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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K/A
 Amendment
No. 1
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED OCTOBER 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER: 0-22354
 MARTEK BIOSCIENCES CORPORATION
  DELAWARE
(STATE OR OTHER JURISDICTION OF 
INCORPORATION OR ORGANIZATION)
    
    52-1399362
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
 6480 DOBBIN ROAD, COLUMBIA, MARYLAND 21045
 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
 þ o
 o þ
 þ o
 o
  þ o o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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EXPLANATORY NOTE
    o
    
    Item 1A  Risk Factorso
    
    Item 6  Selected Financial Datao
    
    Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operationso
    
    Item 8  Financial Statements and Supplementary Datao
    
    Item 9A  Controls and Procedures




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PART IItem 1A.
    
    Risk Factors
    
    
    1PART IIItem 6.
    
    Selected Financial Data
    
    
    11Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 8.
    
    Financial Statements and Supplementary Data
    
    
    23Item 9A.
    
    Controls and Procedures
    
    
    45PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    46Signatures
    
    
    47




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PART I
  ITEM 1A. RISK FACTORS.
  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 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, 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. nor are we aware of any plans by them or any of our
other licensees to do so, the GRAS notification removes a significant regulatory hurdle to
the introduction of competitive products in the U.S. If Ross Products introduces such
competitive products, we cannot be certain that the economic protection that we believe we
have via existing patents, royalty requirements of license agreements and market factors
will protect us from the financial impact of such product introductions.
    
    Reliant Pharmaceuticals is currently selling Omacor, a DHA/ EPA ethyl ester for
treatment of hyperlipidemia. Omacor is a lipid-regulating agent which includes both EPA
and DHA from fish oil. Reliant Pharmaceuticals has recently filed an application with the
FDA for an indication that will expand the use of Omacor. Other pharmaceutical
applications using omega-3 fatty acids may be expected.
    
    Suntory Limited, Cargill Inc., through a joint venture with a company in China, and
other independent Chinese manufacturers are producing and distributing a fungal source of
ARA. In addition, we are aware that there may be manufacturers in China attempting to
produce an algal source of DHA, but we are uncertain of the overall status and commercial
potential of these development efforts.
 1




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
    
    Some infant formulas now on the market outside the United States, including those
marketed by certain of Marteks licensees, use DHA derived from other sources, such as fish
oil or eggs.
    
    In December 2005, Lonza Group LTD, a Swiss chemical and biotechnology group, acquired
from Nutrinova Specialties & Food Ingredients GmbH, a wholly-owned subsidiary of Celanese
Corporation, Nutrinovas business having as its product a DHA-rich microalgal oil. Since
the acquisition, Lonza has actively marketed its DHA oil to the food and beverage and
dietary supplement markets in the United States, Europe and China. Both Nutrinova and
Lonza are defendants in patent infringement actions involving our DHA patents that we have
brought in both the United States and Germany. In October 2006, the infringement action in
the United States was tried, and a verdict favorable to Martek was returned. The jury
found that Lonza infringed all the asserted claims of three Martek patents and that these
patents were valid. It also found that Lonza acted willfully in its infringement of one of
these patents. The judge will now determine if any of the jurys decisions were
inappropriate as a matter of law, whether Martek is entitled to a permanent injunction
against Lonza, and, if so, whether the permanent injunction should be stayed pending the
outcome of any appeal. These lawsuits are further described in
Item 3 of Part I of the original Form 10-K, Legal Proceedings.
    
    Other companies, several with greater financial resources than ours, are developing
plant-based DHA and other companies are developing chemically synthesized DHA.
    
    Several large companies, including BASF AG, DSM and Ocean Nutrition, and a number of
smaller companies, manufacture microencapsulated fish oil products. Although
microencapsulation of the oil resolves many of the odor, stability and taste issues found
with fish oil, a microencapsulated product currently is more costly than regular fish oil.
Fish oil-based products (i) are used as a DHA source by some infant formula companies, (ii)
currently dominate the adult DHA supplement market and (iii) are included in certain foods
on the market in various parts of the world. Because fish oil is generally less costly than
our DHA oil and continues to improve in quality and gain general market acceptance, fish
oil presents a substantial competitive threat.
 If we are unable to obtain or maintain patent protection or if our patents do not provide
protection against competitive products, our results of operations may be adversely affected.
    2




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
    
    Aventis S.A. and Nagase & Co. Ltd. are challenging our European patent covering our
DHA-containing oils. At a hearing in October 2000, the Opposition Division of the European
Patent Office (EPO) revoked our patent on the grounds that it was not novel. We
immediately appealed this ruling, and in July 2002 we received a positive ruling from an
Appeal Board of the EPO, setting aside the prior decision to revoke this patent. The patent
was returned to the Opposition Division for a determination as to whether it has met the
legal requirement of inventive step. A hearing in August 2005 resulted in a ruling by the
Opposition Division that this requirement had been met and the validity of the patent was
upheld. Aventis appealed the decision to the Appeal Board of the EPO. Martek filed its
answer to Aventis grounds for appeal in July 2006. The appeal process is not expected to
be completed before the second half of 2007. Claim one of this patent is the basis of the
patent infringement suit against Nutrinova and Lonza in Germany, discussed below.
    
    With respect to our ARA patent issued by the EPO, BASF AG, Friesland Brands B.V., and
Suntory Limited filed their grounds for opposing this patent with the Opposition Division
of the EPO. At a hearing at the Opposition Division in April 2005, the Opposition Division
of the EPO upheld the patent in a form containing modified claims that are narrower than
the claims originally granted. In an effort to broaden the claims of the patent, we
appealed the decision. Suntory and BASF have also appealed. Friesland Brands B.V. has
withdrawn from the opposition. The patent in the form containing the claims that were
originally granted will remain in full force and effect throughout the appeal process. The
appeal process is not expected to be completed until late 2007 or early 2008. Further, in
order to broaden the scope of protection, Martek has pending patent applications and
intends to pursue new patent applications which would be based on the existing patent.
These pending and new applications, if granted, would provide important additional
protection. If the patent in the narrower form approved by the Opposition Division is
ultimately upheld and certain pending and new related patent applications are not granted
with the desired claim scope, it is likely that Marteks European intellectual property
position with respect to ARA would not afford much competitive protection.
    
    With respect to our blended oil (blend of DHA and ARA oils for use in various
applications, including infant formula) patent issued by the EPO, BASF AG and Suntory
Limited filed their grounds for opposing this patent with the Opposition Division of the
EPO. In November 2004, the Opposition Division of the EPO revoked Marteks European blended
oil patent as a result of these challenges. We immediately filed an appeal of this
decision; as a consequence, the blended oil patent has been reinstated and will remain in
full force and effect during the appeal. Both Suntory and BASF filed responses to our
appeal. Further written submissions were filed by Martek in January 2007. A hearing
before the Appeal Board of the EPO has been scheduled for February 2007. In the event that
the Appeal Board rules against Martek and revokes the patent, that decision would be final.
There would be no further recourse for Martek.
    
