##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED OCTOBER 31, 2008
 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
 Yes þ No o
 Yes o No þ
 þ o
 o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



PART IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    19Item 1B. Unresolved Staff Comments
    
    
    29Item 2. Properties
    
    
    29Item 3. Legal Proceedings
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    31PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    32Item 6. Selected Financial Data
    
    
    34Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    36Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    46Item 8. Financial Statements and Supplementary Data
    
    
    47Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    69Item 9A. Controls and Procedures
    
    
    69Item 9B. Other Information
    
    
    69PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    70Item 11. Executive Compensation
    
    
    70Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    70Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    70Item 14. Principal Accountant Fees and Services
    
    
    70PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    71Signatures
    
    
    73Exhibit 3.07Exhibit 10.07Exhibit 21.01Exhibit 23.01Exhibit 31.01Exhibit 31.02Exhibit 32.01Exhibit 32.02




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##### Table of Contents



PART I
  
 ITEM 1. BUSINESS.
 OVERVIEW
 lifesDHA lifesARA
 NUTRITIONAL PRODUCTS
 lifesDHA ® ® ® and
lifesARA
   ® ® ® ® ® ® ® ® ®
   1




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##### Table of Contents



lifesDHA lifesDHA
 CONTRACT MANUFACTURING
  PRODUCTS AND PRODUCT CANDIDATES
 NUTRITIONAL OILS  INFANT FORMULA APPLICATIONS
   The Journal of Pediatrics
  2




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##### Table of Contents




    
    A study reported by Dr. C. Henriksen and others published in June 2008 in the journal
Pediatricsevaluated the effect of enriching human milk with DHA and ARA to be fed to
premature infants. The results showed that infants receiving the DHA/ARA enriched human
milk demonstrated better recognition memory and had higher problem solving scores at six
months than the non-enriched milk group. Marteks lifesDHAwas used in this study.
 
    
    A study reported by Dr. S. Innis and Dr. R. Friesen published in March 2008 in the
American Journal of Clinical Nutritionexamined visual acuity in infants whose mothers
received DHA supplementation during pregnancy. The results of the study showed that
infants from mothers who received DHA supplementation exhibited a better visual response
than those from mothers who received placebo. Marteks lifesDHAwas used in this study.
 
    
    An independent report by Dr. J. Jacobson and others published in March 2008 in the
Journal of Pediatricsevaluating the role of LCPUFAs on infant development indicated that
higher cord blood DHA was associated with longer gestation and better visual acuity and
cognitive function in these infants. The authors noted the importance of DHA during the
third trimester of pregnancy.
 
    
    An independent study reported by Dr. E. Birch and others published in May 2007 in Early
Human Developmentreported the results of a comparison between children who were breastfed
as infants to both children who as infants used DHA and ARA supplemented formula and
children who as infants used formula not supplemented with DHA and ARA. The results
indicated that children who received the supplemented formula had visual and verbal IQ
scores that did not differ significantly from children who had been breastfed and such
scores were better than children who received unsupplemented formula. Marteks oils were
used in the study. This was a follow up to a study by Dr. E. Birch and others published in
2000 in Developmental Medicine & Child Neurology, which noted the results of a National
Institutes of Health (NIH)-sponsored study that showed a significant improvement in
mental development in term infants given a commercially available infant formula
supplemented with Martek DHA and ARA compared to infants fed the same formula, but without
DHA and ARA. In the double-blind study, infants fed the diet supplemented with our oils
showed, at 18 months of age, a mean increase of 7 points on the Mental Development Index
(MDI) of the Bayley Scales of Infant Development II. Researchers reported that these
data support a long-term cognitive advantage of infant dietary DHA supply during the first
4 months of life. The significant correlations...support the hypothesis that early dietary
supply of DHA was a significant determinant of improved performance on the MDI.
 
    
    A study reported by Dr. N. Pastor and others published in November 2006 in Clinical
Pediatricsfound that infants fed a formula containing 17 mg DHA and 34 mg ARA per 100 kcal
had fewer episodes of bronchiolitis and bronchitis at ages 5, 7, and 9 months compared to
infants receiving control formula not containing these added LCPUFAs. This study used
Marteks oils.
 
    
    A study reported by Dr. C. Agostoni and others published in March 2006 in Developmental
Medicine & Child Neurologyfound that in children with the rare genetic disorder
phenylketonuria (PKU), the addition of DHA in formula was associated with improved visual
scores. This study used Marteks oils.
 
    
    A study reported by Dr. S. Hart and others published in August 2005 in the Journal of
Pediatric Psychologyrevealed a positive correlation between DHA levels in breast milk and
newborn neurobehavioral function. The study analyzed the DHA content of breast milk
collected from 20 breastfeeding mothers nine days after delivery. At the same time, their
infants were tested for neurobehavioral functioning using the Brazelton Neonatal Behavioral
Assessment Scale (NBAS), a commonly used behavioral test. An analysis of this test
revealed a positive correlation between DHA levels in the mothers breast milk and the
childs NBAS score.
 
    
    A study reported by Dr. E. Birch and others published in April 2005 in the American
Journal of Clinical Nutritionfound that DHA and ARA supplementation of term infant formula
during the first year of life resulted in improved visual function in 12-month old infants
compared to those without supplementation. This study used Marteks oils.
 
    
    A summary of four randomized control trials reported by Dr. S. Morale and others
published in February 2005 in Early Human Developmentshowed a continued benefit to visual
development as the result of DHA and ARA supplementation in formula-fed infants throughout
the first year of life.
 
    
    A study reported by Dr. D. Hoffman and others published in the June 2003 issue of The
Journal of Pediatricsreported that infants who were breastfed from birth to between four
and six months of age and then weaned onto formula supplemented with DHA and ARA
experienced significantly improved visual development at one year of age compared to
infants who were breastfed and then weaned onto formula without DHA and ARA. This study
used Marteks oils.
 
    
    A study reported by Dr. E. Birch and others published in March 2002 in the American
Journal of Clinical Nutritionfound that infants who were breastfed for six weeks and then
weaned to DHA and ARA supplemented infant formula had significantly better visual acuity at
17, 26 and 52 weeks of age and significantly better stereoacuity at 17 weeks of age than
infants who were weaned to non-supplemented formula. This study used Marteks oils.
  3




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
    
    Global Standard for the Composition of Infant Formula: Recommendations of anESPGHAN
[European Society for Paediatric Gastroenterology, Hepatology and Nutrition] Coordinated
International Expert Group, authored by Dr. B. Koletzko and others published in Journal of
Pediatric Gastroenterology and Nutritionin November 2005, in which the International
Expert Group, in view of beneficial effects, supported the optional addition of LCPUFAs to
infant formula. Their guidelines specify that the optional addition of DHA should not
exceed 0.5% of total fat; ARA contents should be at least the same concentration as DHA;
and the EPA content should not exceed that of DHA.
 
