semi-annual basis, provide to SELLER market data relating to the countries in which PURCHASER is selling Licensee Products, the brands under which such products are sold, and whether such products are premium or full line conversions.

     9.3 Force Majeure. Neither party to this Agreement shall be liable for damages due to delay or failure to perform any obligation under this Agreement, other than an obligation to make payments, if such delay or failure results directly or indirectly from circumstances beyond the reasonable control of such party and constituting a force majeure event. A force majeure event shall include, but shall not be limited to, acts of God, acts of war, acts of terrorism, civil commotions, riots, strikes, lockouts, acts of the government in either its sovereign or contractual capacity, perturbation in telecommunications transmissions, inability to obtain suitable equipment or components or raw materials, accident, fire, water damages, flood, earthquake, or other natural catastrophes. Upon occurrence of a force majeure event, the party affected shall promptly notify the other in writing, setting forth the details of the occurrence, and make reasonable commercial efforts to resume the performance of its obligations as soon as practicable after the force majeure event ceases. If remittance of U.S. Dollars is prevented or impaired for reasons of force majeure, the party owing the money shall settle such obligations in the manner as reasonably agreed to by the parties, such agreement of a party not to be unreasonably withheld or delayed. Should the effect of force majeure continue for more than six (6) consecutive months, the party to whom the performance is owed may terminate this Agreement without liability (other than for claims arising prior to the effective date of termination) on thirty (30) days notice to the party impaired by force majeure.

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 18–

SELLER expressly acknowledges that under this Agreement SELLER is a strategic and essential supplier for PURCHASER’s ongoing business. Accordingly, notwithstanding anything in this Agreement to the contrary, upon the occurrence of a force majeure event affecting SELLER’s ability to supply Martek Products as ordered by PURCHASER or its Designees in accordance with the terms of this Agreement, the provisions of Section 2.7 shall apply.

     9.4 Insurance. PURCHASER is self-insured with respect to product liability insurance covering Licensee Products. SELLER, at its sole cost and expense, shall procure and maintain in force a policy of comprehensive general liability insurance, including bodily injury, death, and property damage, and product liability coverage, of not less than Ten Million Dollars ($10,000,000.00) per occurrence and Ten Million Dollars ($10,000,000) in the aggregate, covering SELLER’s performance under this Agreement, including the Martek Products, with PURCHASER named as an additional insured and loss payee and providing for at least thirty (30) days prior written notice to PURCHASER of any cancellation, termination or change of such insurance coverage. PURCHASER may request from SELLER a certificate evidencing such insurance and such certificate shall be promptly provided. The minimum insurance coverage set forth above shall be maintained at all times unless changed to equivalent coverage by another carrier upon thirty (30) days prior written notice to PURCHASER. Any successor to or permitted assignee of this Agreement shall similarly procure and maintain such insurance coverage.

     9.5 Notices. Notices required under this Agreement shall be in writing and sent by registered mail, by facsimile transmission, by nationally recognized overnight courier service, or by hand delivery, with written verification of receipt and date of receipt, to the respective parties at the following addresses:

     Notices to SELLER:

Martek Biosciences Corporation
6480 Dobbin Road
Columbia, Maryland 21045
Facsimile: (410) 740-2985
Attn: General Counsel

     Notices to PURCHASER:

Abbott Nutrition
625 Cleveland Ave., Dept. 102300
Columbus, OH 43215
Attn: Manager of Purchasing
Facsimile: (614) 624-6677

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 19–

With a copy to:

Senior Counsel, Abbott Nutrition Legal Operations
Abbott Nutrition
625 Cleveland Ave., Dept. 102300
Columbus, OH 43215
Facsimile: (614) 624-3074

Abbott Nutrition
200 Abbott Park Road
Abbott Park, IL 60064
Attn: Executive Vice President, Global Nutrition
Facsimile: (847) 935-3260

or to such other addresses as either party may designate by a notice given in compliance with this paragraph, and shall be deemed effective when received.

     9.6 Entire Agreement. The terms and provisions contained in this Agreement and its Exhibits constitute the entire agreement between the parties on the subject matter hereof and shall supersede all previous communications, representations, agreements or understandings, either oral or written, between the parties hereto with respect to the subject matter hereof. In the event of any conflict between the terms of this Agreement and the License Agreement, the provisions of this Agreement shall supersede and shall be controlling. No agreement or understanding varying or extending this Agreement will be binding upon either party hereto, unless in a writing which specifically refers to this Agreement, and signed by duly authorized officers or representatives of the respective parties. The provisions of this Agreement not specifically amended by any such further amendment shall remain in full force and effect.

     9.7 Assignment. No party may transfer or assign this Agreement or any of its rights or obligations under this Agreement, directly, indirectly, or in connection with any change in control (with change in control meaning the acquisition of more than fifty percent (50%) of the voting shares of a party or of more than fifty percent (50%) of the assets of a party by any person, entity, or group (whether in a single transaction or a series of transactions)), without the prior written consent of the other party, which consent shall not be unreasonably withheld; provided, however, that either party may, without such other party’s consent, assign its rights and obligations in whole or in part under this Agreement to an affiliate or wholly-owned subsidiary of such party. Notwithstanding the foregoing sentence, either party (“the first Party”) may assign this Agreement and/or its rights or obligations under this Agreement, without the prior written consent of the other party, to any acquirer of all or substantially all of the first Party’s business (which in PURCHASER’s case means its infant formula business, and in SELLER’s case means its entire business) provided that prior notice of the assignment has been given by the first Party to the other party. In the event of any permitted assignment, this Agreement will bind and inure to the benefit of the assignee. Any purported assignment without a required consent shall be void. Any permitted assignee shall assume all obligations of its assignor under this Agreement. No

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 20–

assignment shall relieve any party of its responsibility for the performance of any obligations that accrued prior to the effective date of such assignment.

     9.8 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be a duplicate original, but which, taken together, shall be deemed to constitute a single instrument.

     9.9 Severability. If any provision of this Agreement is declared void or unenforceable by any relevant judicial or administrative authority, such declaration shall not of itself nullify the remaining provisions of this Agreement. Consequently, the parties shall meet to determine the effect of any such declaration and any variations to this Agreement which are mutually desirable.