    Prior to our purchase of OmegaTech, Aventis Research and Technologies GmbH & Co. KG, and
Nagase Limited challenged OmegaTechs European patent covering its DHA-containing oils. At
a hearing in December 2000, the Opposition Division of the EPO upheld some of the claims
and revoked other claims. OmegaTech immediately appealed this ruling, as did Aventis. At an
appeal hearing in May 2005, we received a favorable decision from the Appeal Board of the
EPO, which overturned the decision of the Opposition Division and returned the case to the
Opposition Division for review on the merits of the patent claims. Any decision made by
the Opposition Division can be appealed. Assuming an appeal, the review process is not
expected to be completed until 2009, during which time the patent will remain in full force
and effect.
    
    An EPO Opposition Division hearing was held on November 15, 2005, with respect to a
European DHA patent acquired by Martek as part of the OmegaTech purchase. The patent was
upheld in modified form. This patent is directed to processes for fermenting
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 not expected to be completed before late 2007.
    
    In September 2003, we filed a patent infringement lawsuit in the U.S. District Court in
Delaware against Nutrinova Inc., Nutrinova Nutrition Specialties & Food Ingredients GmbH,
Celanese Ventures GmbH, and Celanese AG. Celanese Ventures GmbH and Celanese AG were
dropped from the lawsuit. In October 2006, after an almost two week trial in Wilmington,
Delaware, the jury returned a favorable verdict to Martek, deciding that all three of the
asserted Martek DHA patents were valid and infringed, and that one was willfully infringed.
The judge will now determine if any of the jurys decisions were inappropriate as a matter
of law, whether Martek is entitled to a permanent injunction against Lonza, and, if so,
whether the permanent injunction should be stayed pending the outcome of any appeal.
 3




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
    
    We also filed a patent infringement suit involving Nutrinova Nutrition Specialties &
Food Ingredients GmbH and Celanese Ventures GmbH in Germany in January 2004. The complaint
alleges infringement of our European patent relating to DHA-containing oils. A hearing in
this case was held in a district court in Dusseldorf in April 2005 and the court delayed
its decision pending input from a court-appointed technical expert. The courts decision is
expected at some point in 2007. Lonza has also been added to this lawsuit.
    
    With respect to our ARA patent in South Korea, Suntory has filed an opposition. A
hearing on the matter was held in late January 2006 and the Korean Intellectual Property
Office Examiners have ruled against Martek. Martek has appealed. The appeal brief is due
in February 2007. The patent will remain in full force and effect during the pendency of
the appeal.
    
    Suntory has also initiated an invalidation case against our blended oil patent in South
Korea. Our response to Suntory was filed in February 2005, Suntory responded in March 2006
and Martek filed further submissions in May 2006. A hearing was held in July 2006. A
preliminary ruling was issued in October 2006, rejecting the fish oil plus microbial ARA
claims, but finding the fish oil plus microbial ARA and DHA claims to be acceptable. The
next ruling is expected in early 2007. The patent will remain in full force and effect
during the pendency of the appeal process.
    
    There are additional intellectual property oppositions pending against Martek that are
not considered material.
   If 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.
  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.
  4




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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.
  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.
  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.
  5




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As we and our major suppliers increase production of our nutritional oils, we may experience
certain risks associated with the start-up/ ramp-up of commercial manufacturing that could have
a material adverse effect on our business, financial condition, and/ or results of operations.
   
    
    we may experience problems processing, handling and shipping the higher quantities of oil produced from our expanded facilities;
    
    the costs of expanding, operating and maintaining our production facilities may exceed our expectations;
    
    product defects may result;
    
    lower than anticipated fermentation success rates may result;
    
    lower downstream processing yields may result;
    
    environmental and safety problems may result from our production process; and
    
    regulatory issues relating to the scale-up and operation regarding our production processes may arise.
  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.
  6




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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 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.
  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
waste. If we fail to properly handle these hazardous materials and/ or waste emissions,
substantial costs and harm to our business could result.
  7




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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 or 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.
   8




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The market price of our common stock may experience a high level of volatility due to factors
such as the volatility in the market for biotechnology stocks generally, and the short-term
effect of a number of possible events.
  
    
    announcements of technical innovations, new commercial products and product launches by us or our competitors;
    
    announcements of use of competitors DHA and/or ARA products by our customers;
    
    arrangements or strategic partnerships by us or our competitors;
    
    announcements of license agreements, acquisitions or strategic alliances;
    
    announcements of sales by us or our competitors;
    
    patent or other intellectual property achievements or adverse developments;
    
    quarterly fluctuations in our revenues and results of operations;
    
    failure to enter into favorable third-party manufacturing agreements;
    
    regulatory decisions (approvals or disapprovals) or changes concerning our products and our competitors products;
    
    events related to threatened, new or existing litigation, or the results thereof;
    
    changes in our estimates of financial performance or changes in recommendations by securities analysts; and
    
    general market conditions for growth companies and bioscience companies.
   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.
   9




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Changes in foreign currency exchange rates or interest rates could result in losses.
  We are a defendant in a putative class action lawsuit which, if determined adversely, could
have a material adverse affect on us.
   10




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PART II
 ITEM 6.
    
    SELECTED FINANCIAL DATA.
   Year ended October 31,In thousands, except per share data
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(restated)Consolidated Statements of Operations DataRevenues:Product sales
    
    $
    255,838
    
    
    $
    203,765
    
    
    $
    170,565
    
    
    $
    112,298
    
    
    $
    46,055Contract manufacturing sales
    
    
    14,816
    
    
    
    14,087
    
    
    
    13,928
    
    
    
    2,439
    
    
    
    Total revenues
    
    
    270,654
    
    
    
    217,852
    
    
    
    184,493
    
    
    
    114,737
    
    
    
    46,055Cost of revenues:Cost of
product sales, including idle capacity costs
    
    
    158,600
    
    
    
    120,865
    
    
    
    103,423
    
    
    
    66,347
    
    
    
    29,794Cost of contract manufacturing sales
    
    
    14,676
    
    
    
    12,516
    
    
    
    11,570
    
    
    
    2,192
    
    
    
    Total cost of revenues
    
    
    173,276
    
    
    
    133,381
    
    
    
    114,993
    
    
    
    68,539
    
    
    
    29,794Gross margin
    
    
    97,378
    
    
    
    84,471
    
    
    
    69,500
    
    
    
    46,198
    
    
    
    16,261Operating expenses:Research and development (1)
    
    
    24,823
    
    
    
    20,468
    
    
    
    18,596
    
    
    
    13,154
    
    
    
    12,188Selling, general and administrative (1)
    
    
    41,614
    
    
    
    33,404
    
    
    
    25,804
    
    
    
    16,275
    
    
    
    11,804Restructuring charge
    
    
    4,729
    
    
    
    
    
    
    
    
    
    
    
    (250
    )
    
    
    1,266Other operating expenses
    
    
    1,158
    
    
    
    7,654
    
    
    
    4,000
    
    
    
    1,943
    
    
    
    406Acquired in-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,788Total operating expenses
    
    
    72,324
    
    
    
    61,526
    
    
    
    48,400
    
    
    
    31,122
    
    
    
    41,452Income (loss) from operations
    
    
    25,054
    
    
    
    22,945
    
    
    
    21,100
    
    
    
    15,076
    
    
    