    
    Feeding Preterm Infants After Hospital Discharge: A Commentary by the ESPGHAN Committee
on Nutrition, authored by Dr. P. Aggett and others published in Journal of Pediatric
Gastroenterology and Nutritionin May 2006. The ESPGHAN Committee on Nutrition reviewed
available evidence and established recommendations for feeding preterm infants after
hospital discharge. The Committee recommended that formula-fed infants born prematurely
should receive infant formula that provides LCPUFAs for optimal growth and development.
Martek DHA and ARA are LCPUFAs added to preterm and term infant formula in the U.S. and
worldwide.
  NUTRITIONAL OILS   NON-INFANT FORMULA APPLICATIONS
 Applications for Pregnant and Nursing Women
  
    
    During the PeriLip meeting, a European Union supported Consensus Conference on Dietary
Fat Intake During the Perinatal Period (September 2005, Germany), the following
recommendation was made regarding DHA consumption: Pregnant and lactating women should
aim to achieve a dietary intake of n-3 LCPUFA [omega-3 long-chain polyunsaturated fatty
acid] that supplies a DHA intake of at least 200 mg/day. These recommendations and
overall results of the PeriLip project were published in the British Journal of Nutrition
(November 2007).
 
    
    A consensus report by Dr. B. Koletzko and others published in January 2008 in the
Journal of Perinatal Medicinerecorded the recommendations of international experts in
maternal and pediatric nutrition regarding the importance of LCPUFAs. The committee
recommended that pregnant and lactating women should aim to achieve an average daily
intake of at least 200 mg DHA. When breastfeeding is not possible for a term infant, the
committee recommended use of an infant formula providing DHA at levels between 0.2 and 0.5
weight percent of total fat, and with the minimum amount of ARA equivalent to the contents
of DHA.
 
    
    The September 2007 issue of the Journal of the American Dietetic Associationincluded a
position statement from the American Dietetic Association and Dietitians of Canada
regarding dietary fatty acids. The groups emphasized the importance of DHA during
pregnancy, lactation, and infancy and its particular importance for neural development and
function. The groups also reviewed the importance of long-chain omega-3 fatty acids for
health and recommend that adults consume 500 mg of long-chain omega-3 fatty acids daily.
  
    
    A study reported by Dr. C. Jensen and others published in July 2005 in the American
Journal of Clinical Nutritionnoted that infants of mothers who supplemented with
lifesDHA while breastfeeding had improved psychomotor skills at 2 1/2 years of age. The
study revealed that children of DHA-supplemented mothers scored significantly higher on the
Bayley Psychomotor Development Index (PDI), when compared to the children of the
non-supplemented breastfeeding mothers. The study also confirmed that DHA supplementation
while breastfeeding effectively increases DHA levels in the mothers milk as it noted that
the mothers supplemented with DHA had 75% more DHA in their breast milk than the control
group and their infants had 35% higher DHA blood levels than the control group infants.
This study was partially funded by Martek.
 
    
    A study published by Dr. J. Cohen and others in November 2005 in the American Journal of
Preventive Medicineprovided a statistical analysis of many studies which had examined
maternal fatty acid intake and effect on infant development. The results of the analysis
showed that increases in maternal DHA intake are associated with modest improvements in
child IQ.
   4




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Other Human Applications
  Cognitive Function
 DHA
and cognitive function in adults 
 
    
    A pre-clinical study reported by Dr. Q. Ma and others published in December 2007 in the
Journal of Neurosciencereported that DHA was found to decrease an important risk factor
for late-onset Alzheimers disease. 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.
 
    
    An independent study reported by Dr. R. McNamara and others published in July 2007 in
the Society of Biological Psychiatryfound a deficit in the total fatty acid composition of
the orbitofrontal cortex and found a selective deficit in the level of DHA compared with
controls in brain examinations of postmortem patients who had been diagnosed with major
depression compared with controls. These findings show a correlation between low tissue
levels of DHA and neuropsychiatric diseases such as depression.
 
    
    A study published by Dr. K. Green and others in April 2007 in The Journal of
Neuroscienceused a transgenic mouse model of Alzheimers disease to show that
supplementation with DHA reduced the accumulation of both amyloid-beta and tau, two
indicators of the disease in humans. This study used Marteks DHA oils and funding for the
study was provided by Martek.
 
    
    A study published by Dr. E. Schaefer and others in November 2006 in the Archives of
Neurologyinvestigated the relationship of blood DHA levels and the development of
dementia in a prospective follow-up study of the participants in the Framingham Heart
Study. The results of the study noted that subjects with the highest levels of plasma DHA
(top 20%) had a significant reduction in the risk of developing dementia from all causes.
The study was partially funded by Martek.
 
    
    The results of an in vitro study conducted by Dr. S. Florent and others published in
November 2005 in the Journal of Neurochemistrynotes that DHA enrichment likely induces
changes in neuronal membrane properties that may assist in the prevention of Alzheimers
disease and other neurodegenerative diseases.
 
    
    The results of an in vitro study conducted by Dr. W. Lukiw and others published in
October 2005 in the Journal of Clinical Investigationsuggest that DHA intake could benefit
people with Alzheimers disease by lowering the accumulation of amyloid-B peptides, which
are associated with brain aging and Alzheimers.
 
    
    In vitro research conducted by Dr. N. Bazan and published in August 2005 in Molecular
Neurobiologyreported on a metabolite of DHA that appears to have a protective role in
neural cell survival and Alzheimers disease.
 
    
    A scientific review on DHA performed by Dr. J. Marszalek and Dr. H. Lodish published in
June 2005 in Annual Review of Cell and Developmental Biologysuggests the significant role
that DHA plays in the maintenance of normal neurological function.
 
    
    The Agency for Healthcare Research and Quality (AHRQ) of the United States Department
of Health and Human Services issued in February 2005 a report on the effects of omega-3
fatty acids on cognitive function with respect to persons experiencing aging, dementia and
neurological diseases. They stated: Total omega3 FA [omega-3 fatty acid] consumption and
consumption of DHA (but not ALA [alpha-linolenic acid] or EPA) were associated with a
significant reduction in the incidence of Alzheimers.
 