     9.10 Waiver. No waiver by either party of any breach of any of the terms or conditions herein provided to be performed by the other party shall be construed as a waiver of any subsequent breach, whether of the same or of any other term or condition hereof.

     9.11 Headings. Section headings contained in this Agreement are inserted for convenience of reference only, shall not be deemed to be a part of this Agreement for any purpose, and shall not in any way define or affect the meaning, construction or scope of any of the provisions hereof.

     9.12 Survival. Sections 2.1.2, 2.5.1, 2.7.4, 3.1.4, 3.2, 3.3, 4.3, 4.4, 5.3.1, 5.5, 9.1, 9.5, 9.6, 9.7, 9.9, 9.10, 9.11, 9.12, 9.13 and 9.14, and Articles 6 and 7 shall survive the termination or expiration of this Agreement for the longer of five (5) years or the term of the License Agreement; Section 8 shall survive the termination or expiration of this Agreement for ten (10) years; and Section 9.4 shall survive the termination or expiration of this Agreement for two (2) years.

     9.13 Construction of Agreement. This Agreement shall be construed and the respective rights of the parties shall be determined under and pursuant to the laws of the State of Delaware, without regard to the principles of conflict of laws thereof. The parties expressly exclude the applicability of the Convention on Contracts for the International Sale of Goods.

     9.14 Relationship between Parties. Neither party to this Agreement shall have the power to bind the other by any guarantee or representation that either party may give, or in any other respect whatsoever, or to incur any debts or liabilities in the name of or on behalf of the other party, and for purposes of this Agreement, the parties hereto hereby acknowledge and agree that they shall not be deemed partners, joint venturers, or to have created the relationship of agency or of employer and employee between the parties.

     9.15 Debarment and Exclusion. SELLER represents and warrants that neither it, nor any of its employees or agents performing hereunder, have ever been, are currently, or are the subject of a proceeding that could lead to it or such employees or agents becoming, as applicable, a Debarred Entity or Individual, an Excluded Entity or Individual or a Convicted Entity or Individual. SELLER further covenants, represents and warrants that if, during the term of this Agreement, it, or any of its employees or agents performing hereunder, become or are the subject of a proceeding that could lead to that party becoming, as applicable, a Debarred Entity or

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 21–

Individual, an Excluded Entity or Individual or a Convicted Entity or Individual, SELLER shall immediately notify PURCHASER, and PURCHASER shall have the right to immediately terminate this Agreement. This provision shall survive termination or expiration of this Agreement. For purposes of this provision, the following definitions shall apply:

     9.15.1 A “Debarred Individual” is an individual who has been debarred by the FDA pursuant to 21 U.S.C. §335a (a) or (b) from providing services in any capacity to a person that has an approved or pending drug product application.

     9.15.2 A “Debarred Entity” is a corporation, partnership or association that has been debarred by the FDA pursuant to 21 U.S.C. §335a (a) or (b) from submitting or assisting in the submission of any abbreviated drug application, or a subsidiary or affiliate of a Debarred Entity.

     9.15.3 An “Excluded Individual” or “Excluded Entity” is (i) an individual or entity, as applicable, who has been excluded, debarred, suspended or is otherwise ineligible to participate in federal health care programs such as Medicare or Medicaid by the Office of the Inspector General of the U.S. Department of Health and Human Services (“OIG/HHS”), or (ii) is an individual or entity, as applicable, who has been excluded, debarred, suspended or is otherwise ineligible to participate in federal procurement and non-procurement programs, including those produced by the U.S. General Services Administration (“GSA”).

(REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)

     9.15.4 A “Convicted Individual” or “Convicted Entity” is an individual or entity, as applicable, who has been convicted of a criminal offense that falls within the ambit of 21 U.S.C. §335a (a) or 42 U.S.C. §1320a — 7(a), but has not yet been excluded, debarred, suspended or otherwise declared ineligible.

     IN WITNESS WHEREOF, this Supply Agreement has been executed in English in four copies, each a duplicate original, of which two are for SELLER and two are for PURCHASER, as of the day and year first above written.

MARTEK BIOSCIENCES CORPORATION			ABBOTT NUTRITION, a division of ABBOTT LABORATORIES
By:	/s/ David Abramson		By:	/s/ Holger Liepmann
	Name:	David Abramson		Name:	Holger Liepmann
	Title:	President		Title:	Executive Vice President
October 5, 2007			October 5, 2007

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

–Page 22–

EXHIBIT A

PURCHASE PRICE

During the Term, the pricing provisions set forth in Section 1 below shall amend the License Agreement by replacing Sections 4.1(iii) through 4.1(v) of the License Agreement in their entirety. Following termination by either party for any reason, such Sections of the License Agreement shall once again be in full force and effect for actions occurring after such termination.

1. Purchase Price

PURCHASER and its Designees shall pay SELLER compensation for the Martek Products (in oil form) and/or the rights granted to PURCHASER with respect to the Martek Products in accordance with this Exhibit A. All prices and pricing provisions in this Exhibit A or elsewhere in this Agreement are subject to Section 2.1.2 of this Agreement.

The prices set forth in this Exhibit A may be increased annually by SELLER by up to the amount of the percentage increase above * in the US Producer Price Index for Consumer Goods Excluding Food as published by the U.S. Bureau of Labor Statistics (“PPI”) as compared to the PPI for the previous year. In the event SELLER, pursuant to the prior sentence, is entitled to but elects not to take a given annual price increase, SELLER may elect to take a cumulative price increase as of the next annual price review; provided, however, that in no event shall such cumulative price increase exceed * eligible but untaken increases.

For purposes of pricing under this Agreement, a kilogram of the Martek Products, as referred to in this Exhibit A, shall contain approximately forty percent (40%), by weight, of DHA or ARA or DHA and ARA in the aggregate combined. Notwithstanding the previous sentence, should Martek Products containing approximately forty percent (40%), by weight, of DHA or ARA or DHA and ARA in the aggregate cease to be available, the per kilogram pricing alternatives set forth below shall be subject to change based on the available percent weight of DHA or ARA.