    (25,191
    )Interest and other income (expense), net
    
    
    (1,528
    )
    
    
    1,125
    
    
    
    772
    
    
    
    916
    
    
    
    958Income (loss) before income tax provision (benefit)
    
    
    23,526
    
    
    
    24,070
    
    
    
    21,872
    
    
    
    15,992
    
    
    
    (24,233
    )Income tax provision (benefit) (1)
    
    
    8,588
    
    
    
    8,786
    
    
    
    (25,176
    )
    
    
    
    
    
    
    Net income (loss)
    
    $
    14,938
    
    
    $
    15,284
    
    
    $
    47,048
    
    
    $
    15,992
    
    
    $
    (24,233
    )Net income (loss) per share, basic
    
    $
    0.47
    
    
    $
    0.49
    
    
    $
    1.62
    
    
    $
    0.63
    
    
    $
    (1.10
    )Net income (loss) per share, diluted
    
    $
    0.46
    
    
    $
    0.48
    
    
    $
    1.55
    
    
    $
    0.58
    
    
    $
    (1.10
    )Shares used in computing basic earnings per share
    
    
    32,113
    
    
    
    31,164
    
    
    
    29,033
    
    
    
    25,510
    
    
    
    21,982Shares used in computing diluted earnings per share
    
    
    32,343
    
    
    
    32,032
    
    
    
    30,386
    
    
    
    27,417
    
    
    
    21,982(1)   Includes the following amounts related to equity-based compensation
expense:Research and development
    
    
    1,143
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling, general and administrative
    
    
    2,129
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income tax provision (benefit)
    
    
    (1,194
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 11




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October 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(restated)Consolidated Balance Sheets and Other DataCash, cash equivalents, short-term investments and marketable securities
    
    $
    26,828
    
    
    $
    33,347
    
    
    $
    42,650
    
    
    $
    96,971
    
    
    $
    22,419Working capital
    
    
    120,182
    
    
    
    124,208
    
    
    
    68,195
    
    
    
    106,218
    
    
    
    30,457Total assets
    
    
    597,973
    
    
    
    578,485
    
    
    
    501,398
    
    
    
    295,523
    
    
    
    124,312Long-term debt, notes payable and other long-term obligations
    
    
    46,277
    
    
    
    66,115
    
    
    
    97,175
    
    
    
    10,441
    
    
    
    Long-term portion of deferred revenue
    
    
    9,335
    
    
    
    8,959
    
    
    
    9,140
    
    
    
    8,992
    
    
    
    2,246Accumulated deficit
    
    
    (34,298
    )
    
    
    (49,236
    )
    
    
    (64,520
    )
    
    
    (111,568
    )
    
    
    (127,560
    )Total stockholders equity
    
    
    492,575
    
    
    
    469,205
    
    
    
    346,164
    
    
    
    243,964
    
    
    
    105,977Cash dividends declared  common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 12




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 This Managements Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements concerning our business and operations, including, among other things,
statements concerning the following:
 
    
    expectations regarding future revenue growth, gross margin and overall profitability;
    
    expectations regarding product introductions and growth in nutritional product sales;
    
    expectations regarding potential collaborations and acquisitions
    
    expectations regarding demand for products with our nutritional oils;
    
    expectations regarding sales to and by our infant formula licensees and supplemented infant formula market penetration levels;
    
    expectations regarding marketing of our oils by our infant formula licensees;
    
    expectations regarding continued interest by and agreements with food, beverage and supplement companies;
    
    expectations regarding growing consumer recognition of the key health benefits of DHA and ARA;
    
    expectations regarding competitive products;
    
    expectations regarding future efficiencies and improvements in manufacturing
processes and the cost of production of our nutritional oils;
    
    expectations regarding future purchases of third-party manufactured oils;
    
    expectations regarding the amount of production capacity and our ability to meet future demands for our nutritional oils;
    
    expectations regarding the amount of inventory held by us or our customers;
    
    expectations regarding production capacity utilization and the effects of excess production capacity;
    
    expectations regarding future selling, general and administrative and research and development costs;
    
    expectations regarding future capital expenditures;
    
    expectations regarding levels of consumption through governmental programs of infant
formula products containing our nutritional oils;
    
    expectations regarding possibly significant expenses to defend putative securities
class action lawsuits alleging false and material misstatements and omissions of
material facts concerning our business and prospects; and
    
    expectations regarding our ability to protect our intellectual property.
 Forward-looking statements include those statements containing words such as the following:
 
    
    will,
    
    should,
    
    could,
    
    anticipate,
    
    believe,
    
    plan,
    
    estimate,
    
    expect,
    
    intend, and other similar expressions.
 All of these forward-looking statements involve risks and uncertainties. They and other
forward-looking statements in this Form 10-K/A 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/A 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.
 13




---



##### 



GENERAL
 lifesDHA ® lifesDHA ® ®
 ®
  lifesDHA
 
    
    Mead Johnson launched Expecta LIPIL®, a DHA supplement for pregnant and nursing women containing lifesDHA.
    
    PBM Products launched a beverage containing lifesDHA that is formulated for diabetics
and people with atypical glucose tolerance.
    
    GlaxoSmithKline launched a second powdered drink mix containing lifesDHA in India. The
product, Junior Horlicks, is formulated for a childs developing brain and nervous system.
GlaxoSmithKline had previously launched an adult DHA beverage.
    
    Sciele Pharma, Inc. launched OptiNate and Mission Pharmacal launched Citracal® Prenatal
+ DHA. Both of these products are prescription prenatal supplements containing lifesDHA.
    
    Vincent Foods, LLC is selling Oh Mama! nutrition bars containing lifesDHA, which also
target pregnant and nursing women.
    
    Several egg producers, including Gold Circle Farms®, are producing eggs and liquid eggs
using lifesDHA. These eggs are sold in several grocery store chains in the U.S. and
Europe.
    
    Priégola is selling Simbi + Omega-3 yogurt with lifesDHA, which is now available in
major supermarket chains throughout Spain and is being marketed to children and adults for
its brain health benefits.
    
    Odwalla, Inc. is selling Odwalla Soymilk and the Soy Smart Chai Soymilk drink, both of
which feature lifesDHA, in the U.S.
    
    Dynamic Confections recently re-formulated the Botticelli Choco-Omeg® line of
nutritional bars to include lifesDHA. The bars are available at Canadian retailers.
    
    Flora, Inc. recently launched Udos Choice® DHA Oil Blend, a flaxseed oil blend,
containing lifesDHA. Floras Udos Choice brand is a line of vegetarian, organic and
sustainable health oils.
    
    Italian dairy company Latteria Merano/Milchhof Meran recently launched Mente Viva
fortified drinkable yogurt with lifesDHA. This product is available in supermarkets
throughout Italy.
    
    Italian company Centrale Del Latte Di Brescia launched Sprintissimo fortified drinkable
yogurt with lifesDHA. This product is available in supermarkets throughout Italy.
    
    NutraBella is selling Bellybar nutrition bars containing lifesDHA.
    
    Life Science Nutritionals recently launched Nutri-Kids Nutrition-to-Go including
lifesDHA. This ready-to-drink milk product is available at select grocery and nutrition
retailers in the U.S. and Canada.
    