    
    In September 2004, Dr. F. Calon and others at the UCLA School of Medicine published the
results of an animal study in the journal Neuronnoting the effects of Marteks DHA on the
advancement of Alzheimers disease. The study found that a diet rich in DHA significantly
lessened the memory loss and cell damage associated with Alzheimers disease in laboratory
mice. In 2005, this laboratory extended their findings using DHA in the European Journal of
Neuroscience. The authors reported how dietary essential fatty acids may influence
cognition and Alzheimers disease risk.
 
    
    In July 2003, the results of a study conducted by Dr. M.C. Morris and others published
in the Archives of Neurologyindicated that weekly consumption of fish and dietary intake
of DHA, but not other omega-3 fatty acids, are associated with a reduced risk of
Alzheimers disease by up to 60 percent. The study examined whether fish consumption and
the associated intakes of omega-3 fatty acids would afford a protective effect against
Alzheimers disease. The study showed that in those individuals consuming the highest
amounts of dietary DHA, the risk of developing Alzheimers disease was reduced by up to 60
percent. The risk of developing Alzheimers disease was not correlated with EPA
consumption.
   5




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DHA
and cognitive function in children 
 
    
    A study reported by Dr. A. Ryan and Dr. E. Nelson, both employees of Martek, was
published in the May 2008 issue of Clinical Pediatricsand showed that while primary
endpoints were not achieved, a preplanned regression analysis yielded a statistically
significant positive association between a higher DHA level in the blood and higher scores
on the Peabody Picture Vocabulary Test, a cognitive test designed to measure listening
comprehension and vocabulary skills. Performance on the test is an indicator of school
readiness. The study was funded by Martek Biosciences and used Marteks lifesDHA.
 lifesDHA
 Cardiovascular Health
  
    
    A study reported by Dr. D. Kelley and others published in January 2008 in the Journal
of Nutritiondemonstrated 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. Results showed that the study participants
(hypertriglyceridemic men) experienced 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.
 
    
    A study published by Dr. D. Kelley and others in August 2007 in the American Journal of
Clinical Nutritionfound that DHA is effective in reducing the level of triglycerides in
male hypertriglyceridemic patients. In this study, DHA alone was effective without EPA, the
other omega-3 commonly found in fish oil, in reducing triglycerides. Hypertriglyceridemia
(high triglyceride levels) in men is associated with an increased risk of cardiovascular
disease and metabolic syndrome. Martek contributed the DHA supplements and funding for this
study.
 
    
    An independent study reported by Dr. H. Theobald and others published in April 2007 in
The Journal of Nutritionassessed the effects of low-dose DHA on blood pressure in healthy
men and women in the United Kingdom. Compared with placebo, supplementation with Marteks
lifesDHAsignificantly reduced diastolic blood pressure by 3.3 mm Hg.
 
    
    The results of a study reported by Dr. L. Keilson and others, which were presented in
March 2007 at the American College of Cardiology 56th Annual Scientific Session, showed
that supplementation with lifesDHAreduced triglycerides by nearly 20%, reduced pulse
rate by 5 beats per minute and reduced diastolic blood pressure by 4 mm Hg. The
DHA-supplemented group also showed an 8% reduction in total cholesterol and a 5% increase
in HDL (good) cholesterol level. The study was conducted in men and women with
hypertriglyceridemia who were already taking statin medications for the reduction of
cholesterol. This study used Martek oils and funding for this study was provided by
Martek.
 
    
    An independent study reported by Dr. L. Schwellenbach and others published in December
2006 in the Journal of the American College of Nutritioncompared Marteks lifesDHA
(algal oil) to DHA plus EPA (fish oil) for their ability to lower triglycerides in subjects
with coronary artery disease and elevated triglycerides, most of whom were undergoing
statin therapy. Both supplements significantly lowered triglycerides, but only lifesDHA
increased high density (good) cholesterol. The authors concluded that there was no added
benefit provided by EPA for lowering triglycerides at this level. The authors of the study
also indicated that lifesDHAwas better tolerated by the study participants than fish
oil, noting that a greater proportion of subjects in the fish oil group reported fishy
taste as a problem with their treatment.
 
    
    A study published by Dr. A. Erkkilä and others in September 2006 in the Journal of Lipid
Researchnoted an important relationship between plasma DHA levels and the reduced
progression of cardiac disease. Specifically, women whose DHA levels were above the median
at enrollment had slower progression of coronary artery stenosis over a three-year period.
This effect was not seen with the other omega-3 fatty acids, ALA or EPA.
 
    
    A review conducted by Dr. C. Wang and others published in July 2006 in The American
Journal of Clinical Nutritionstated that evidence suggests that increased consumption of
long-chain omega-3 fatty acids, but not alpha-linolenic acid, reduces all cause mortality,
cardiac and sudden death, and possibly stroke. lifesDHA is a long-chain omega-3 fatty
acid.
 
    
    A Scientific Statement entitled Diet and Lifestyle Recommendations Revision 2006
published by Dr. A. Lichtenstein and other members of the American Heart Association
Nutrition Committee published in July 2006 in Circulationincluded a recommendation that
people with documented heart disease consume approximately one gram of DHA plus
eicosapentaenoic acid (EPA) per day. They affirm that with appropriate medical advice, use
of supplements may be substituted for fish.
  6




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##### Table of Contents




    
    The results of a study conducted by Dr. K. Maki and others and published in the Journal
of the American College of Nutritionin June 2005 demonstrated that lifesDHA
supplementation lowered triglycerides by approximately 21%. This study was sponsored by
Martek.
 
    
    Dr. K. Stark and Dr. B. Holub reported in May 2004 in the American Journal of Clinical
Nutritionthat DHA supplementation of postmenopausal women with lifesDHA resulted in a
20% reduction in triglycerides, a 6-10% increase in HDL cholesterol (good cholesterol)
and a 7% reduction in heart rate relative to placebo.
 
    
    In May 2002, in the publication Circulation,the American Heart Association (AHA)
issued a Scientific Statement entitled Fish Consumption, Fish Oil, Omega-3 Fatty Acids,
and Cardiovascular Disease. The Scientific Statement outlines the findings of a
comprehensive report that examined the cardiovascular health benefit of omega-3 fatty
acids, specifically DHA and EPA, from fish sources. The report concluded that consumption
of such omega-3 fatty acids, either through diet or supplements, reduces the incidence of
cardiovascular disease. The statement refers to studies that have indicated the following
to be associated with the intake of omega-3 fatty acids:
 
    
    decreased risk of sudden death and arrhythmia;
 
    
    decreased thrombosis (blood clot);
 
    
    decreased triglyceride levels;
 
    
    decreased growth of atherosclerotic plaque;
 
    
    improved arterial health; and
 
    
    lower blood pressure.
    
    
    reduces triglycerides and raises the HDL or good cholesterol;
 
    
    reduces blood pressure;
 
    
    reduces heart rate; and
 
    
    increases LDL and HDL cholesterol particle size.
 Other
  
    
    An independent observational study by Dr. J.M. Norris and others published in September
2007 in the Journal of the American Medical Associationwas designed to determine whether
the intake of omega-3 and omega-6 fatty acids is associated with the development of Type 1
diabetes in children. This study was conducted with children known to be at genetic risk
for developing Type 1 diabetes. Results showed that the omega-3 fatty acid levels were
inversely correlated with the risk for developing diabetes in this group of at-risk
children. These investigators are further investigating this relationship in an ongoing
clinical trial to determine whether DHA, specifically, has a role in Type 1 diabetes
prevention.
 