Purchase Price for annual volumes^† of the Martek Products up to * will be calculated as follows, which Purchase Price SELLER represents and warrants provides PURCHASER with * as of the Effective Date as required pursuant to Section 2.1.2:

Annual Volume (Units)	Price per Unit of Martek Products	Annual Volume (Kilograms)	Price per Kilogram of Martek Products
*	*	*	*
*	*	*	*
*	*	*	*
*	*	*	*

†	Annual volumes are calculated on a full calendar year basis based on the cumulative total of all purchases of Martek Products by PURCHASER and its Designees under this Agreement in the relevant calendar year. In the event of less than a full calendar year period, the above pricing brackets
-*	The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

shall be pro rated in direct proportion to such shorter period. Furthermore, the price for all Martek Product purchased will be dictated by the final annual volume price bracket for the relevant calendar year (e.g., if PURCHASER purchases * in a calendar year, the price for all such Units would be * per Unit of Martek Product). Notwithstanding the foregoing three (3) sentences, and subject to the * in this Agreement, pricing for annual volume purchased over * will be supplied by SELLER if applicable and will apply only to the annual volume purchased in excess of *.

Royalty: *

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

EXHIBIT B

ADDITIONAL AMENDMENTS TO LICENSE AGREEMENT

1. The License Agreement is hereby amended by adding the following at the end of Article I:

“Designee” shall mean an entity that is designated by Licensee, and is approved by Licensor in writing, such approval not to be unreasonably withheld or delayed, to order quantities of the Martek Products from Licensor pursuant to any supply agreement then in effect between Licensee and Licensor solely for (a) microencapsulation and/or other processing and (b) resale to Licensee solely for use in accordance with the terms of the License Agreement. As of October 1, 2007, * are approved as Designees.

2. Section * of the License Agreement is amended by adding the word * before * and after *.

3. Section 2.1 of the License Agreement is amended by adding the following to the end of such Section: “and (iv) to use the Martek Products for Licensee’s internal research and development purposes relating to infant nutrition”.

4. Section 2.3 of the License Agreement is hereby deleted in its entirety and replaced with the following:

     Reserved.

5. Sections 2.4(ii) and (iii) of the License Agreement are hereby deleted in their entirety, and Section 2.4(iv) of the License Agreement is hereby renumbered as Section 2.4(ii), and amended by adding the following to the end of the section:

     Notwithstanding the foregoing, Licensee may transfer the Martek Products, or may direct Licensor to transfer the Martek Products, to any Designee solely for (a) microencapsulation and/or other processing that may be approved in writing by Licensor and (b) resale to Licensee solely for use in accordance with the terms of the License Agreement.

6. Section 3.4 of the License Agreement is hereby amended by adding the following sentence to the end: “Notwithstanding the above, Licensee may not terminate this Agreement effective earlier than January 1, 2012.”

7. Section 4.4 of the License Agreement is hereby amended by deleting all language after the first sentence thereof.

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

EXHIBIT C

MARTEK PRODUCT SPECIFICATIONS

ARASCO^®

Product Specifications

General Characteristics

Description:
Appearance:
Odor:
Antioxidants: Vegetable oil from fungi, containing 40% arachidonic acid (ARA)
Free flowing yellow liquid oil (triglyceride)
Characteristic
*

Chemical Characteristics	Fatty Acid Composition	Area %
*
	*	*
*

Elemental Composition

*

Product Storage and Stability

Maximum stability of ARASCO is achieved by shipping and storing the product frozen in the original unopened container at -20 degrees Centigrade until thawed for use. The oil should be protected from exposure to oxygen and elevated temperatures (> 30 C). Shipping and storage under frozen conditions provides stability for ARASCO for up to three years if product is kept frozen and unopened.

Once a container of oil is thawed and opened, use entire contents immediately. However, if it is not possible to use the entire amount at one time, the remainder may be nitrogen purged and refrozen at -20 degrees Centigrade.

Ingredients

Fungal Oil; *

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

DHASCO^®

Product Specifications

General Characteristics

Description:
Appearance:
Odor:
Antioxidants: Vegetable oil from microalgae, containing 40% docosahexaenoic acid (DHA)
Free flowing light yellow to dark orange liquid oil (triglyceride)
Characteristic
*

Chemical Characteristics	Fatty Acid Composition	Area %
*
	*	*
*

Elemental Composition

*

Product Storage and Stability

Maximum stability of DHASCO is achieved by shipping and storing the product frozen in the original unopened container at -20 degrees Centigrade until thawed for use. The oil should be protected from exposure to oxygen and elevated temperatures (> 30 C). Shipping and storage under frozen conditions provides stability for DHASCO for up to three years if product is kept frozen and unopened.

Once a container of oil is thawed and opened, use entire contents immediately. However, if it is not possible to use the entire amount at one time, the remainder may be nitrogen purged and refrozen at -20 degrees Centigrade.

Ingredients

Algal Oil; *

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

EXHIBIT D

ALTERNATIVE DISPUTE RESOLUTION

     The parties recognize that from time to time a dispute may arise relating to either party’s rights or obligations under this Agreement. The parties agree that any such dispute shall be resolved by the Alternative Dispute Resolution (“ADR”) provisions set forth in this Exhibit, the result of which shall be binding upon the parties.

     To begin the ADR process, a party first must send written notice of the dispute to the other party for attempted resolution by good faith negotiations between their respective presidents (or their designees) of the affected subsidiaries, divisions, or business units within twenty-eight (28) days after such notice is received (all references to “days” in this ADR provision are to calendar days). If the matter has not been resolved within twenty-eight (28) days of the notice of dispute, or if the parties fail to meet within such twenty-eight (28) days, either party may initiate an ADR proceeding as provided herein. The parties shall have the right to be represented by counsel in such a proceeding.

     1. To begin an ADR proceeding, a party shall provide written notice to the other party of the issues to be resolved by ADR. Within fourteen (14) days after its receipt of such notice, the other party may, by written notice to the party initiating the ADR, add additional issues to be resolved within the same ADR.