    General Mills has introduced Yoplait Kids® featuring lifesDHA. This yogurt product
will be available at U.S. retailers nationwide in mid-February 2007.
 14




---



##### 



lifesDHA





    
    the timing of infant formula market introductions by our customers both domestically and internationally;
    
    the timing of our customers production and ordering patterns;
    
    the timing and extent of stocking and destocking of inventory by our customers,
including the potential that customers will move to just in time inventory purchasing now
that we have reached a base finished goods inventory level;
    
    the timing and extent of our customers plant maintenance shutdowns;
    
    the timing and extent of introductions of DHA into various child and/or adult applications;
    
    the continued acceptance of products containing our oils under WIC programs in the U.S.;
    
    the continued acceptance of these products by consumers and continued demand by our customers;
    
    the ability by us and our third-party manufacturers to produce adequate levels of our nutritional oils on a consistent basis;
    
    our ability to protect against competitive products through our patents;



    
    competition from alternative sources of DHA and ARA; and
    
    agreements with other future third-party collaborators to market our products or develop new products.
  MANAGEMENT OUTLOOK
 lifesDHA
   PRODUCTION
  15




---



##### 









CRITICAL ACCOUNTING POLICIES AND
THE USE OF ESTIMATES
  Valuation of Long-lived Assets
 16




---



##### 



Revenue Recognition




Deferred Income Taxes


Inventory
 Equity-Based Compensation Expense
  Restructuring Charge
 Patent Cost Capitalization
 17




---



##### 



RESULTS OF OPERATIONS


Revenues




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




Cost of Revenues
  Year ended October 31,2006
    
    2005
    
    2004(restated)Cost of
product sales, including idle capacity costs
    
    $
    158,600
    
    
    $
    120,865
    
    
    $
    103,423Cost of contract manufacturing sales
    
    
    14,676
    
    
    
    12,516
    
    
    
    11,570Total cost of revenues
    
    $
    173,276
    
    
    $
    133,381
    
    
    $
    114,993
     18




---



##### 



Operating Expenses




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


Research and Development




Selling, General and Administrative
  Restructuring Charge
 Other Operating Expenses
 Interest and Other Income, Net
  Interest Expense
  Income Tax Provision (Benefit)
    19




---



##### 



Net Income










RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS






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.




20




---



##### 







Less than
    
    
    1-3
    
    
    3-5
    
    
    More thanIn thousands
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsNotes payable(1)
    
    $
    11,368
    
    
    $
    1,163
    
    
    $
    9,043
    
    
    $
    370
    
    
    $
    792Borrowings under revolving credit facility
    
    
    36,000
    
    
    
    
    
    
    
    
    
    
    
    36,000
    
    
    
    Operating lease obligations(2)
    
    
    4,422
    
    
    
    1,013
    
    
    
    1,895
    
    
    
    1,172
    
    
    
    342Unconditional purchase obligations(3), (4)
    
    
    35,667
    
    
    
    4,289
    
    
    
    31,378
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    87,457
    
    
    $
    6,465
    
    
    $
    42,316
    
    
    $
    37,542
    
    
    $
    1,134
  (1)
    
    Minimum payments above include interest and principal due under these notes.(2)
    
    Does not include lease payments on equipment formerly subject to operating lease
at our Kingstree facility that we repurchased for $3.9 million in November 2006.(3)
    
    Primarily includes future inventory purchases from DSM pursuant to the guarantee
described below in Off-Balance Sheet Arrangements.(4)
    
    Does not include $750,000 license payment for plant-based DHA technology due upon
execution of an amendment to collaboration agreement between Martek and a Canadian
biotechnology company in January 2007.   21




---



##### 










    
    our ability to operate profitably and generate positive cash flow;
    
    growth in our infant formula, food and beverage and other nutritional product sales;
    
    the extent and progress of our research and development programs;
    
    the progress of pre-clinical and clinical studies;
    
    the time and costs of obtaining and maintaining regulatory clearances for our products that are subject to such clearances;
    
    the costs involved in filing, protecting and enforcing patent claims;
    
    competing technological and market developments;
    
    the development or acquisition of new products;
    
    the cost of acquiring additional and/or operating and expanding existing manufacturing
facilities for our various products and potential products (depending on which products we
decide to manufacture and continue to manufacture ourselves);
    
    the costs associated with our internal build-up of inventory levels;
    
    the costs associated with our defense against a putative securities class action and other lawsuits;
    
    the costs of merger and acquisition activity; and
    
    the costs of marketing and commercializing our products.




OFF-BALANCE SHEET ARRANGEMENTS
    22




---



##### 



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
    
    PAGEReport of Ernst &Young LLP, Independent Registered Public Accounting Firm
    
    24Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on
Internal Control Over Financial Reporting
    
    25Consolidated Balance Sheets as of October 31, 2006 and 2005
    
    26Consolidated Statements of Income for the years ended
October 31, 2006, 2005 and 2004
    
    27Consolidated Statements of Stockholders Equity for the years
ended October 31, 2006, 2005 and 2004
    
    28Consolidated Statements of Cash Flows for the years ended
October 31, 2006, 2005 and 2004
    
    29Notes to Consolidated Financial Statements
    
    30
 23




---



##### 



Report of Independent Registered Public Accounting Firm
 
        
  24




---



##### 



Report of Independent Registered Public Accounting Firm on

Internal Control over Financial Reporting
 
           
 25




---



##### 



MARTEK BIOSCIENCES CORPORATION
  October 31,In thousands, except share and per share data
    

2006
    
    

2005(restated)AssetsCurrent assetsCash and cash equivalents
    
    $
    15,578
    
    
    $
    11,047Short-term investments and marketable securities
    
    
    11,250
    
    
    
    22,300Accounts receivable, net
    
    
    32,746
    
    
    
    27,603Inventories, net
    
    
    100,320
    
    
    
    91,535Other current assets
    
    
    10,074
    
    
    
    5,929Total current assets
    
    
    169,968
    
    
    
    158,414Property, plant and equipment, net
    
    
    286,922
    
    
    
    290,733Deferred tax asset
    
    
    41,619
    
    
    
    48,201Goodwill
    
    
    48,603
    
    
    
    48,490Other intangible assets, net
    
    
    36,828
    
    
    
    31,129Other assets, net
    
    
    14,033
    
    
    
    1,518Total assets
    
    $
    597,973
    
    
    $
    578,485Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    21,663
    
    
    $
    16,661Accrued liabilities
    
    
    24,098
    
    
    
    13,692Current portion of notes payable and other long-term obligations
    
    
    1,231
    
    
    
    3,113Current portion of deferred revenue
    
    
    2,794
    
    
    
    740Total current liabilities
    
    
    49,786
    
    
    
    34,206Long-term debt under revolving credit facility
    
    
    36,000
    
    
    
    55,000Notes payable and other long-term obligations
    
    
    10,277
    
    
    
    11,115Long-term portion of deferred revenue
    
    
    9,335
    
    
    
    8,959Total liabilities
    
    
    105,398
    
    
    
    109,280CommitmentsStockholders equityPreferred stock, $.01 par value, 4,700,000 shares authorized; none issued or outstanding
    
    
    
    
    
