##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended January 31, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From  to
 
 COMMISSION FILE NUMBER 0-22354
 MARTEK BIOSCIENCES CORPORATION
  Delaware
    
    52-1399362(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)
 6480 Dobbin Road, Columbia, Maryland 21045
 (410) 740-0081
 
 
 þ o
  Large accelerated filer o
    
    Accelerated filerþ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



PART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    1Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    22PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    23Item 1A.
    
    Risk Factors
    
    
    25Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3.
    
    Defaults Upon Senior Securities
    
    
    35Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    35Item 5.
    
    Other Information
    
    
    35Item 6.
    
    Exhibits
    
    
    35Signatures
    
    
    36Exhibit 10.01Exhibit 31.01Exhibit 31.02Exhibit 32.01Exhibit 32.02




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 MARTEK BIOSCIENCES CORPORATION
  January 31,
    
    
    October 31,2008
    
    
    2007In thousands, except share and per share data
    
    (unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    22,145
    
    
    $
    16,973Short-term investments and marketable securities
    
    
    
    
    
    
    4,675Accounts receivable, net
    
    
    41,104
    
    
    
    41,643Inventories, net
    
    
    107,542
    
    
    
    109,409Deferred tax asset
    
    
    14,631
    
    
    
    14,549Other current assets
    
    
    9,249
    
    
    
    8,237Total current assets
    
    
    194,671
    
    
    
    195,486Property, plant and equipment, net
    
    
    274,257
    
    
    
    277,915Deferred tax asset
    
    
    32,814
    
    
    
    36,757Long-term auction rate security investments
    
    
    15,825
    
    
    
    Goodwill
    
    
    51,592
    
    
    
    51,564Other intangible assets, net
    
    
    33,799
    
    
    
    34,320Other assets, net
    
    
    586
    
    
    
    653Total assets
    
    $
    603,544
    
    
    $
    596,695Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    14,025
    
    
    $
    18,118Accrued liabilities
    
    
    13,537
    
    
    
    25,154Current portion of notes payable and other long-term obligations
    
    
    8,390
    
    
    
    1,012Current portion of deferred revenue
    
    
    1,434
    
    
    
    1,857Total current liabilities
    
    
    37,386
    
    
    
    46,141Long-term debt under revolving credit facility
    
    
    
    
    
    
    Notes payable and other long-term obligations
    
    
    1,618
    
    
    
    9,310Long-term portion of deferred revenue
    
    
    9,381
    
    
    
    9,517Total liabilities
    
    
    48,385
    
    
    
    64,968CommitmentsStockholders equityPreferred 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; 32,857,501 and 32,335,622 shares issued and
outstanding, respectively
    
    
    3,286
    
    
    
    3,234Additional paid-in capital
    
    
    545,430
    
    
    
    530,575Accumulated other comprehensive income
    
    
    59
    
    
    
    203Retained earnings (accumulated deficit)
    
    
    6,384
    
    
    
    (2,285
    )Total stockholders equity
    
    
    555,159
    
    
    
    531,727Total liabilities and stockholders equity
    
    $
    603,544
    
    
    $
    596,695
 See accompanying notes.
  1




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MARTEK BIOSCIENCES CORPORATION
  Three months ended January 31,Unaudited - In thousands, except per share data
    
    2008
    
    
    2007Revenues:Product sales
    
    $
    78,609
    
    
    $
    66,712Contract manufacturing sales
    
    
    4,272
    
    
    
    3,549Total revenues
    
    
    82,881
    
    
    
    70,261Cost of revenues:Cost of product sales
    
    
    45,097
    
    
    
    42,969Cost of contract manufacturing sales
    
    
    3,688
    
    
    
    3,423Total cost of revenues
    
    
    48,785
    
    
    
    46,392Gross margin
    
    
    34,096
    
    
    
    23,869Operating expenses:Research and development
    
    
    5,981
    
    
    
    5,942Selling, general and administrative
    
    
    12,981
    
    
    
    10,632Amortization of intangible assets
    
    
    1,679
    
    
    
    1,546Restructuring charge
    
    
    
    
    
    
    518Other operating expenses
    
    
    153
    
    
    
    473Total operating expenses
    
    
    20,794
    
    
    
    19,111Income from operations
    
    
    13,302
    
    
    
    4,758Interest and other income, net
    
    
    373
    
    
    