     2. Within twenty-one (21) days following the initiation of the ADR proceeding, the parties shall select a mutually acceptable neutral to preside in the resolution of any disputes in this ADR proceeding. If the parties are unable to agree on a mutually acceptable neutral within such period, either party may request the President of the CPR International Institute for Conflict Prevention and Resolution (“CPR”), 575 Lexington Avenue, 21st Floor, New York, New York 10022, to select a neutral pursuant to the following procedures:

     (a) The CPR shall submit to the parties a list of not less than five (5) candidates within fourteen (14) days after receipt of the request, along with a Curriculum Vitae for each candidate. No candidate shall be an employee, director, or shareholder of either party or any of their subsidiaries or affiliates.

     (b) Such list shall include a statement of disclosure by each candidate of any circumstances likely to affect his or her impartiality.

     (c) Each party shall number the candidates in order of preference (with the number one (1) signifying the greatest preference) and shall deliver the list to the CPR within seven (7) days following receipt of the list of candidates. If a party believes a conflict of interest exists regarding any of the candidates, that party shall provide a written explanation of the conflict to the CPR along with its list showing its order of preference for the candidates. Any party failing to return a list of preferences on time shall be deemed to have no order of preference.

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

     (d) If the parties collectively have identified fewer than three (3) candidates deemed to have conflicts, the CPR immediately shall designate as the neutral the candidate for whom the parties collectively have indicated the greatest preference. If a tie should result between two candidates, the CPR may designate either candidate. If the parties collectively have identified three (3) or more candidates deemed to have conflicts, the CPR shall review the explanations regarding conflicts and, in its sole discretion, may either (i) immediately designate as the neutral the candidate for whom the parties collectively have indicated the greatest preference, or (ii) issue a new list of not less than five (5) candidates, in which case the procedures set forth in subparagraphs 2(a) — 2(d) shall be repeated.

     3. No earlier than twenty-eight (28) days or later than fifty-six (56) days after selection, the neutral shall hold a hearing to resolve each of the issues identified by the parties. The ADR proceeding shall take place at a location agreed upon by the parties. If the parties cannot agree, the neutral shall designate a location other than the principal place of business of either party or any of their subsidiaries or affiliates.

     4. At least seven (7) days prior to the hearing, each party shall submit the following to the other party and the neutral:

     (a) a copy of all exhibits on which such party intends to rely in any oral or written presentation to the neutral;

     (b) a list of any witnesses such party intends to call at the hearing, and a short summary of the anticipated testimony of each witness;

     (c) a proposed ruling on each issue to be resolved, together with a request for a specific damage award or other remedy for each issue. The proposed rulings and remedies shall not contain any recitation of the facts or any legal arguments and shall not exceed one (1) page per issue. The parties agree that neither side shall seek as part of its remedy any punitive damages.

     (d) a brief in support of such party’s proposed rulings and remedies, provided that the brief shall not exceed twenty (20) pages. This page limitation shall apply regardless of the number of issues raised in the ADR proceeding.

          Except as expressly set forth in subparagraphs 4(a) — 4(d), no discovery shall be required or permitted by any means, including depositions, interrogatories, requests for admissions, or production of documents.

     5. The hearing shall be conducted on two (2) consecutive days and shall be governed by the following rules:

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

     (a) Each party shall be entitled to five (5) hours of hearing time to present its case. The neutral shall determine whether each party has had the five (5) hours to which it is entitled.

     (b) Each party shall be entitled, but not required, to make an opening statement, to present regular and rebuttal testimony, documents or other evidence, to cross-examine witnesses, and to make a closing argument. Cross-examination of witnesses shall occur immediately after their direct testimony, and cross-examination time shall be charged against the party conducting the cross-examination.

     (c) The party initiating the ADR shall begin the hearing and, if it chooses to make an opening statement, shall address not only issues it raised but also any issues raised by the responding party. The responding party, if it chooses to make an opening statement, also shall address all issues raised in the ADR. Thereafter, the presentation of regular and rebuttal testimony and documents, other evidence, and closing arguments shall proceed in the same sequence.

     (d) Except when testifying, witnesses shall be excluded from the hearing until closing arguments.

     (e) Settlement negotiations, including any statements made therein, shall not be admissible under any circumstances. Affidavits prepared for purposes of the ADR hearing also shall not be admissible. As to all other matters, the neutral shall have sole discretion regarding the admissibility of any evidence.

     6. Within seven (7) days following completion of the hearing, each party may submit to the other party and the neutral a post-hearing brief in support of its proposed rulings and remedies, provided that such brief shall not contain or discuss any new evidence and shall not exceed ten (10) pages. This page limitation shall apply regardless of the number of issues raised in the ADR proceeding.

     7. The neutral shall rule on each disputed issue within fourteen (14) days following completion of the hearing. Such ruling shall adopt in its entirety the proposed ruling and remedy of one of the parties on each disputed issue but may adopt one party’s proposed rulings and remedies on some issues and the other party’s proposed rulings and remedies on other issues. The neutral shall not issue any written opinion or otherwise explain the basis of the ruling.

     8. The neutral shall be paid a reasonable fee plus expenses. These fees and expenses, along with the reasonable legal fees and expenses of the prevailing party (including all expert witness fees and expenses), the fees and expenses of a court reporter, and any expenses for a hearing room, shall be paid as follows:

     (a) If the neutral rules in favor of one party on all disputed issues in the ADR, the losing party shall pay 100% of such fees and expenses.

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

     (b) If the neutral rules in favor of one party on some issues and the other party on other issues, the neutral shall issue with the rulings a written determination as to how such fees and expenses shall be allocated between the parties. The neutral shall allocate fees and expenses in a way that bears a reasonable relationship to the outcome of the ADR, with the party prevailing on more issues, or on issues of greater value or gravity, recovering a relatively larger share of its legal fees and expenses.

     9. The rulings of the neutral and the allocation of fees and expenses shall be binding, non-reviewable, and non-appealable, and may be entered as a final judgment in any court having jurisdiction.