    
    A study by Dr. K. Connor and others published in July 2007 in Nature Medicinereported
that increasing consumption of long-chain omega-3 fatty acids, including DHA, reduces
destructive vascularization in the retina. In this animal study of retinopathy associated
with prematurity, the authors summarize a series of experiments demonstrating that
long-chain omega-3 fatty acids, and selected metabolites, are effective in reducing retinal
vascular disease, which is a leading cause of blindness. A portion of these studies
included Martek oils as the source of long-chain fatty acids.
  7




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LifesDHA ® lifesDHA lifesDHA
 lifesDHA
  CONTRACT MANUFACTURING
     TECHNOLOGY
  Discovery
  8




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Process Development and Product Formulation
  Product Safety and Efficacy Evaluation
 Scale-up and Commercial Production 
  COLLABORATIVE AND LICENSING AGREEMENTS
       9




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lifesDHA lifesDHA lifesDHA
    PRODUCTION
     10




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SOURCES OF SUPPLY
  RESEARCH AND DEVELOPMENT
 lifesDHA
 SALES AND MARKETING
 lifesDHA lifesDHA
 LifesDHA ® lifesDHA lifesDHA
  11




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lifesDHA
  lifesDHA lifesARA. lifesDHA lifesARA lifesDHA lifesARA
 COMPETITION
  Mortierella alpina
      12




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
    
    our oils do not have the impurities that may limit the usefulness of DHA derived from
unencapsulated fish oil;
 
    
    our oils, in general, are easier to formulate in food and beverage products;
 
    
    our oils can be blended in a variety of mixtures in precise ratios for specific
applications, whereas the composition of fish oils may vary;
 
    
    each of our oils used in infant formula is comprised of a fatty acid blend that does not
contain certain other fatty acids in significant quantities such as eicosapentaenoic acid
(EPA), which may not be appropriate for consumption by infants at high levels.
 
    
    our oils do not contain substances found in certain fish and fish oils such as
methylmercury, polychlorinated biphenyls (PCBs), dioxins and other toxic contaminants;
 
    
    our oils have a higher oxidative stability and longer shelf life than certain fish oils
and are, therefore, more amenable to the spray drying process required for powdered
formula;
 
    
    our oils are not produced from animal sources and, therefore, should be more desirable
for use in food and beverage products as the available market does not exclude consumers
who require a vegetable-sourced DHA, unlike fish oil;
 
    
    our oils are produced from renewable, sustainable natural resources, unlike fish oil;
 
    
    our DHA and ARA-enriched oils are in an easily digestible triglyceride form similar to
that found in fish oils and breast milk, but different from the phospholipid form found in
egg yolk lipids; and
 
    
    our oils can be produced in large quantities under controlled conditions satisfying
strict regulatory scrutiny.
        13




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PATENTS, LICENSES AND PROPRIETARY TECHNOLOGY
    
    
    any patent applications filed by, assigned to or licensed to us will be granted;
 
    
    we will develop additional products that are patentable;
 
    
    any patents issued to or licensed by us will provide us with any competitive advantages
or adequate protection for inventions;
 
    
    any patents issued to or licensed by us will not be challenged, invalidated or
circumvented by others; or
 
    
    issued patents, or patents that may be issued, will provide protection against
competitive products or otherwise be commercially valuable.
     14




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GOVERNMENT REGULATION AND PRODUCT TESTING
    ® ®
  lifesDHA lifesDHA Schizochytrium
   15




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EMPLOYEES
   16




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EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    PositionSteve Dubin
    
    
    55
    
    
    Chief Executive Officer and DirectorDavid M. Abramson
    
    
    55
    
    
    PresidentPeter L. Buzy
    
    
    49
    
    
    Chief Financial Officer, Treasurer and Executive
Vice President for Finance and AdministrationPeter A. Nitze
    
    
    50
    
    
    Chief Operating Officer and Executive Vice PresidentBarney B. Easterling
    
    
    63
    
    
    Senior Vice President, ManufacturingTim Fealey, Ph.D.
    
    
    64
    
    
    Senior Vice President and Chief Innovation OfficerDavid M. Feitel
    
    
    45
    
    
    Senior Vice President and General Counsel
       17




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COMPANY
 http://www.martek.com
   18




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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.
   
    
    Abbott Nutritionals (then known as 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 Abbott Nutritionals
has not announced any introduction of such 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.
 
    
    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. GlaxoSmithKline has recently filed an application with the FDA for
an indication that will expand the use of LOVAZA. Other pharmaceutical companies offering
other 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 or attempting to produce 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.
  19




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##### Table of Contents




    
    In December 2005, Lonza Group LTD, a Swiss chemical and biotechnology group, acquired
from Nutrinova Nutrition Specialties & Food Ingredients GmbH, a wholly-owned subsidiary of
Celanese Corporation, Nutrinovas business having as its product a DHA-rich microalgal oil.
Since the acquisition, Lonza has actively marketed its DHA oil to the food, beverage and
dietary supplement market in Europe and Asia, and was actively marketing in the United
States. Nutrinova and Lonza are defendants in patent infringement actions involving our
DHA patents that we have brought in both the United States and Germany. One of Nutrinovas
customers is also a defendant in these actions in Germany. These lawsuits are further
described below in the risk factor regarding patent protection and in Item 3 of Part I of
this Form 10-K, Legal Proceedings.
 