    
    Series A junior participating preferred stock, $.01 par value; 300,000 shares authorized; none issued or outstanding
    
    
    
    
    
    
    Series B junior participating preferred stock, $.01 par value; 300,000 shares authorized; none issued or outstanding
    
    
    
    
    
    
    Common stock, $.10 par value; 100,000,000 shares authorized; 32,156,162 and 32,026,595 shares issued and
outstanding, respectively
    
    
    3,216
    
    
    
    3,203Additional paid-in capital
    
    
    523,486
    
    
    
    515,237Accumulated other comprehensive income
    
    
    171
    
    
    
    1Accumulated deficit
    
    
    (34,298
    )
    
    
    (49,236
    )Total stockholders equity
    
    
    492,575
    
    
    
    469,205Total liabilities and stockholders equity
    
    $
    597,973
    
    
    $
    578,485
 See accompanying notes.
 26




---



##### 



MARTEK BIOSCIENCES CORPORATION
  Year ended October 31,In thousands, except share and per share data
    
    2006
    
    
    2005
    
    
    2004(restated)Revenues:Product sales
    
    $
    255,838
    
    
    $
    203,765
    
    
    $
    170,565Contract manufacturing sales
    
    
    14,816
    
    
    
    14,087
    
    
    
    13,928Total revenues
    
    
    270,654
    
    
    
    217,852
    
    
    
    184,493Cost of revenues:Cost of
product sales, including idle capacity costs
    
    
    158,600
    
    
    
    120,865
    
    
    
    103,423Cost of contract manufacturing sales
    
    
    14,676
    
    
    
    12,516
    
    
    
    11,570Total cost of revenues
    
    
    173,276
    
    
    
    133,381
    
    
    
    114,993Gross margin
    
    
    97,378
    
    
    
    84,471
    
    
    
    69,500Operating expenses:Research and development (1)
    
    
    24,823
    
    
    
    20,468
    
    
    
    18,596Selling, general and administrative (1)
    
    
    41,614
    
    
    
    33,404
    
    
    
    25,804Restructuring charge
    
    
    4,729
    
    
    
    
    
    
    
    Other operating expenses
    
    
    1,158
    
    
    
    7,654
    
    
    
    4,000Total operating expenses
    
    
    72,324
    
    
    
    61,526
    
    
    
    48,400Income from operations
    
    
    25,054
    
    
    
    22,945
    
    
    
    21,100Interest and other income, net
    
    
    1,490
    
    
    
    1,428
    
    
    
    777Interest expense
    
    
    (3,018
    )
    
    
    (303
    )
    
    
    (5
    )Income before income tax provision (benefit)
    
    
    23,526
    
    
    
    24,070
    
    
    
    21,872Income tax provision (benefit) (1)
    
    
    8,588
    
    
    
    8,786
    
    
    
    (25,176
    )Net income
    
    $
    14,938
    
    
    $
    15,284
    
    
    $
    47,048Net income per shareBasic
    
    $
    0.47
    
    
    $
    0.49
    
    
    $
    1.62Diluted
    
    $
    0.46
    
    
    $
    0.48
    
    
    $
    1.55Weighted average common shares outstandingBasic
    
    
    32,113,301
    
    
    
    31,164,149
    
    
    
    29,033,241Diluted
    
    
    32,343,015
    
    
    
    32,031,503
    
    
    
    30,385,707(1)   Includes the following amounts related to
equity-based compensation expense:Research and development
    
    
    1,143
    
    
    
    
    
    
    
    Selling, general and administrative
    
    
    2,129
    
    
    
    
    
    
    
    Income tax provision (benefit)
    
    
    (1,194
    )
    
    
    
    
    
    
    
 See accompanying notes.
 27




---



##### 



MARTEK BIOSCIENCES CORPORATION
  AccumulatedAdditional
    
    
    OtherCommon Stock
    
    
    Paid-in
    
    
    Comprehensive
    
    
    AccumulatedIn thousands, except share data
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Income
    
    
    Deficit
    
    
    TotalBalance at October 31, 2003
    
    
    28,041,323
    
    
    $
    2,804
    
    
    $
    352,728
    
    
    $
    
    
    
    $
    (111,568
    )
    
    $
    243,964Issuance of common stock, net of issuance costs
    
    
    176,885
    
    
    
    18
    
    
    
    11,272
    
    
    
    
    
    
    
    
    
    
    
    11,290Exercise of stock options and warrants
    
    
    1,272,919
    
    
    
    127
    
    
    
    20,817
    
    
    
    
    
    
    
    
    
    
    
    20,944Equity-based compensation
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    28Tax benefit of exercise of non-qualified stock options
    
    
    
    
    
    
    
    
    
    
    22,822
    
    
    
    
    
    
    
    
    
    
    
    22,822Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,048
    
    
    
    47,048Other comprehensive income:Unrealized gain on exchange rate forward
contract, net of tax of $0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    68Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,116Balance at October 31, 2004
    
    
    29,491,127
    
    
    
    2,949
    
    
    
    407,667
    
    
    
    68
    
    
    
    (64,520
    )
    
    
    346,164Issuance of common stock, net of issuance costs
    
    
    1,756,614
    
    
    
    176
    
    
    
    81,268
    
    
    
    
    
    
    
    
    
    
    
    81,444Exercise of stock options
    
    
    778,854
    
    
    
    78
    
    
    
    18,592
    
    
    
    
    
    
    
    
    
    
    
    18,670Equity-based compensation
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    36Tax benefit of exercise of non-qualified stock options
    
    
    
    
    
    
    
    
    
    
    7,674
    
    
    
    
    
    
    
    
    
    
    
    7,674Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,284
    
    
    
    15,284Other comprehensive income:Unrealized loss on exchange rate forward
contract, net of tax of $0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67
    )
    
    
    
    
    
    
    (67
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,217Balance at October 31, 2005
    
    
    32,026,595
    
    
    
    3,203
    
    
    
    515,237
    
    
    
    1
    
    
    
    (49,236
    )
    
    
    469,205Exercise of stock options and warrants
    
    
    129,567
    
    
    
    13
    
    
    
    2,909
    
    
    
    
    
    
    
    
    
    
    
    2,922Equity-based compensation
    
    
    
    
    
    
    
    
    
    
    3,753
    
    
    
    
    
    
    
    
    
    
    
    3,753Tax benefit of exercise of non-qualified stock options
    
    
    
    
    
    
    
    
    
    
    1,587
    
    
    
    
    
    
    
    
    
    
    
    1,587Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,938
    
    
    
    14,938Other comprehensive income:Unrealized gain on exchange rate forward
contract, net of tax of $102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    170
    
    
    
    
    
    
    
    170Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,108Balance at October 31, 2006 (restated)
    
    
    32,156,162
    
    
    $
    3,216
    
    
    $
    523,486
    
    
    $
    171
    
    
    $
    (34,298
    )
    
    $
    492,575
 See accompanying notes.
 28




---



##### 



MARTEK BIOSCIENCES CORPORATION
  Year ended October 31,In thousands
    
    2006
    
    
    2005
    
    
    2004(restated)Operating activitiesNet income
    
    $
    14,938
    
    
    $
    15,284
    
    
    $
    47,048Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    21,672
    
    
    