     10. Except as provided in paragraph 9 or as required by law, the existence of the dispute, any settlement negotiations, the ADR hearing, any submissions (including exhibits, testimony, proposed rulings, and briefs), and the rulings shall be deemed Confidential Information. The neutral shall have the authority to impose sanctions for unauthorized disclosure of Confidential Information.

     11. All ADR hearings shall be conducted in the English language.

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

EXHIBIT E

PRESS RELEASE

[Martek Letterhead]

For Immediate Release	Contact:
	Philip Fass
	Public Relations
	(443) 542-2570
	pfass@martek.com
	Kyle Stults
	Investor Relations
	(410) 740-0081
	investors@martek.com

Martek Signs Multi-Year Worldwide Sole Source Supply Agreement with Abbott

COLUMBIA, Md. — October 8, 2007 — Martek Biosciences Corporation announced today that it has entered into a long-term supply agreement with Abbott Nutrition, a leading worldwide producer of infant formula products including the Similac^® Advance^® brand. Martek will serve as Abbott’s exclusive worldwide DHA and ARA supplier for all of its infant formula products. The agreement provides for a ten-year term with Abbott having the right to terminate the arrangement as of January 2012.

Martek has been supplying DHA and ARA to Abbott for use in infant formula products under a 25-year license agreement signed in 2000 which remains in effect. In the new supply agreement, Abbott has committed to purchase all of its worldwide DHA and ARA requirements from Martek.

Martek manufactures nutritional oils that contain the long-chain polyunsaturated fatty acids DHA and ARA, both of which are naturally present in breast milk. Clinical studies have demonstrated benefits for infants receiving formula supplemented with DHA and ARA. Martek’s proprietary blend of DHA and ARA, marketed under the brand names life’sDHA™ and life’sARA™, is currently used in over 95% of U.S. infant formulas. Additionally, infant formula containing life’sDHA and life’sARA has been consumed by over 20 million infants in over 65 countries worldwide.

“This new agreement affirms the benefits of adding Martek’s DHA and ARA to infant formula,” said Steve Dubin, CEO of Martek. “With this new arrangement, two-thirds of Martek’s business in the infant formula market is subject to multi-year, sole source agreements.”

Martek Biosciences Corporation (NASDAQ: MATK) is a leader in the innovation and development of DHA omega-3 products that promote health and wellness through every stage of life. The company produces life’sDHA™, a sustainable and vegetarian source of the omega-3 fatty acid DHA (docosahexaenoic acid), for use in foods, beverages, infant formula, and supplements. The company also produces life’sARA™ (arachidonic acid), an omega-6 fatty acid, from a sustainable, vegetarian source, for use in infant formula. For more information on Martek Biosciences Corporation, visit http://www.martek.com.

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

Sections of this release contain forward-looking statements. These statements are based upon numerous assumptions which Martek cannot control and involve risks and uncertainties that could cause actual results to differ. These statements should be understood in light of the risk factors set forth in the company’s filings with the Securities and Exchange Commission, including, but not limited to, the company’s Form 10-K for the fiscal year ended October 31, 2006 and other filed reports on Form 10-K, Form 10-K/A, Form 10-Q and Form 8-K.

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

EXHIBIT F

*

-* The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule 24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.

EX-10.50

EXHIBIT 10.50

SETTLEMENT AGREEMENT AND GENERAL RELEASE

     THIS SETTLEMENT AGREEMENT AND RELEASE (the “Agreement”) is made and entered into as of the 15^th day of October, 2007 (“Settlement Date”), by and between Martek Biosciences Corporation (“Martek”) and Robert Zuccaro (“Zuccaro”), on his own behalf and as Stockholders’ Representative of certain former interest holders (the “Former Interest Holders”) of OmegaTech, Inc. (“OmegaTech”).

RECITALS:

     A. Pursuant to a Merger Agreement, dated March 25, 2002, by and between Martek and OmegaTech, as amended (the “Merger Agreement”), the Former Interest Holders received certain contingent rights to receive shares of Martek’s Common Stock, par value $0.10 per share (the “Common Stock”), upon the occurrence of certain events described in the Merger Agreement (the “Contingent Rights”).

     B. There is an action pending currently in the United States District Court for the District of Maryland, styled Martek Biosciences Corporation v. Robert Zuccaro, as Stockholders’ Representative of the Former Interest Holders of OmegaTech, Inc., Civil Action No. AMD 04-3349, which arises out of the Merger Agreement (the “Litigation”).

     C. To avoid the risks and costs of continued litigation, Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders, pursuant to his express authority to act on behalf of the Former Interest Holders as granted to him in Section 7.3(a) of the Merger Agreement, and Martek wish to compromise and settle the Litigation and certain other potential claims.

     D. This Agreement is entered into to settle and compromise all disputed claims, and no party, by virtue of entering into this Agreement, admits liability for, or the validity of, any claims or defenses asserted in the Litigation.

     NOW, THEREFORE, it is agreed between Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders, and Martek, as follows:

     1. Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders, represents and warrants:

          a. that he has the full power and authority to enter into this Agreement and bind all of the Former Interest Holders; specifically, pursuant to Section 7.3 of the Merger Agreement, Zuccaro has “full power and authority to represent all of the [Former Interest Holders] and their successors with respect to all matters arising under this Agreement and the Escrow Agreement and all actions taken by the Stockholders’ Representative hereunder and thereunder shall be binding on all such Former Interest Holders and their successors as if expressly confirmed and ratified in writing by each of them;” and

          b. that neither Zuccaro nor any of the Former Interest Holders has paid or given, directly or indirectly, any commission or other remuneration for soliciting the exchange of the Contingent Rights for the Settlement Shares contemplated hereby, and Zuccaro has no knowledge of any facts that would lead him to the conclusion that Martek is disqualified from relying on the exemption afforded by Section 3(a)(9) of the Securities Act of 1933, as amended (the “Securities Act”) in connection with the exchange of the Contingent Rights for the Settlement Shares.