    
    Other companies, several with greater financial resources than ours, are developing
plant-based DHA or other plant-based oils that may compete with us 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.
 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.
    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.
   20




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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 hearing has been scheduled
for March 2009. Claim 1 of this patent is the basis of the patent infringement suit
against Nutrinova and Lonza in Germany, discussed below. In the event Martek were to lose
this appeal, this DHA patent would be revoked. The revocation of this patent would result
in the dismissal of the patent infringement suit against Nutrinova and Lonza in Germany,
discussed below, and patent protection for Marteks DHA-containing oils for use in infant
formula would be compromised in Europe. Currently, annual sales of Marteks DHA for use in
infant formula in Europe to companies other than those with whom Martek has or expects to
have an exclusive supply agreement are less than $1 million. Such exclusive agreements
generally run through 2011. An adverse decision would not impact Marteks ARA patent
position in Europe. Moreover, the outcome of this appeal will not affect the patent
infringement lawsuit against Lonza in the U.S., as the U.S. lawsuit is based on a different
family of patents.
 
    
    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,
N.V. Nutricia and Cargill filed oppositions against this divisional ARA patent. N.V.
Nutricia has withdrawn from the opposition. 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. Nutrinova Nutrition Specialties & Food Ingredients GmbH is the
only opponent, and they appealed. The appeal hearing was held in October 2008 and the
patent was upheld in modified form. The modified patent claims are directed to processes
for fermenting Thraustochytriumand Schizochytriumin a medium containing sodium sulfate
and less than 120 milligrams per liter of chloride.
  21




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
    
    In September 2003, we filed a patent infringement lawsuit in the U.S. District Court in
Delaware against Nutrinova Inc., Nutrinova Nutrition Specialties & Food Ingredients GmbH,
Celanese Ventures GmbH, and Celanese AG. Celanese Ventures GmbH and Celanese AG were
dropped from the lawsuit. Lonza Ltd. was added to the lawsuit. In October 2006, after an
almost two week trial in Wilmington, Delaware, the jury returned a favorable verdict to
Martek, deciding that all three of the asserted Martek DHA patents were valid and
infringed, and that one was willfully infringed. In October 2007, the judge upheld the
October 2006 jury verdict that the defendants infringed all of the asserted claims of U.S.
Patent Nos. 5,340,594 and 6,410,281 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 U.S. Patent No. 6,410,281. 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s request to the judge to reconsider his ruling
on the third patent was denied. Martek and the defendants have appealed aspects of the
judges final decision. The two patents where the infringement was upheld, U.S. Patent Nos.
5,340,594 and 6,410,281, are scheduled to expire in July 2009 and August 2011, respectively.
 
    
    We also filed a patent infringement suit involving Nutrinova Nutrition Specialties &
Food Ingredients GmbH and Celanese Ventures GmbH in Germany in January 2004. Lonza Ltd. and
a customer of Nutrinova have also been added to this lawsuit. The complaint alleges
infringement of our European patent relating to DHA-containing oils. A hearing was held in
a district court in Dusseldorf in September 2007 and the court issued its decision in
October 2007, ruling that Marteks patent was infringed by the defendants. The defendants
have appealed, and an appeal hearing was scheduled for February 2009. Martek and the
defendants requested that the appeal hearing be delayed until the Appeal Board of the EPO
decides whether to uphold Marteks European patent covering our DHA-containing oils. As
discussed above, this EPO Appeal Board hearing is scheduled for March 2009. In December
2008, Martek requested that the court expand the appeal to include Lonzas production of
DHA in Germany, based on evidence discovered in October 2008.
 
    
    We filed a patent infringement suit involving Lonza Ltd AG and Capsugel France in France
in November 2008. The complaint alleges infringement of our European patent relating to
DHA-containing oils.
 
    
    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 Court held hearings in August 2008 and September 2008. The Patent
Court ruled against Martek in November 2008, and we appealed to the Korean Supreme Court in
December 2008. The patent will remain in full force and effect during the pendency of the
appeal. Martek has also filed a correction trial with the Korean Intellectual Property
Office in an attempt to amend the claims so that they may be more acceptable to the court.
 
    
    Suntory also initiated an invalidation case against one of our blended oil patents 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 to the Patent
Court in April 2007. The Patent Court ruled against Martek, and we appealed to the Korean
Supreme Court in August 2008. The Korean Supreme Court issued a summary dismissal of our
appeal in December 2008, resulting in this Korean blended oil patent being finally revoked.
The revoked patent covered a blend of fish oil DHA and microbial oil ARA.
 
    
    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. An Opposition Division hearing on the
first European patent was held in April 2008, and the Opposition Division revoked the
Suntory patent. Suntory has appealed, during which time the patent will remain in full
force and effect. Hearings on the other European patent and on the Australian patent are
expected in 2009.
 
    
    Third parties have filed Requests for Reexamination (Requests) of ten of Marteks U.S.
patents. Seven of these Requests were filed by Lonza with respect to seven of Marteks DHA
patents (three of which have now expired) and an anonymous party filed the other three
Requests with respect to two of Marteks blended oils patents and one ARA patent. The U.S.
Patent Office has granted all ten of the Requests to initiate a Reexamination process. As
a result of Reexamination, the claims of the subject patents can be upheld in their current
form, amended, abandoned or cancelled. Three of the patents have expired and another one
is likely to expire before the initial Reexamination process is complete. In the event
that Martek elects to appeal an unfavorable decision regarding five of the remaining six
patents, which are scheduled to expire between 2011 and 2014, it is likely that any such
patent would expire before all appeal options were exhausted. Only one patent, which
expires in 2018, is likely to be subject to the risk of a shortened term if all appeal
options are exhausted. If Martek were to decide not to pursue all of its appeal options,
up to six of the patents could be subject to shortened terms under the worst-case scenario.
 
    
    There are additional intellectual property proceedings pending against Martek or that
Martek has pending against third parties that are not considered material.
   22




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##### Table of Contents



If our non-infant formula 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
these markets 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 and nutritional supplements markets.
  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.
    23




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##### Table of Contents



Because food and beverage pricing is very competitive, the premium that our oils adds to the
cost of a 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 and dietary supplements markets.
  If the FDA finalizes its proposed rule to prohibit nutrient content claims for DHA and EPA, our
penetration of the food and beverage and dietary supplements markets may be limited.
  If the FDA
narrowly interprets certain sections of the Food and Drug Administration Amendments
Act of 2007, such an interpretation could have a material adverse effect on our business and
financial condition.
   24




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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.
  Market fluctuations in the availability and cost of raw materials and energy are beyond our
control and may adversely impact our business.
  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.
   25




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##### Table of Contents



Failure to effectively manage our growth could disrupt our operations and prevent us from
generating the revenues and gross profit margins we expect.
  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.
  Our corporate compliance program cannot guarantee that we are in compliance with all potentially
applicable federal and state regulations.
   26




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##### Table of Contents



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.
  