    16,494
    
    
    
    8,687Provision for inventory obsolescence
    
    
    500
    
    
    
    2,000
    
    
    
    500Deferred tax provision (benefit)
    
    
    8,588
    
    
    
    8,786
    
    
    
    (25,176
    )Equity-based compensation expense
    
    
    3,272
    
    
    
    
    
    
    
    Incremental tax benefit from exercise of non-qualified stock options
    
    
    (1,587
    )
    
    
    
    
    
    
    Loss from disposal and write-down of assets and other
    
    
    2,845
    
    
    
    1,131
    
    
    
    169Changes in operating assets and liabilities:Accounts receivable
    
    
    (5,143
    )
    
    
    9,689
    
    
    
    (17,128
    )Inventories
    
    
    (20,804
    )
    
    
    (63,156
    )
    
    
    (15,525
    )Other assets
    
    
    (4,393
    )
    
    
    1,413
    
    
    
    1,324Accounts payable
    
    
    5,002
    
    
    
    (10,303
    )
    
    
    9,150Accrued liabilities
    
    
    8,527
    
    
    
    2,947
    
    
    
    1,552Deferred revenue and other liabilities
    
    
    2,205
    
    
    
    (1,429
    )
    
    
    (511
    )Net cash provided by (used in) operating activities
    
    
    35,622
    
    
    
    (17,144
    )
    
    
    10,090Investing activitiesSale (purchase) of short-term investments and marketable securities, net
    
    
    11,050
    
    
    
    (9,095
    )
    
    
    53,842Expenditures for property, plant and equipment
    
    
    (10,902
    )
    
    
    (57,181
    )
    
    
    (180,409
    )(Repurchase) proceeds from sale-leaseback transaction and other
    
    
    (6,877
    )
    
    
    4,272
    
    
    
    10,895Capitalization of intangible and other assets
    
    
    (6,862
    )
    
    
    (4,989
    )
    
    
    (9,383
    )Net cash used in investing activities
    
    
    (13,591
    )
    
    
    (66,993
    )
    
    
    (125,055
    )Financing activitiesRepayments of notes payable and other long-term obligations
    
    
    (3,009
    )
    
    
    (4,875
    )
    
    
    (2,748
    )(Repayments) borrowings under revolving credit facility, net
    
    
    (19,000
    )
    
    
    (30,000
    )
    
    
    85,000Proceeds from the issuance of common stock, net of issuance costs
    
    
    
    
    
    
    81,444
    
    
    
    11,290Proceeds from the exercise of stock options and warrants
    
    
    2,922
    
    
    
    18,670
    
    
    
    20,944Incremental tax benefit from exercise of non-qualified stock options
    
    
    1,587
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    500
    
    
    
    Net cash (used in) provided by financing activities
    
    
    (17,500
    )
    
    
    65,739
    
    
    
    114,486Net increase (decrease) in cash and cash equivalents
    
    
    4,531
    
    
    
    (18,398
    )
    
    
    (479
    )Cash and cash equivalents, beginning of year
    
    
    11,047
    
    
    
    29,445
    
    
    
    29,924Cash and cash equivalents, end of year
    
    $
    15,578
    
    
    $
    11,047
    
    
    $
    29,445Supplemental cash flow disclosures:Interest paid
    
    $
    3,625
    
    
    $
    3,528
    
    
    $
    2,084Income taxes paid
    
    $
    280
    
    
    $
    
    
    
    $
    Notes payable issued in acquisition of land
    
    $
    
    
    
    $
    800
    
    
    $
    Purchase of DSM license through long-term obligation
    
    $
    
    
    
    $
    
    
    
    $
    6,000
 See accompanying notes.
 29




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
    As
    
    
    
    
    
    
    AsReported
    
    
    Adjustment
    
    
    RestatedProperty, plant and equipment, net
    
    $
    291,445
    
    
    $
    (4,523
    )
    
    $
    286,922Deferred tax asset
    
    
    39,969
    
    
    
    1,650
    
    
    
    41,619Total assets
    
    
    600,846
    
    
    
    (2,873
    )
    
    
    597,973Accumulated deficit
    
    
    (31,425
    )
    
    
    (2,873
    )
    
    
    (34,298
    )Total stockholders equity
    
    
    495,448
    
    
    
    (2,873
    )
    
    
    492,575Total liabilities and stockholders equity
    
    
    600,846
    
    
    
    (2,873
    )
    
    
    597,973
  As
    
    
    
    
    
    
    AsReported
    
    
    Adjustment
    
    
    RestatedCost of product sales, including idle capacity costs
    
    $
    154,077
    
    
    $
    4,523
    
    
    $
    158,600Total cost of revenues
    
    
    168,753
    
    
    
    4,523
    
    
    
    173,276Gross margin
    
    
    101,901
    
    
    
    (4,523
    )
    
    
    97,378Income from operations
    
    
    29,577
    
    
    
    (4,523
    )
    
    
    25,054Income before income tax provision (benefit)
    
    
    28,049
    
    
    
    (4,523
    )
    
    
    23,526Income tax provision (benefit)
    
    
    10,238
    
    
    
    (1,650
    )
    
    
    8,588Net income
    
    
    17,811
    
    
    
    (2,873
    )
    
    
    14,938Net income per share:Basic
    
    $
    0.55
    
    
    $
    (0.08
    )
    
    $
    0.47Diluted
    
    $
    0.55
    
    
    $
    (0.09
    )
    
    $
    0.46
 30




---



##### 



2. ORGANIZATION AND DESCRIPTION OF BUSINESS
    3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
 Use of Estimates
 Segment Information
 Revenue Recognition
  Shipping Income and Costs
 31




---



##### 



Foreign Currency Transactions and Hedging Activities
  Research and Development
 Advertising
 Other Operating Expenses
 Deferred Income Taxes
 Equity-Based Compensation
 Net Income Per Share
 Comprehensive Income
 Cash and Cash Equivalents
 Short-Term Investments and Marketable Securities
   32




---



##### 



Fair Value of Financial Instruments
 Trade Receivables
 Concentration of Credit Risk and Significant Customers
 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
 33




---



##### 



Impairment of Long-Lived Assets
 Recently Issued Accounting Pronouncements
  4. EQUITY-BASED COMPENSATION
    Year ended October 31,2006
    
    
    2005
    
    
    2004(restated)Net income, as reported
    
    $
    14,938
    
    
    $
    15,284
    
    
    $
    47,048Deduct: Total equity-based employee compensation expense
    determined under fair value-based methods for all awards
    
    
    
    
    
    
    (58,349
    )
    
    
    (17,920
    )Pro forma net income (loss)
    
    $
    14,938
    
    
    $
    (43,065
    )
    
    $
    29,128Net income (loss) per share:Basic  as reported
    
    $
    0.47
    
    
    $
    0.49
    
    
    $
    1.62Basic  pro forma
    
    $
    0.47
    
    
    $
    (1.38
    )
    
    $
    1.00Diluted  as reported
    
    $
    0.46
    
    
    $
    0.48
    
    
    $
    1.55Diluted  pro forma
    
    $
    0.46
    
    
    $
    (1.38
    )
    