    283Interest expense
    
    
    (156
    )
    
    
    (724
    )Income before income tax provision
    
    
    13,519
    
    
    
    4,317Income tax provision
    
    
    4,850
    
    
    
    1,567Net income
    
    $
    8,669
    
    
    $
    2,750Net income per shareBasic
    
    $
    0.26
    
    
    $
    0.09Diluted
    
    $
    0.26
    
    
    $
    0.08Weighted average common shares outstandingBasic
    
    
    32,745
    
    
    
    32,181Diluted
    
    
    33,130
    
    
    
    32,366
 See accompanying notes.
  2




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##### Table of Contents



MARTEK BIOSCIENCES CORPORATION
  Accumulated
    
    
    RetainedAdditional
    
    
    Other
    
    
    EarningsCommon Stock
    
    
    Paid-in
    
    
    Comprehensive
    
    
    (AccumulatedUnaudited - In thousands, except share data
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Income
    
    
    Deficit)
    
    
    TotalBalance at October 31, 2007
    
    
    32,335,622
    
    
    $
    3,234
    
    
    $
    530,575
    
    
    $
    203
    
    
    $
    (2,285
    )
    
    $
    531,727Issuance of shares related to OmegaTech contingent
purchase price
    
    
    340,946
    
    
    
    34
    
    
    
    10,130
    
    
    
    
    
    
    
    
    
    
    
    10,164Exercise of stock options
    
    
    180,933
    
    
    
    18
    
    
    
    3,530
    
    
    
    
    
    
    
    
    
    
    
    3,548Equity-based compensation
    
    
    
    
    
    
    
    
    
    
    620
    
    
    
    
    
    
    
    
    
    
    
    620Tax benefit of exercise of non-qualified stock options
    
    
    
    
    
    
    
    
    
    
    575
    
    
    
    
    
    
    
    
    
    
    
    575Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,669
    
    
    
    8,669Other comprehensive income (loss):Realized gain on exchange rate forward
contract, net of tax of $(116)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (203
    )
    
    
    
    
    
    
    (203
    )Unrealized gain on exchange rate forward
contract, net of tax of $33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    
    
    
    
    59Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,525Balance at January 31, 2008
    
    
    32,857,501
    
    
    $
    3,286
    
    
    $
    545,430
    
    
    $
    59
    
    
    $
    6,384
    
    
    $
    555,159
 See accompanying notes.
  3




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##### Table of Contents



MARTEK BIOSCIENCES CORPORATION
  Three months ended January 31,Unaudited - In thousands
    
    2008
    
    
    2007Operating activitiesNet income
    
    $
    8,669
    
    
    $
    2,750Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    6,981
    
    
    
    6,334Deferred tax provision
    
    
    4,850
    
    
    
    1,567Equity-based compensation expense
    
    
    538
    
    
    
    609Incremental tax benefit from exercise of non-qualified stock options
    
    
    (575
    )
    
    
    (117
    )Loss from disposal and write-down of assets and other
    
    
    221
    
    
    
    248Changes in operating assets and liabilities:Accounts receivable
    
    
    539
    
    
    
    (1,655
    )Inventories
    
    
    1,949
    
    
    
    (6,332
    )Other assets
    
    
    (1,356
    )
    
    
    363Accounts payable
    
    
    (4,093
    )
    
    
    (2,711
    )Accrued liabilities
    
    
    (1,988
    )
    
    
    (5,362
    )Deferred revenue and other liabilities
    
    
    (619
    )
    
    
    (626
    )Net cash provided by (used in) operating activities
    
    
    15,116
    
    
    
    (4,932
    )Investing activitiesPurchase of investments and marketable securities
    
    
    (15,475
    )
    
    
    Sale of investments and marketable securities
    
    
    4,325
    
    
    
    6,850Expenditures for property, plant and equipment
    
    
    (1,866
    )
    
    
    (1,628
    )Repurchase from sale-leaseback transaction
    
    
    
    
    
    
    (3,910
    )Capitalization of intangible and other assets
    
    
    (799
    )
    
    
    (2,710
    )Net cash used in investing activities
    
    
    (13,815
    )
    
    
    (1,398
    )Financing activitiesRepayments of notes payable and other long-term obligations
    
    
    (252
    )
    
    
    (252
    )Borrowings under revolving credit facility
    
    
    