    
    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 by us or our
competitors;
 
    
    announcements of sales by us or our competitors
 
    
    announcements of results of clinical trials by us, our competitors or others;
 
    
    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;
  27




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##### Table of Contents




    
    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.
   Current economic and market conditions could adversely affect our revenue and profitability.
  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.
   28




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##### Table of Contents



ITEM 1B. UNRESOLVED STAFF COMMENTS.
  
 ITEM 2. PROPERTIES.
      29




---



##### Table of Contents



ITEM 3. LEGAL PROCEEDINGS
    Thraustochytrium Schizochytrium
     30




---



##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
   31




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##### Table of Contents



PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
  Sales Price Range of Common Stock
 Fiscal 2007
    
    High
    
    
    LowNovember 1,
2006  January 31, 2007
    
    $
    26.83
    
    
    $
    22.45February 1, 2007  April 30, 2007
    
    $
    24.43
    
    
    $
    19.64May 1, 2007  July 31, 2007
    
    $
    28.10
    
    
    $
    19.76August 1, 2007  October 31, 2007
    
    $
    31.00
    
    
    $
    24.33
 Fiscal 2008
    
    High
    
    
    LowNovember 1, 2007  January 31, 2008
    
    $
    34.70
    
    
    $
    24.18February 1, 2008  April 30, 2008
    
    $
    36.80
    
    
    $
    27.52May 1, 2008  July 31, 2008
    
    $
    38.55
    
    
    $
    32.00August 1, 2008  October 31, 2008
    
    $
    39.60
    
    
    $
    22.47
   32




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##### Table of Contents



Performance Graph
  COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Martek Biosciences Corporation, The NASDAQ Composite Index
And The NASDAQ Biotechnology Index
 
 *
    
    $100 invested on 10/31/03 in
stock & index-including reinvestment of dividends.Fiscal year ending October 31.  33




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA.
   Year ended October 31,In thousands, except per share data
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Consolidated Statements of Operations DataRevenues:Product sales
    
    $
    336,609
    
    
    $
    292,549
    
    
    $
    255,838
    
    
    $
    203,765
    
    
    $
    170,565Contract manufacturing sales
    
    
    15,753
    
    
    
    14,264
    
    
    
    14,816
    
    
    
    14,087
    
    
    
    13,928Total revenues
    
    
    352,362
    
    
    
    306,813
    
    
    
    270,654
    
    
    
    217,852
    
    
    
    184,493Cost of revenues:Cost of product sales
    
    
    192,848
    
    
    
    179,367
    
    
    
    158,600
    
    
    
    120,865
    
    
    
    103,423Cost of contract manufacturing sales
    
    
    14,000
    
    
    
    13,952
    
    
    
    14,676
    
    
    
    12,516
    
    
    
    11,570Total cost of revenues
    
    
    206,848
    
    
    
    193,319
    
    
    
    173,276
    
    
    
    133,381
    
    
    
    114,993Gross margin
    
    
    145,514
    
    
    
    113,494
    
    
    
    97,378
    
    
    
    84,471
    
    
    
    69,500Operating expenses:Research and development
    
    
    26,223
    
    
    
    24,853
    
    
    
    24,044
    
    
    
    19,415
    
    
    
    17,794Selling, general and administrative
    
    
    54,181
    
    
    
    44,855
    
    
    
    39,597
    
    
    
    31,968
    
    
    
    24,739Amortization of intangible assets
    
    
    7,422
    
    
    
    6,558
    
    
    
    2,796
    
    
    
    2,489
    
    
    
    1,867Restructuring charge
    
    
    
    
    
    
    853
    
    
    
    4,729
    
    
    
    
    
    
    
    Other operating expenses
    
    
    1,504
    
    
    
    1,614
    
    
    
    1,158
    
    
    
    7,654
    
    
    
    4,000Total operating expenses
    
    
    89,330
    
    
    
    78,733
    
    
    
    72,324
    
    
    
    61,526
    
    
    
    48,400Income from operations
    
    
    56,184
    
    
    
    34,761
    
    
    
    25,054
    
    
    
    22,945
    
    
    
    21,100Interest and other income (expense), net
    
    
    1,137
    
    
    
    (1,089
    )
    
    
    (1,528
    )
    
    
    1,125
    
    
    
    772Income before income tax provision (benefit)
    
    
    57,321
    
    
    
    33,672
    
    
    
    23,526
    
    
    
    24,070
    
    
    
    21,872Income tax provision (benefit)
    
    
    19,654
    
    
    
    1,659
    
    
    
    8,588
    
    
    
    8,786
    
    
    
    (25,176
    )Net income
    
    $
    37,667
    
    
    $
    32,013
    
    
    $
    14,938
    
    
    $
    15,284
    
    
    $
    47,048Net income per share, basic
    
    $
    1.14
    
    
    $
    0.99
    
    
    $
    0.47
    
    
    $
    0.49
    
    
    $
    1.62Net income per share, diluted
    
    $
    1.13
    
    
    $
    0.98
    
    
    $
    0.46
    
    
    $
    0.48
    
    
    $
    1.55Weighted average common shares outstanding, basic
    
    
    32,951
    
    
    
    32,336
    
    
    
    32,113
    
    
    
    31,164
    
    
    
    29,033Weighted average common shares outstanding, diluted
    
    
    33,284
    
    
    
    32,593
    
    
    
    32,343
    
    
    
    32,032
    
    
    
    30,386
  34




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##### Table of Contents



October 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Consolidated Balance Sheets and Other DataCash, cash equivalents, short-term investments and marketable securities
    
    $
    102,495
    
    
    $
    21,648
    
    
    $
    26,828
    
    
    $
    33,347
    
    
    $
    42,650Working capital
    
    
    224,831
    
    
    
    149,345
    
    
    
    128,488
    
    
    
    124,208
    
    
    
    68,195Total assets
    
    
    645,981
    
    
    
    596,695
    
    
    
    597,973
    
    
    
    578,485
    
    
    
    501,398Long-term debt, notes payable and other long-term obligations
    
    
    793
    
    
    
    9,310
    
    
    
    46,277
    
    
    
    66,115
    
    
    
    97,175Long-term portion of deferred revenue
    
    
    9,263
    
    
    
    9,517
    
    
    
    9,335
    
    
    
    8,959
    
    
    
    9,140Retained earnings (accumulated deficit)
    
    
    35,382
    
    
    
    (2,285
    )
    
    
    (34,298
    )
    
    
    (49,236
    )
    
    
    (64,520
    )Total stockholders equity
    
    
    588,583
    
    
    
    531,727
    
    
    
    492,575
    
    
    
    469,205
    
    
    