2

     2. Martek, in reliance upon Zuccaro’s representation and warranty set forth in Section 1 hereof, and upon fulfillment of the terms and conditions contained in this Agreement, agrees to transfer to Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders, and Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders, agrees to accept, 341,061.499 shares of Martek Common Stock, par value $0.10 per share (the “Settlement Shares”), for the benefit of the Former Interest Holders in exchange for the Contingent Rights held by the Former Interest Holders, of which 8,000 shares of Common Stock (the “Escrow Shares”) shall be deposited into an escrow account established for the benefit of the Former Interest Holders pursuant to subsection (f) of this Section 2 (the “Escrow Account”), and 333,061.499 shares of Common Stock (the “Exchange Shares”) shall be distributed to the Former Interest Holders as set forth below.

          a. Attached as Schedule A hereto is a schedule of the Former Interest Holders setting forth, for each Former Interest Holder, its respective Contingent Rights, the Settlement Shares for which its Contingent Rights shall be exchanged, and its address. Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders, hereby acknowledges that he has reviewed the information contained on Schedule A and, to his knowledge, the information on Schedule A is correct and complete with respect to each of the Former Interest Holders. As promptly as reasonably practicable following the Settlement Date, Martek shall deposit with Registrar & Transfer Company or another bank or trust company designated as the

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exchange agent by Martek (the “Exchange Agent”) certificates representing the Settlement Shares, together with cash in an amount sufficient to permit the payment of cash in lieu of fractional shares pursuant to subsection (j) of this Section 2.

          b. As soon as practicable after the Settlement Date, Martek shall use its reasonable efforts to cause the Exchange Agent to send to each Former Interest Holder, in accordance with Schedule A, a certificate of acknowledgment (the “Acknowledgement Certificate”) which (i) shall contain, for those Former Interest Holders who have previously received certificates representing Contingent Rights (“Contingent Rights Certificates”), instructions for use in effecting the surrender of the Contingent Rights Certificates, (ii) shall request, from those Former Shareholders who have not previously received Contingent Rights Certificates, an acknowledgment to such effect; and (iii) shall require, for each Former Interest Holder, an acknowledgement that such Former Interest Holder has agreed to relinquish any rights such Former Interest Holder may have in the Contingent Rights in exchange for such Former Interest Holder’s portion of the Settlement Shares. Each Former Interest Holder shall also acknowledge that delivery of the Acknowledgment Certificate and, if applicable, Contingent Rights Certificates, shall be effected and risk of loss and title to any Contingent Rights Certificates shall pass, only upon actual delivery thereof to the Exchange Agent. Upon submission to the Exchange Agent of a duly executed Acknowledgement Certificate and, if applicable, a Contingent Rights Certificate for cancellation, such Former Interest Holder shall be entitled to receive in exchange therefor (A) a certificate representing the number of whole Settlement Shares into which

4

the Contingent Rights represented by the submitted Acknowledgment Certificate were converted as of the Settlement Date, and (B) cash in lieu of any fractional Settlement Share in accordance with subsection (j) of this Section 2, and any Contingent Rights Certificates so surrendered shall then be canceled. Until surrendered as contemplated by this Section 2, any Contingent Rights Certificate, from and after the Settlement Date, shall be deemed to represent only the right to receive, upon such surrender, the number of Settlement Shares set forth with respect to such Contingent Rights Certificate on Schedule A hereto.

          c. If any certificate representing Settlement Shares or any cash is to be issued or paid to any person other than the registered holder of the Contingent Rights surrendered in exchange therefor, it shall be a condition to such exchange that such third party be designated on the Acknowledgment Certificate and any surrendered Contingent Rights Certificate shall be properly endorsed and otherwise in proper form for transfer and such person either (i) shall pay to the Exchange Agent any transfer or other taxes required as a result of the issuance of such certificates of Common Stock and the distribution of such cash payment to such person or (ii) shall establish to the reasonable satisfaction of the Exchange Agent that such tax has been paid or is not applicable. Martek or the Exchange Agent shall be entitled to deduct and withhold from the amounts otherwise payable pursuant to this Agreement to any Former Interest Holder such amounts as Martek or the Exchange Agent is required to deduct and withhold with respect to the making of such payment under the Internal Revenue Code of 1986, as amended (the “Code”), or any provision of state, local or foreign tax law. To

5

the extent that amounts are so withheld by Martek or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Former Interest Holder in respect of which such deduction and withholding was made by Martek or the Exchange Agent. All amounts in respect of taxes received or withheld by Martek shall be disposed of by Martek in accordance with the Code or such state, local or foreign tax law, as applicable.

          d. If any previously received Contingent Rights Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Former Interest Holder claiming such Contingent Rights Certificate to be lost, stolen or destroyed, Martek shall issue in exchange for such lost, stolen or destroyed Contingent Rights Certificate the Settlement Shares and pay any cash in lieu of fractional shares in respect of such Contingent Rights Certificate. The owner of such lost, stolen or destroyed Contingent Rights Certificate shall indemnify Martek against any claim that may be made against Martek with respect to the Contingent Rights Certificate alleged to have been lost, stolen or destroyed.

          e. Delivery of the Settlement Shares by Martek in exchange for the Contingent Rights shall wholly and completely discharge Martek of any liability related thereto. In particular, and without limitation, all Contingent Rights shall, upon the Settlement Date, be cancelled and no Former Interest Holder shall have any further rights thereunder, including any rights whatsoever to receive Martek Common Stock on account of any milestones under the Merger Agreement, other than the right to receive the Settlement Shares set forth on Schedule A with respect to each Former Interest

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Holder. Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders of OmegaTech, represents and warrants that he will provide an exclusive mechanism for (i) allocating the Escrow Shares; and (ii) resolving any disputes arising out of such allocation. Disputes relating to the forgoing shall not affect the validity or finality of this Agreement.

          f. Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders, shall be solely responsible for establishing and identifying the Escrow Account into which Martek shall deposit the Escrow Shares. Martek’s sole responsibilities with respect to the Escrow Shares are (i) to deposit said shares into the Escrow Account and (ii) to include the Escrow Shares in the Registration Statement (as defined below), and Martek bears no responsibility for setting up the Escrow Account or distributing the shares from the Escrow Account.