    
    
    
    5,000Proceeds from the exercise of stock options
    
    
    3,548
    
    
    
    639Incremental tax benefit from exercise of non-qualified stock options
    
    
    575
    
    
    
    117Net cash provided by financing activities
    
    
    3,871
    
    
    
    5,504Net increase (decrease) in cash and cash equivalents
    
    
    5,172
    
    
    
    (826
    )Cash and cash equivalents, beginning of period
    
    
    16,973
    
    
    
    15,578Cash and cash equivalents, end of period
    
    $
    22,145
    
    
    $
    14,752Supplemental cash flow disclosures:Interest paid
    
    $
    159
    
    
    $
    754Income taxes paid
    
    $
    185
    
    
    $
    150
 See accompanying notes.
  4




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
 Consolidation
 Use of Estimates
 Segment Information
 Revenue Recognition
  Shipping Income and Costs
 Foreign Currency Transactions and Hedging Activities
   5




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Research and Development
 Advertising
 Other Operating Expenses
 Deferred Income Taxes
  The Company adopted Financial Accounting Standards Boards Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (FIN 48), effective November 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position
to be recognized in the financial statements if that position is more likely than not of being sustained upon
examination by the taxing authority.  The adoption of FIN 48 did not have a material effect on the Companys
consolidated financial position or results of operations. Pursuant to FIN 48, the Company recognizes interest accrued
related to unrecognized tax benefits and penalties as income tax expense.  As of November 1, 2007, the Companys total
gross urecognized tax benefit was approximately $700,000, all of which would affect the effective income tax rate if
recognized.  Interest and penalties accrued as of November 1, 2007, net of related benefit, was less than $100,000. 
The Company is subject to U.S. federal income tax as well as state and local tax in various jurisdictions.  Because the
Companys 2006 U.S. federal income tax return used net operating loss carryforwards dating, in part, back to fiscal
1991, some elements of income tax returns back to fiscal 1991 are subject to examination.  The Company believes
appropriate provisions for all outstanding issues have been made for all jurisdicitons and all open years.  It is
reasonably possible that the total amount of unrecognized tax benefits will change within the next 12 months as various
uncertainties are resolved.  The Company cannot reasonably estimate the range of potential outcomes. Equity-Based Compensation
 Net Income Per Share
 Comprehensive Income
 Cash and Cash Equivalents
 Investments and Marketable Securities
   6




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Fair Value of Financial Instruments
 Trade Receivables
 Inventories
 Property, Plant and Equipment
 Asset Description
    
    Useful Life (years)Building
    
    15  30Fermentation equipment
    
    10  20Oil processing equipment
    
    10  20Other machinery and equipment
    
    5  10Furniture and fixtures
    
    5   7Computer hardware and software
    
    3   7
  Patent Costs
 Goodwill and Other Intangible Assets
 Impairment of Long-Lived Assets
  7




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Reclassification
 2. DSM SUPPLY AND LICENSE AGREEMENT
    3. INVESTMENTS
     8




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##### Table of Contents



4. INVENTORIES
  January 31,
    
    
    October 31,2008
    
    
    2007Finished goods
    
    $
    58,415
    
    
    $
    57,852Work in process
    
    
    45,796
    
    
    
    48,721Raw materials
    
    
    3,331
    
    
    
    2,836Inventories, net
    
    $
    107,542
    
    
    $
    109,409
  5. PROPERTY, PLANT AND EQUIPMENT
  January 31,
    
    
    October 31,2008
    
    
    2007Land
    
    $
    2,320
    
    
    $
    2,320Building and improvements
    
    
    64,122
    
    
    
    63,892Machinery and equipment
    
    
    258,062
    
    
    
    256,739Furniture and fixtures
    
    
    2,770
    
    
    
    3,143Computer hardware and software
    
    
    15,003
    
    
    
    13,929342,277
    
    
    
    340,023Less: accumulated depreciation and amortization
    
    
    (75,269
    )
    
    
    (70,459
    )267,008
    
    
    
    269,564Construction in progress
    
    
    7,249
    
    
    
    8,351Property, plant and equipment, net
    
    $
    274,257
    
    
    $
    277,915
   9




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6. GOODWILL AND OTHER INTANGIBLE ASSETS
  January 31, 2008
    
    
    October 31, 2007Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedIntangible Asset
    