    346,164Cash dividends declared  common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  35




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 This Managements Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements concerning our business and operations, including, among other things,
statements concerning the following:
 
    
    expectations regarding future revenue growth, gross margin, operating cash flow and
overall profitability;
 
    
    expectations regarding product introductions and growth in nutritional product sales;
 
    
    expectations regarding potential collaborations and acquisitions;
 
    
    expectations regarding demand for products with our nutritional oils;
 
    
    expectations regarding sales to and by our infant formula licensees and supplemented
infant formula market penetration levels;
 
    
    expectations regarding marketing of our oils by our infant formula licensees;
 
    
    expectations regarding future agreements with, and revenues from, companies in the
food and beverage, 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-K are all made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. We wish to caution you that our actual
results may differ significantly from the results we discuss in our forward-looking statements. We
discuss some of the risks that could cause such differences in Part I Item 1A. Risk Factors in this
report on Form 10-K and in our various other filings with the Securities and Exchange Commission.
Our forward-looking statements speak only as of the date of this document, and we do not intend to
update these statements to reflect events or circumstances that occur after that date.
 GENERAL
 lifesDHA lifesARA lifesDHA ® ® ® lifesARA
  36




---



##### Table of Contents



®
 lifesDHA
  lifesDHA lifesDHA lifesDHA lifesDHA
  
    
    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 levels of inclusion of our oils in infant formula;
 
    
    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.
  MANAGEMENT OUTLOOK
   37




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PRODUCTION
       38




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES AND
THE USE OF ESTIMATES
  Valuation of Long-lived Assets
 Revenue Recognition
  Deferred Income Taxes
   39




---



##### Table of Contents



Inventory
 Patent Cost Capitalization
 Long-Term Auction Rate Securities
 RESULTS OF OPERATIONS
 Revenues
  Year ended October 31,2008
    
    
    2007
    
    
    2006Product sales
    
    $
    336,609
    
    
    $
    292,549
    
    
    $
    255,838Contract manufacturing sales
    
    
    15,753
    
    
    
    14,264
    
    
    
    14,816Total revenues
    
    $
    352,362
    
    
    $
    306,813
    
    
    $
    270,654
  Year ended October 31,2008
    
    
    2007
    
    
    2006Infant formula market
    
    $
    300,742
    
    
    $
    265,563
    
    
    $
    240,497Food and beverage market
    
    
    10,431
    
    
    
    5,483
    
    
    
    1,404Pregnancy and nursing, nutritional
supplements and animal feeds
    
    
    20,835
    
    
    
    17,439
    
    
    
    10,121Non-nutritional products
    
    
    4,601
    
    
    
    4,064
    
    
    
    3,816Total product sales
    
    $
    336,609
    
    
    $
    292,549
    
    
    $
    255,838
  40




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##### Table of Contents



lifesDHA .
     Cost of Revenues
  Year ended October 31,2008
    
    
    2007
    
    
    2006Cost of product sales
    
    $
    192,848
    
    
    $
    179,367
    
    
    $
    158,600Cost of contract manufacturing sales
    
    
    14,000
    
    
    
    13,952
    
    
    
    14,676Total cost of revenues
    
    $
    206,848
    
    
    $
    193,319
    
    
    $
    173,276
     Operating Expenses
  Year ended October 31,2008
    
    
    2007
    
    
    2006Research and development
    
    $
    26,223
    
    
    $
    24,853
    
    
    $
    24,044Selling, general and administrative
    
    
    54,181
    
    
    
    44,855
    
    
    
    39,597Amortization of intangible assets
    
    
    7,422
    
    
    
    6,558
    
    
    
    2,796Restructuring charge
    
    
    
    
    
    
    853
    
    
    
    4,729Other operating expenses
    
    
    1,504
    
    
    
    1,614
    
    
    
    1,158Total operating expenses
    
    $
    89,330
    
    
    $
    78,733
    
    
    $
    72,324
  41




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##### Table of Contents



Research and Development lifesDHA lifesDHA
 Selling, General and Administrative
  Amortization of Intangible Assets
 Restructuring Charge
 Other Operating Expenses
 Interest and Other Income, Net
  Interest Expense
  Income Tax Provision (Benefit)
    42




---



##### Table of Contents



Net Income
  RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS
       43




---



##### Table of Contents



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.
     Less than
    
    
    1-3
    
    
    3-5
    
    
    More thanIn thousands
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsNotes payable(1)
    
    $
    740
    
    
    $
    137
    
    
    $
    167
    
    
    $
    77
    
    
    $
    359Operating lease obligations
    
    
    3,221
    
    
    
    1,173
    
    
    
    1,666
    
    
    
    121
    
    
    
    261Unconditional
purchase obligations(2), (3)
    
    
    83,035
    
    
    
    82,635
    
    
    
    400
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    86,996
    
    
    $
    83,945
    
    
    $
    2,233
    
    
    $
    198
    
    
    $
    620
 (1)
    
    Minimum payments above include interest and principal due under these notes.(2)
    
    Primarily includes future inventory purchases from DSM pursuant to minimum purchase
commitment (see Note 4 to the consolidated financial statements).(3)
    
    Excludes $5.6 million of financial commitments associated with a research collaboration
that are contingent upon the successful completion of identified milestones (see Note 12 to
the consolidated financial statements).(4)
    
    The table above does not include uncertain tax payments of $1.7 million, the timing of
which is also uncertain.   44




---



##### Table of Contents




    
    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, and any capital requirements related to, merger and acquisition activity;
and
    
    the costs of marketing and commercializing our products.
  OFF-BALANCE SHEET ARRANGEMENTS
     45




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
      46




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
    
    PAGEManagements Report on Internal Control Over Financial Reporting
    
    
    48Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
    
    
    49Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Internal
Control Over Financial Reporting
    
    
    50Consolidated Balance Sheets as of October 31, 2008 and 2007
    
    
    51Consolidated Statements of Income for the years ended October 31, 2008, 2007 and 2006
    
    
    52Consolidated Statements of Stockholders Equity for the years ended October 31, 2008,
2007 and 2006
    
    
    53Consolidated Statements of Cash Flows for the years ended October 31, 2008, 2007 and 2006
    
    
    54Notes to Consolidated Financial Statements
    
    
    55
  47




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##### Table of Contents



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
   Internal ControlIntegrated Framewor Internal ControlIntegrated Framework
  /s/ Steve Dubin
    
    /s/ Peter L. BuzySteve Dubin
    
    Peter L. BuzyChief Executive Officer and Director
    
    Chief Financial Officer, Treasurer and Executive Vice President forFinance and AdministrationDecember 24, 2008
    