    $
    0.96
 34




---



##### 



Year ended October 31,2006
    
    2005
    
    2004Expected volatility
    
    
    61.1
    %
    
    
    62.7
    %
    
    
    78.9
    %Risk-free interest rate
    
    
    4.7
    %
    
    
    3.9
    %
    
    
    3.9
    %Expected life of options
    
    5 years
    
    5 years
    
    5 yearsExpected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Forfeiture rate
    
    
    1
    %
    
    
    2
    %
    
    
    2
    %
 Expected Volatility
 Risk-Free Interest Rate
 Expected Life of Options
 Expected Dividend Yield
 Forfeiture Rate
  Stock
Option Plans
    35




---



##### 



Weighted AverageRemainingNumber of
    
    
    Weighted Average
    
    
    Aggregate
    
    
    ContractualShares
    
    
    Price/Share
    
    
    Intrinsic Value
    
    
    Term (years)Options outstanding at October 31, 2003
    
    
    4,294
    
    
    $
    22.55Options exercisable at October 31, 2003
    
    
    2,514
    
    
    $
    18.45Granted
    
    
    1,067
    
    
    $
    59.60Exercised
    
    
    (1,240
    )
    
    $
    16.39Cancelled
    
    
    (71
    )
    
    $
    36.39Options outstanding at October 31, 2004
    
    
    4,050
    
    
    $
    33.91Options exercisable at October 31, 2004
    
    
    2,138
    
    
    $
    26.33Granted
    
    
    700
    
    
    $
    48.69Exercised
    
    
    (779
    )
    
    $
    23.98Cancelled
    
    
    (47
    )
    
    $
    44.79Options outstanding at October 31, 2005
    
    
    3,924
    
    
    $
    38.39Options exercisable at October 31, 2005
    
    
    3,438
    
    
    $
    40.14Granted
    
    
    59
    
    
    $
    31.71Exercised
    
    
    (98
    )
    
    $
    24.92Cancelled
    
    
    (171
    )
    
    $
    40.21Options outstanding at October 31, 2006
    
    
    3,714
    
    
    $
    38.56
    
    
    $
    6,483
    
    
    
    6.2Options exercisable at October 31, 2006
    
    
    3,466
    
    
    $
    39.32
    
    
    $
    6,049
    
    
    
    6.2
   OPTIONS OUTSTANDING
    
    OPTIONS EXERCISABLEWeightedAverageRemaining
    
    Weighted
    
    
    
    
    
    WeightedContractual
    
    Average
    
    
    
    
    
    AverageRange of
    
    Options
    
    Life
    
    Exercise
    
    Options
    
    ExerciseExercise Prices
    
    Outstanding
    
    (years)
    
    Price
    
    Exercisable
    
    Price$6.25  $9.37
    
    
    32,675
    
    
    
    2.5
    
    
    $
    7.35
    
    
    
    32,675
    
    
    $
    7.35$9.38  $14.07
    
    
    128,529
    
    
    
    3.3
    
    
    $
    11.84
    
    
    
    128,529
    
    
    $
    11.84$14.08  $21.12
    
    
    602,839
    
    
    
    4.2
    
    
    $
    16.48
    
    
    
    537,129
    
    
    $
    16.39$21.13  $31.69
    
    
    1,151,962
    
    
    
    6.0
    
    
    $
    27.68
    
    
    
    1,046,994
    
    
    $
    27.85$31.70  $47.55
    
    
    170,075
    
    
    
    7.8
    
    
    $
    39.40
    
    
    
    115,635
    
    
    $
    41.78$47.56  $68.08
    
    
    1,628,369
    
    
    
    7.2
    
    
    $
    57.07
    
    
    
    1,605,369
    
    
    $
    57.133,714,449
    
    
    
    6.2
    
    
    $
    38.56
    
    
    
    3,466,331
    
    
    $
    39.32
 
   36




---



##### 



5. DSM SUPPLY AND LICENSE AGREEMENT
  6. SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES
  7. INVENTORIES
  October 31,2006
    
    
    2005Finished goods
    
    $
    43,928
    
    
    $
    34,328Work in process
    
    
    66,968
    
    
    
    55,073Raw materials
    
    
    3,024
    
    
    
    3,634Total inventories
    
    
    113,920
    
    
    
    93,035Less: inventory reserve
    
    
    (1,600
    )
    
    
    (1,500
    )Total inventories, net
    
    
    112,320
    
    
    
    91,535Less: long-term portion
    
    
    (12,000
    )
    
    
    Inventories, net
    
    $
    100,320
    
    
    $
    91,535
   37




---



##### 



8. PROPERTY, PLANT AND EQUIPMENT
  October 31,2006
    
    
    2005(restated)Land
    
    $
    2,320
    
    
    $
    2,318Building and improvements
    
    
    61,855
    
    
    
    45,515Machinery and equipment
    
    
    248,107
    
    
    
    187,922Furniture and fixtures
    
    
    2,716
    
    
    
    3,161Computer hardware and software
    
    
    11,413
    
    
    
    8,085326,411
    
    
    
    247,001Less: accumulated depreciation and amortization
    
    
    (50,473
    )
    
    
    (33,143
    )275,938
    
    
    
    213,858Construction in progress
    
    
    10,984
    
    
    
    76,875Property, plant and equipment, net
    
    $
    286,922
    
    
    $
    290,733
    9. GOODWILL AND OTHER INTANGIBLE ASSETS
  October 31, 2006
    
    
    October 31, 2005Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedIntangible Asset
    
    Gross
    
    
    Amortization
    
    
    Net
    
    
    Gross
    
    
    Amortization
    
    
    NetTrademarks
    
    $
    2,053
    
    
    $
    (545
    )
    
    $
    1,508
    
    
    $
    2,026
    
    
    $
    (401
    )
    
    $
    1,625Patents
    
    
    19,233
    
    
    
    (1,835
    )
    
    
    17,398
    
    
    
    11,741
    
    
    
    (1,734
    )
    
    
    10,007Core technology
    
    
    1,708
    
    
    
    (455
    )
    
    
    1,253
    
    
    
    1,708
    
    
    
    (342
    )
    
    
    1,366Current products
    
    
    10,676
    
    
    
    (3,228
    )
    
    
    7,448
    
    
    
    10,676
    
    
    
    (2,516
    )
    
    
    8,160Licenses
    
    
    11,091
    
    
    
    (1,870
    )
    
    
    9,221
    
    
    
    11,091
    
    
    
    (1,120
    )
    
    
    9,971Goodwill
    
    
    48,603
    
    
    
    
    
    
    
    48,603
    
    
    
    48,490
    
    
    
    
    
    
    
    48,490$
    93,364
    
    
    $
    (7,933
    )
    
    $
    85,431
    
    
    $
    85,732
    
    
    $
    (6,113
    )
    
    $
    79,619
   38




---



##### 



10. ACCRUED LIABILITIES
  October 31,2006
    
    
    2005Salaries and employee benefits
    
    $
    12,328
    
    
    $
    7,214Inventory receipt obligations
    
    
    3,094
    
    
    
    1,544Other
    
    
    8,676
    
    
    