    Gross
    
    
    Amortization
    
    
    Net
    
    
    Gross
    
    
    Amortization
    
    
    NetTrademarks
    
    $
    2,118
    
    
    $
    (730
    )
    
    $
    1,388
    
    
    $
    2.098
    
    
    $
    (691
    )
    
    $
    1,407Patents
    
    
    22,747
    
    
    
    (6,687
    )
    
    
    16,060
    
    
    
    22,226
    
    
    
    (5,594
    )
    
    
    16,632Core technology
    
    
    1,708
    
    
    
    (598
    )
    
    
    1,110
    
    
    
    1,708
    
    
    
    (569
    )
    
    
    1,139Current products
    
    
    10,676
    
    
    
    (4,118
    )
    
    
    6,558
    
    
    
    10,676
    
    
    
    (3,940
    )
    
    
    6,736Licenses
    
    
    11,532
    
    
    
    (2,849
    )
    
    
    8,683
    
    
    
    10,996
    
    
    
    (2,590
    )
    
    
    8,406Goodwill
    
    
    51,592
    
    
    
    
    
    
    
    51,592
    
    
    
    51,564
    
    
    
    
    
    
    
    51,564$
    100,373
    
    
    $
    (14,982
    )
    
    $
    85,391
    
    
    $
    99,268
    
    
    $
    (13,384
    )
    
    $
    85,884
  7. NOTES PAYABLE AND LONG-TERM DEBT
    8. COMMITMENTS AND CONTINGENCIES
 Purchase Commitments
 OmegaTech Contingent Purchase Price
  10




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Patent Infringement Litigation
 Class Action Lawsuit
  Other
 9. STOCKHOLDERS EQUITY
       11




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10. NET INCOME PER SHARE
   Three months ended January 31,2008
    
    
    2007Net income
    
    $
    8,669
    
    
    $
    2,750Weighted average shares outstanding, basic
    
    
    32,745
    
    
    
    32,181Effect of dilutive potential common shares:Stock options
    
    
    295
    
    
    
    183Restricted stock units
    
    
    90
    
    
    
    2Total dilutive potential common shares
    
    
    385
    
    
    
    185Weighted average shares outstanding, diluted
    
    
    33,130
    
    
    
    32,366Net income per share, basic
    
    $
    0.26
    
    
    $
    0.09Net income per share, diluted
    
    $
    0.26
    
    
    $
    0.08
  11. COMPREHENSIVE INCOME
  Three months ended January 31,2008
    
    
    2007Net income, as reported
    
    $
    8,669
    
    
    $
    2,750Other comprehensive income (loss):Realized gain on exchange rate forward contract,
net of tax of $(116) and $(93), respectively
    
    
    (203
    )
    
    
    (155
    )Unrealized gain on exchange rate forward contract,
net of tax of $33 and $14, respectively
    
    
    59
    
    
    
    24Comprehensive income
    
    $
    8,525
    
    
    $
    2,619
  12




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Item 2. 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, pregnancy and nursing, nutritional supplement, and animal feed
markets;
    
    expectations regarding future revenues from contract
manufacturing customers;
    
    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; 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-Q 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 Part II, Item 1A. Risk Factors in
this report on Form 10-Q 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
 lifesDHA lifesARA lifesDHA ® ® ® lifesARA
  13




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##### Table of Contents




    
    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.
  RECENT HIGHLIGHTS
 lifesDHA lifes DHA
 Food and Beverage Products
 
    
    Boost Juices Pocket Rocket Juice with lifesDHA(Australia)
    
    Dalco Foods Wellness Line meat products with lifesDHA(Europe)
    
    Parmalat Australias Vaalia Low Fat Yoghurt and Vaalia Yoghurt for Toddlers with
lifesDHA
 Pregnancy and Nursing Products
 
    
    Azur Pharmas Natelle Plus with lifesDHA(United States)
  14




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lifesDHA
 
    
    A pre-clinical study published in the Journal of Neuroscience(December 2007)
reported that DHA was found to decrease an important risk factor for late-onset
Alzheimers disease. Conducted at the University of California, Los Angeles using a
mouse model, a diabetic rat model and cultured human cells, the study found that DHA
increases the production of LR11, a protein vital to clearing the brain of the enzymes
that make the beta amyloid plaques that are thought to cause Alzheimers disease. The
investigators used Marteks lifesDHAfor a portion of the research.
 