          g. The Settlement Shares will be issued in a transaction exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). Martek shall use its commercially reasonable efforts to prepare, file as promptly as practicable following the Settlement Date and cause to become effective, within 60 Business Days after the Settlement Date (or as soon as practicable thereafter in the event the Registration Statement becomes subject to review by the staff of the SEC), a registration statement on Form S-3 or such other form as may be appropriate to be filed with the SEC by Martek under the Securities Act (together with any amendments or supplements thereto, whether prior to or after the effective date thereof, a “Registration Statement”) covering the public resale of the Settlement Shares, and Martek shall use

7

its commercially reasonable efforts to keep the Registration Statement continuously effective until the second anniversary of the Settlement Date (the “Effective Period”). Any such registration shall be subject to the customary terms and conditions used in connection with resale prospectuses. Martek’s obligations under this Section 2(c) are contingent upon each Former Interest Holder providing promptly all information concerning the Former Interest Holder and its proposed plan of distribution as Martek may reasonably request in connection with any of the foregoing. Martek may by written notice to the Former Interest Holders immediately suspend the use of any resale prospectus for a period not to exceed 45 consecutive days in any one instance and for a period not to exceed 90 calendar days in any 12-month period (each, a “Suspension Period”) pursuant to a Registration Statement at any time that (a) Martek becomes engaged in a business activity or negotiation that is not disclosed therein under applicable law and which Martek desires to keep confidential for business purposes or (b) Martek determines that a particular disclosure so determined to be required to be disclosed therein be premature or would adversely affect Martek or its business or prospects. Martek will use its commercially reasonable efforts to ensure that the use of any such Registration Statement may be resumed as soon as practicable. Martek shall promptly notify the Former Interest Holders upon the termination of any Suspension Period, promptly amend or supplement the Registration Statement following the termination of such Suspension Period, if necessary, so that it does not contain any untrue statement of material fact or amount to state a material fact required to be stated therein in order to make the statements therein not misleading, and furnish to the

8

Former Interest Holders such numbers of copies of the prospectus therein as so amended or supplemented on documents incorporated by reference therein as the Former Interest Holders may reasonably request.

          h. In connection with any registration of Common Stock pursuant to this Agreement, Martek will pay all expenses incident to its performance of or compliance with this Section 2 including, without limitation, all registration, filing and National Association of Securities Dealers fees, fees and expenses of compliance with federal or state securities laws, printing expenses and fees and disbursements of counsel for Martek and all independent public accountants.

          i. The certificates evidencing the Settlement Shares will bear the legend set forth below:

THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE TRANSFERRED IN ACCORDANCE WITH REGISTRATION UNDER OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933.

          j. No certificates or scrip representing fractional shares of Common Stock shall be issued upon the surrender for exchange of Contingent Rights and such a fractional share shall not entitle the record or beneficial owner thereof to vote or to any other rights as a stockholder of Martek. In lieu of receiving any such fractional share, each Former Interest Holder who would otherwise have been entitled thereto upon the surrender of Contingent Rights for exchange will receive cash (without interest) in an

9

amount rounded to the nearest whole cent, determined by multiplying such fractional share by the Current Average Price. “Current Average Price” shall mean the average closing price of a share of Common Stock as reported on the Nasdaq National Market for the 45 most recent days that Common Stock has traded ending on the business day prior to the Settlement Date.

     3. Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders, their respective trusts, trustees, heirs, heirs-at-law, executors, administrators, beneficiaries, successors, assigns, agents, representatives, attorneys and insurers, does hereby, separately and severally, fully, completely, and absolutely RELEASE AND FOREVER DISCHARGE Martek and its respective predecessors, successors, parents, subsidiaries, affiliates, divisions, assigns, principals, stockholders, officers, directors, employees, agents, independent contractors, representatives, attorneys, insurers, trusts, and trustees, separately and severally, from any and every claim, demand, agreement, understanding and cause of action, both known and unknown, which Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders, had at any time in the past, now have or may have in the future, against Martek. Specifically, without limitation, Zuccaro, on his own behalf himself and as Stockholders’ Representative of the Former Interest Holders, releases and discharges Martek from (i) any and all claims that were asserted or could have been asserted in the Litigation, (ii) any and all claims that any Former Interest Holder may have against Martek arising under the Merger Agreement and the Contingent Rights, including, without limitation, any claims based upon the achievement or

10

purported achievement of any Milestone, as such term is defined in the Merger Agreement, and (iii) any claims based upon the allocation of the Settlement Shares among the Former Interest Holders. It is the intent of Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders, to grant an absolute, full, complete and unconditional release of Martek from anything and everything, except acts or omissions of Martek occurring subsequent to the date of this release.

     4. Martek, its respective predecessors, successors, parents, subsidiaries, affiliates, divisions, assigns, principals, stockholders, officers, directors, employees, agents, independent contractors, representatives, attorneys, insurers, trusts, and trustees, does hereby, separately and severally, fully, completely, and absolutely RELEASE AND FOREVER DISCHARGE Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders, their respective trusts, trustees, heirs, heirs-at-law, executors, administrators, beneficiaries, successors, assigns, agents, representatives, attorneys and insurers, separately and severally, from any and every claim, demand, agreement, understanding and cause of action, both known and unknown, which Martek had at any time in the past, now have or may have in the future, against Martek. Specifically, without limitation, Martek releases and discharges Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders, from any and all claims that were asserted or could have been asserted in the Litigation and any and all claims that Martek may have against Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders, arising under the Merger Agreement and the Contingent Rights, including, without

11

limitation, any claims based upon the achievement or purported achievement of any Milestone, as such term is defined in the Merger Agreement. It is the intent of Martek to grant an absolute, full, complete and unconditional release of Martek from anything and everything, except acts or omissions of Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders, occurring subsequent to the date of this release.

     5. The releases contained in this Agreement include, but are not limited to, any and every claim, demand and cause of action, known or unknown, at law or equity, whether in contract, tort, statutory or otherwise, against Martek relating in any way to any provision of the Merger Agreement.