    4,934$
    24,098
    
    
    $
    13,692
 11. NOTES PAYABLE AND LONG-TERM DEBT
    Fiscal Year2007
    
    $
    6702008
    
    
    6862009
    
    
    7,7772010
    
    
    1832011
    
    
    100Subsequent to 2011
    
    
    626$
    10,042
   12. RESTRUCTURING CHARGE
   39




---



##### 



EmployeeSeparation
    
    
    AssetCosts
    
    
    Write-down
    
    
    Other
    
    
    TotalInitial charge in the fourth quarter of fiscal 2006
    
    $
    2,032
    
    
    $
    2,568
    
    
    $
    129
    
    
    $
    4,729Cash payments
    
    
    (60
    )
    
    
    
    
    
    
    (55
    )
    
    
    (115
    )Asset write-down
    
    
    
    
    
    
    (2,568
    )
    
    
    
    
    
    
    (2,568
    )Liability for restructuring costs at October 31, 2006
    
    $
    1,972
    
    
    $
    
    
    
    $
    74
    
    
    $
    2,046
 13. COMMITMENTS AND CONTINGENCIES
 Leases
    Fiscal Year2007
    
    $
    1,0132008
    
    
    9972009
    
    
    8982010
    
    
    9152011
    
    
    257After 2011
    
    
    342$
    4,422
 Scientific Research Collaborations
  40




---



##### 



Purchase Commitments
 OmegaTech Milestone
  Patent Infringement Litigation
 Class Action Lawsuit
 Other
 14. LICENSE AGREEMENTS
  41




---



##### 



15. NET INCOME PER SHARE
   Year ended October 31,2006
    
    
    2005
    
    
    2004(restated)Net income
    
    $
    14,938
    
    
    $
    15,284
    
    
    $
    47,048Weighted average shares outstanding, basic
    
    
    32,113
    
    
    
    31,164
    
    
    
    29,033Effect of dilutive potential common shares:Stock options
    
    
    230
    
    
    
    849
    
    
    
    1,315Warrants
    
    
    
    
    
    
    19
    
    
    
    38Total dilutive potential common shares
    
    
    230
    
    
    
    868
    
    
    
    1,353Weighted average shares outstanding, diluted
    
    
    32,343
    
    
    
    32,032
    
    
    
    30,386Net income per share, basic
    
    $
    0.47
    
    
    $
    0.49
    
    
    $
    1.62Net income per share, diluted
    
    $
    0.46
    
    
    $
    0.48
    
    
    $
    1.55
  16. STOCKHOLDERS EQUITY
 Issuance
of Common Stock
   Stockholder Rights Plan
      42




---



##### 



17. INCOME TAXES
  Year ended October 31,2006
    
    
    2005
    
    
    2004(restated)Federal income tax expense at 35%
    
    $
    8,234
    
    
    $
    8,425
    
    
    $
    7,656State taxes, net of Federal benefit
    
    
    210
    
    
    
    283
    
    
    
    828Change in valuation allowance
    
    
    
    
    
    
    
    
    
    
    (33,593
    )Other
    
    
    144
    
    
    
    78
    
    
    
    (67
    )Total provision (benefit)
    
    $
    8,588
    
    
    $
    8,786
    
    
    $
    (25,176
    )
    October 31,2006
    
    
    2005(restated)Deferred tax assets:Accruals and reserves
    
    $
    1,815
    
    
    $
    1,408Patents and trademarks
    
    
    309
    
    
    
    528Net operating loss carryforwards
    
    
    66,437
    
    
    
    77,833Deferred revenue
    
    
    4,271
    
    
    
    3,494Equity-based compensation
    
    
    1,306
    
    
    
    Other
    
    
    79
    
    
    
    214Total assets
    
    
    74,217
    
    
    
    83,477Deferred tax liabilities:Property, plant and equipment
    
    
    (8,863
    )
    
    
    (5,958
    )Acquired intangibles
    
    
    (3,051
    )
    
    
    (3,507
    )Goodwill
    
    
    (816
    )
    
    
    (559
    )Other
    
    
    (101
    )
    
    
    Total liabilities
    
    
    (12,831
    )
    
    
    (10,024
    )Total deferred tax asset
    
    
    61,386
    
    
    
    73,453Valuation allowance
    
    
    (18,586
    )
    
    
    (23,832
    )Deferred tax asset, net of valuation allowance
    
    
    42,800
    
    
    
    49,621Less: current deferred tax asset
    
    
    (1,181
    )
    
    
    (1,420
    )Long-term deferred tax asset
    
    $
    41,619
    
    
    $
    48,201
 43




---



##### 



18. EMPLOYEE 401(K) PLAN
  19. QUARTERLY FINANCIAL INFORMATION (unaudited)
  1st
    
    
    2nd
    
    
    3rd
    
    
    4thQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter2006 (restated)Total revenues
    
    $
    62,892
    
    
    $
    70,218
    
    
    $
    70,358
    
    
    $
    67,186Cost of revenues
    
    
    39,489
    
    
    
    44,293
    
    
    
    44,952
    
    
    
    44,542Income from operations
    
    
    8,015
    
    
    
    8,962
    
    
    
    7,640
    
    
    
    437
    (1)Net income
    
    
    4,770
    
    
    
    5,451
    
    
    
    4,615
    
    
    
    102
    (1)Net income per share, basic
    
    
    0.15
    
    
    
    0.17
    
    
    
    0.14
    
    
    
    0.00Net income per share, diluted
    
    
    0.15
    
    
    
    0.17
    
    
    
    0.14
    
    
    
    0.002005Total revenues
    
    $
    66,489
    
    
    $
    55,831
    
    
    $
    39,489
    (2)
    
    $
    56,043Cost of revenues
    
    
    38,906
    
    
    
    35,377
    
    
    
    25,690
    
    
    
    33,408Income (loss) from operations
    
    
    11,137
    
    
    
    4,951
    
    
    
    (587
    )(2)
    
    
    7,444Net income (loss)
    
    
    7,072
    
    
    
    3,433
    
    
    
    (109
    )(2)
    
    
    4,888Net income (loss) per share, basic
    
    
    0.24
    
    
    
    0.11
    
    
    
    (0.00
    )
    
    
    0.15Net income (loss) per share, diluted
    
    
    0.23
    
    
    
    0.11
    
    
    
    (0.00
    )
    
    
    0.15
 
 (1)
    
    In the fourth quarter of fiscal 2006, Martek recognized a charge of $4.7 million related to the
restructuring of plant operations (see Note 12).(2)
    
    In the third quarter of fiscal 2005, revenues declined due to a build-up of inventory by
certain customers. 44




---



##### 



ITEM 9A. CONTROLS AND PROCEDURES.
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  Managements
Report on Internal Control over Financial Reporting (as revised)
   Internal ControlIntegrated Framework
  Internal Control 
Integrated Framework.
  Remediation
of Material Weakness
  45




---



##### 



PART
IV
 ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
   46




---



##### 



SIGNATURES
  MARTEK BIOSCIENCES CORPORATIONBy
    /s/ Steve DubinSteve DubinChief Executive Officer and Director 47




---



##### 



EXHIBIT
INDEX
 EXHIBITNUMBER#
    
    DESCRIPTION23.01
    
    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.**
 
 **
    
    Filed herewith.