    
    A study published in the Journal of Nutrition(January 2008) demonstrated the effects
of DHA supplementation on remnant-like particle-cholesterol (RLP-C) and red blood cell
omega-3 content in plasma, two potential risk factors for cardiovascular disease. In
the study, 28 hypertriglyceridemic men were given 3 grams of DHA per day or an olive oil
placebo for 90 days. Results showed a decrease in atherogenic RLP-C and an increase in
the cardio-protective omega-3 index, both of which are associated with improved
cardiovascular health. The study used Marteks lifesDHA.
 MANAGEMENT OUTLOOK
   PRODUCTION
    15




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16




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CRITICAL ACCOUNTING POLICIES AND
THE USE OF ESTIMATES
  RESULTS OF OPERATIONS
 Revenues
 Three months ended January 31,2008
    
    
    2007Product sales
    
    $
    78,609
    
    
    $
    66,712Contract manufacturing sales
    
    
    4,272
    
    
    
    3,549Total revenues
    
    $
    82,881
    
    
    $
    70,261
  Three months ended January 31,2008
    
    
    2007Infant formula market
    
    $
    70,278
    
    
    $
    60,852Food and beverage market
    
    
    2,095
    
    
    
    721Pregnancy
and nursing, nutritional supplement and animal feed markets
    
    
    5,292
    
    
    
    3,973Non-nutritional products
    
    
    944
    
    
    
    1,166Total product sales
    
    $
    78,609
    
    
    $
    66,712
 lifesDHA .
     17




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##### Table of Contents



Cost of Revenues
 Three months ended January 31,2008
    
    
    2007Cost of product sales
    
    $
    45,097
    
    
    $
    42,969Cost of contract manufacturing sales
    
    
    3,688
    
    
    
    3,423Total cost of revenues
    
    $
    48,785
    
    
    $
    46,392
    Operating Expenses
 Three months ended January 31,2008
    
    
    2007Research and development
    
    $
    5,981
    
    
    $
    5,942Selling, general and administrative
    
    
    12,981
    
    
    
    10,632Amortization of intangible assets
    
    
    1,679
    
    
    
    1,546Restructuring charge
    
    
    
    
    
    
    518Other operating expenses
    
    
    153
    
    
    
    473Total operating expenses
    
    $
    20,794
    
    
    $
    19,111
 Research and Development lifesDHA lifesDHA
 Selling, General and Administrative
 Amortization of Intangible Assets
  18




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##### Table of Contents



Restructuring Charge
 Other Operating Expenses
 Interest and Other Income, Net
 Interest Expense
 Income Tax Provision
  Net Income
 LIQUIDITY AND CAPITAL RESOURCES
  
    
    cash generated from operations;
    
    proceeds from the sale of equity securities;
    
    cash received from the exercise of stock options and warrants; and
    
    debt financing.
    19




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##### Table of Contents



Less than
    
    
    1-3
    
    
    3-5
    
    
    More thanIn thousands
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsNotes payable (1)
    
    $
    9,906
    
    
    $
    8,558
    
    
    $
    451
    
    
    $
    280
    
    
    $
    617Borrowings under revolving credit facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    3,950
    
    
    
    1,136
    
    
    
    2,333
    
    
    
    190
    
    
    
    291Unconditional purchase obligations (2)
    
    
    119,257
    
    
    
    94,814
    
    
    
    24,443
    
    
    
    
    
    
    
    Total contractual cash obligations (3)
    
    $
    133,113
    
    
    $
    104,508
    
    
    $
    27,227
    
    
    $
    470
    
    
    $
    908
 (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 2 to Consolidated Financial Statements) and guarantee
described below in Off-Balance Sheet Arrangements.(3)
    
    The table above does not include uncertain tax payments of $400,000, the timing of
which is also uncertain.    
    
    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 litigation to which we are a party;
    
    the costs of any merger and acquisition activity; and
    
    the costs of marketing and commercializing our products.
   20




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OFF-BALANCE SHEET ARRANGEMENTS
    21




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk.
    