     6. Within 15 days of the entry of the filing of a Stipulation of Dismissal with Prejudice in the form attached hereto, Zuccaro shall return to Martek all documents and other materials produced by Martek in response to discovery requests made in the Litigation or any confidential portions of any depositions taken in the Litigation (“Martek Materials”). As an alternative to returning such materials, Zuccaro may elect to destroy Martek Materials, subject to the certification requirements set forth below. Zuccaro shall, at that time, certify that he has handled Martek Materials consistent with the Protective Order entered in the Litigation, that he has retrieved all such Martek Materials from any person to whom they have made such materials available pursuant to the Protective Order, and that they have either returned or destroyed all such Martek Materials. The parties agree that it would be extremely difficult and impracticable under the presently known and anticipated facts and circumstances to ascertain and fix the

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actual damages Martek would incur should Zuccaro fail to comply with the provisions of this Section 6.

     7. Each of the parties to this Agreement acknowledge that they are responsible for their own costs, fees, expenses and attorneys fees incurred in the Litigation.

     8. This Settlement Agreement and the covenants, obligations, undertakings, rights and benefits shall be binding and shall inure to the benefit of the parties hereto and their respective representatives, successors, assigns, heirs, executors, trustees, beneficiaries, administrators, respective predecessors, successors, parents, subsidiaries, affiliates, divisions, assigns, principals, stockholders, officers, directors, employees, agents, independent contractors, representatives, attorneys, insurers, trusts, and trustees.

     9. This Agreement contains the entire agreement between the parties hereto and supersedes all prior agreements, negotiations, discussions, representations, commitments, or understandings. There have been no other representations, promises, agreements, or inducements not herein expressed, and this Agreement contains the entire and only agreement between Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders, and Martek. The parties understand, agree and expressly assume the risk that any fact not recited, contained or embodied in this Agreement may turn out hereinafter to be other than, different from, or contrary to the facts now known to them or believed by them to be true, and further agree that this Agreement shall be effective in all respects notwithstanding and shall not be subject to

13

termination, modification or rescission by reason of any such difference in facts. This Agreement cannot be amended or modified except by a writing signed by all parties hereto.

     10. Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders, agrees that the language of this Agreement shall not be construed, by any rule of law or presumption of law or otherwise, against the drafter. He further agrees that he and his attorney have had full opportunity to read and review this Agreement and to contribute or alter language or contents thereof.

     11. The parties agree that this Agreement shall be governed by the laws of the State of Maryland as applied to contracts made and fully performed in such state.

     12. Exclusive jurisdiction to resolve any disputes between the parties about the meaning or interpretation of this Agreement shall lie with the United States District Court for the District of Maryland.

     13. Any notices required under this Agreement to be given to a party hereto shall be sent by certified mail to the party’s address as set forth below:

If to Martek:

Martek Biosciences Corporation c/o:
David Feitel, Esquire
6480 Dobbin Road
Columbia, MD 21045

with a copy to:

Mark D. Gately, Esquire
Hogan & Hartson L.L.P.
111 South Calvert Street, Suite 1600
Baltimore, Maryland 21202

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If to Zuccaro:

Robert Zuccaro
1405 Nancy Island Drive
Seabrook Island, South Carolina 29455

with a copy to:

J. Clifford Gunter, III, Esquire
Andrew Edison, Esquire
Bracewell & Giuliani LLP
Pennzoil Place — South Tower
711 Louisiana Street, Suite 2900
Houston, Texas 77002-2781

or to such other address or person as any party may have specified in a notice duly given to the other party as provided herein.

     14. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and this Agreement and any counterpart so executed shall be deemed to be one and the same instrument.

     15. Zuccaro, on his own behalf and as Stockholders’ Representative of the Former Interest Holders, acknowledges and declares that he has read and fully understands this Agreement and has had fully opportunity to discuss its contents with his counsel.

     SIGNED AND AGREED to, this 15^th day of October, 2007.

/s/ MARTEK BIOSCIENCES CORPORATION  

MARTEK BIOSCIENCES CORPORATION 

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By:	/s/ David M. Feitel
	Name:	David M. Feitel
	Title:	Senior VP and General Counsel
/s/ Robert Zuccaro
ROBERT ZUCCARO, ON HIS OWN BEHALF
AND AS STOCKHOLDERS’ REPRESENTATIVE OF THE FORMER INTEREST HOLDERS OF OMEGATECH, INC.

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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 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-3ASR No. 333-147963) of Martek Biosciences Corporation,
(10)	Registration Statement (Form S-8 No. 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,
(11)	Registration Statement (Form S-8 No. 333-46949) pertaining to the Martek Biosciences Corporation 1997 Employee Stock Option Plan,
(12)	Registration Statement (Form S-8 No. 333-27671) pertaining to the Martek Biosciences Corporation 1997 Stock Option Plan,
(13)	Registration Statement (Form S-8 No. 333-84317) pertaining to the Martek Biosciences Corporation 1997 Stock Option Plan, as amended,
(14)	Registration Statement (Form S-8 No. 333-52298) pertaining to the Martek Biosciences Corporation 1997 Stock Option Plan, as amended,
(15)	Registration Statement (Form S-8 No. 333-74092) pertaining to the Martek Biosciences Corporation 2001 Stock Option Plan,
(16)	Registration Statement (Form S-8 No. 333-85856) pertaining to the Martek Biosciences Corporation 2002 Stock Incentive Plan,
(17)	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,
(18)	Registration Statement (Form S-8 No. 333-105555) pertaining to the Martek Biosciences Corporation 2002 Stock Incentive Plan, as amended,
(19)	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,
(20)	Registration Statement (Form S-8 No. 333-125802) pertaining to the Martek Biosciences Corporation Amended and Restated 2004 Stock Incentive Plan, and
(21)	Registration Statement (Form S-8 No. 333-137633) pertaining to the Martek Biosciences Corporation Amended and Restated 2004 Stock Incentive Plan

of our reports dated December 21, 2007, with respect to the consolidated financial statements and schedule of Martek Biosciences Corporation and the effectiveness of Martek Biosciences Corporation’s internal control over financial reporting included in this Annual Report (Form 10-K) for the year ended October 31, 2007.

/s/ Ernst & Young LLP

McLean, Virginia
December 28, 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: December 28, 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: December 28, 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, 2007 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: December 28, 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, 2007 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: December 28, 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.