 Item 4. Controls and Procedures.
 a)
    
    Evaluation of Disclosure Controls and Procedures.The Chief Executive Officer and Chief
Financial Officer of Martek Biosciences Corporation have evaluated the effectiveness of our
disclosure controls and procedures pursuant to Exchange Act rules 13a-15(e) and 15d-15(e)
and 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.There was no change in our internal control
over financial reporting in connection with the evaluation required by paragraph (d) of
Rules 13a-15 or 15d-15 under the Exchange Act that occurred during Marteks quarter ended
January 31, 2008 that materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
  22




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
    Thraustochytrium Schizochytrium
      23




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24




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##### Table of Contents



Item 1A. Risk Factors.
  A substantial portion of our nutritional oil products sales is made to five 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 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.
   
    
    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 alpinaare 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.
  25




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##### Table of Contents




    
    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 efforts.
 
    
    Some infant formulas now on the market outside the United States, including those
marketed by certain of Marteks licensees, use DHA derived from other sources, such as fish
oil or eggs.
 
    
    In December 2005, Lonza Group LTD, a Swiss chemical and biotechnology group, acquired
from Nutrinova Nutrition Specialities & 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 1 of Part II of this Form
10-Q, Legal Proceedings.
 
    
    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.
     26




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##### Table of Contents




    
    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. This divisional ARA patent
strengthens Marteks intellectual property position by providing commercially significant
protection through the expiration date of the original patent, January 22, 2012. Suntory
and Cargill have filed oppositions against this divisional ARA patent. In light of this
divisional ARA 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 is no longer in force and effect.
 
    
    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. Martek and Aventis have appealed. The appeal 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
Thraustochytriumand Schizochytriumunder 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 Specialities & 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 Specialities &
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. Appeal
hearings are scheduled for March 2008. The patent will remain in full force and effect
during the pendency of the appeal process.
  27




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##### Table of Contents




    
    Martek is opposing two of Suntorys low sterol ARA oil patents in Europe and one in
Australia. The patents are generally directed to processes for producing microbial ARA oil
having a low ratio of certain sterols, the resulting oil and its use in infant formula.
Martek believes that the patents are invalid for a number of reasons, including prior art
that anticipates the claims relevant to Martek. Evidence
that Marteks ARA oil was publicly
available before the priority date of the patents has been provided to the EPO. An Opposition Division hearing on the first European patent is scheduled for April
2008. Hearings on the other European patent and on the Australian patent are expected in
late 2008 or 2009.
 
    
    There are additional intellectual property proceedings
pending against Martek or that Martek has pending against third
parties that are
not considered material.
   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.
  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.
  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.
   28




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##### Table of Contents



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.
   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.
  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.
  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.
    29




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##### Table of Contents



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.
  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.
   
    
    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.
  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.
  Failure to effectively manage our growth could disrupt our operations and prevent us from
generating the revenues and gross profit margins we expect.
  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.
  30




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##### Table of Contents



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.
  Our business would be harmed if we fail to comply with applicable good manufacturing practices
as required by the FDA.
  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.
  31




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##### Table of Contents



Our corporate compliance program cannot guarantee that we are in compliance with all potentially
applicable federal and state regulations.
  Our business exposes us to potential product liability claims and recalls, which could adversely
impact our financial condition and performance.
  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.
   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.
   32




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##### Table of Contents




    
    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.
   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.
  Changes in foreign currency exchange rates or interest rates could reduce profitability.
   33




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##### Table of Contents



We are a defendant in a putative class action lawsuit which, if determined adversely, could have
a material adverse effect on us.
    34




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
 10.01
    
    License and Supply Agreement, executed February 13, 2008 and effective January 1, 2008, by
and between Numico Trading B.V. and the Company. * +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.*
 *
    
    Filed or furnished herewith.+
    
    Confidential treatment was requested for certain portions of this agreement. The
confidential portions were filed separately with the Commission.  35




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##### Table of Contents



SIGNATURES
  MARTEK BIOSCIENCES CORPORATION
(Registrant)Date:  March 11, 2008
    /s/ Peter L. BuzyPeter L. BuzyChief Financial Officer, Treasurer and Executive Vice
President for Finance and Administration
(Principal Financial and Accounting Officer)  36




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description10.01
    
    License and Supply Agreement, executed February 13, 2008 and effective January 1, 2008, by
and between Numico Trading B.V. and the Company. * +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.*
 *
    
    Filed or furnished herewith.+
    
    Confidential treatment was requested for certain portions of this agreement. The
confidential portions were filed separately with the Commission.  37