    December 24, 2008
  48




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##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Internal
Control-Integrated Framework
 /s/ Ernst & Young LLPDecember 24, 2008McLean, Virginia
  49




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##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
 
 Internal ControlIntegrated Framework Managements Report on Internal Control Over Financial
Reporting
      /s/ Ernst & Young LLPMcLean, VirginiaDecember 24, 2008
  50




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##### Table of Contents



MARTEK BIOSCIENCES CORPORATION
 
  October 31,In thousands, except share and per share data
    
    2008
    
    
    2007AssetsCurrent assetsCash and cash equivalents
    
    $
    102,495
    
    
    $
    16,973Short-term investments and marketable securities
    
    
    
    
    
    
    4,675Accounts receivable, net
    
    
    40,438
    
    
    
    41,643Inventories, net
    
    
    99,553
    
    
    
    109,409Deferred tax asset
    
    
    24,821
    
    
    
    14,549Other current assets
    
    
    4,866
    
    
    
    8,237Total current assets
    
    
    272,173
    
    
    
    195,486Property, plant and equipment, net
    
    
    265,900
    
    
    
    277,915Deferred tax asset
    
    
    13,535
    
    
    
    36,757Long-term auction rate security investments
    
    
    11,336
    
    
    
    Goodwill
    
    
    51,592
    
    
    
    51,564Other intangible assets, net
    
    
    30,997
    
    
    
    34,320Other assets, net
    
    
    448
    
    
    
    653Total assets
    
    $
    645,981
    
    
    $
    596,695Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    17,105
    
    
    $
    18,118Accrued liabilities
    
    
    28,819
    
    
    
    25,154Current portion of notes payable and other long-term obligations
    
    
    374
    
    
    
    1,012Current portion of deferred revenue
    
    
    1,044
    
    
    
    1,857Total current liabilities
    
    
    47,342
    
    
    
    46,141Notes payable and other long-term obligations
    
    
    793
    
    
    
    9,310Long-term portion of deferred revenue
    
    
    9,263
    
    
    
    9,517Total liabilities
    
    
    57,398
    
    
    
    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; 33,147,360 and 32,335,622 shares issued and
outstanding, respectively
    
    
    3,315
    
    
    
    3,234Additional paid-in capital
    
    
    553,871
    
    
    
    530,575Accumulated other comprehensive (loss) income
    
    
    (3,985
    )
    
    
    203Retained earnings (accumulated deficit)
    
    
    35,382
    
    
    
    (2,285
    )Total stockholders equity
    
    
    588,583
    
    
    
    531,727Total liabilities and stockholders equity
    
    $
    645,981
    
    
    $
    596,695
 See accompanying notes.
  51




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MARTEK BIOSCIENCES CORPORATION
 
  Year ended October 31,In thousands, except per share data
    
    2008
    
    
    2007
    
    
    2006Revenues:Product sales
    
    $
    336,609
    
    
    $
    292,549
    
    
    $
    255,838Contract manufacturing sales
    
    
    15,753
    
    
    
    14,264
    
    
    
    14,816Total revenues
    
    
    352,362
    
    
    
    306,813
    
    
    
    270,654Cost of revenues:Cost of product sales
    
    
    192,848
    
    
    
    179,367
    
    
    
    158,600Cost of contract manufacturing sales
    
    
    14,000
    
    
    
    13,952
    
    
    
    14,676Total cost of revenues
    
    
    206,848
    
    
    
    193,319
    
    
    
    173,276Gross margin
    
    
    145,514
    
    
    
    113,494
    
    
    
    97,378Operating expenses:Research and development
    
    
    26,223
    
    
    
    24,853
    
    
    
    24,044Selling, general and administrative
    
    
    54,181
    
    
    
    44,855
    
    
    
    39,597Amortization of intangible assets
    
    
    7,422
    
    
    
    6,558
    
    
    
    2,796Restructuring charge
    
    
    
    
    
    
    853
    
    
    
    4,729Other operating expenses
    
    
    1,504
    
    
    
    1,614
    
    
    
    1,158Total operating expenses
    
    
    89,330
    
    
    
    78,733
    
    
    
    72,324Income from operations
    
    
    56,184
    
    
    
    34,761
    
    
    
    25,054Interest and other income, net
    
    
    1,647
    
    
    
    1,144
    
    
    
    1,490Interest expense
    
    
    (510
    )
    
    
    (2,233
    )
    
    
    (3,018
    )Income before income tax provision
    
    
    57,321
    
    
    
    33,672
    
    
    
    23,526Income tax provision
    
    
    19,654
    
    
    
    1,659
    
    
    
    8,588Net income
    
    $
    37,667
    
    
    $
    32,013
    
    
    $
    14,938Net income per shareBasic
    
    $
    1.14
    
    
    $
    0.99
    
    
    $
    0.47Diluted
    
    $
    1.13
    
    
    $
    0.98
    
    
    $
    0.46Weighted average common shares outstandingBasic
    
    
    32,951
    
    
    
    32,336
    
    
    
    32,113Diluted
    
    
    33,284
    
    
    
    32,593
    
    
    
    32,343
 See accompanying notes.
  52




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MARTEK BIOSCIENCES CORPORATION
 
  Accumulated
    
    
    RetainedAdditional
    
    
    Other
    
    
    EarningsCommon Stock
    
    
    Paid-in
    
    
    Comprehensive
    
    
    (AccumulatedIn thousands, except share data
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Income (Loss)
    
    
    Deficit)
    
    
    TotalBalance at October 31, 2005
    
    
    32,026,595
    
    
    $
    3,203
    
    
    $
    515,237
    
    
    $
    1
    
    
    $
    (49,236
    )
    
    $
    469,205Issuance of common stock under employee stock plans
    
    
    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 (loss):Realized gain on exchange rate forward
contracts, net of tax of $
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Unrealized gain on exchange rate forward
contracts, net of tax of $102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171
    
    
    
    
    
    
    
    171Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,108Balance at October 31, 2006
    
    
    32,156,162
    
    
    
    3,216
    
    
    
    523,486
    
    
    
    171
    
    
    
    (34,298
    )
    
    
    492,575Issuance of common stock under employee stock plans
    
    
    179,460
    
    
    
    18
    
    
    
    2,747
    
    
    
    
    
    
    
    
    
    
    
    2,765Equity-based compensation
    
    
    
    
    
    
    
    
    
    
    2,710
    
    
    
    
    
    
    
    
    
    
    
    2,710Tax benefit of exercise of non-qualified stock options
    
    
    
    
    
    
    
    
    
    
    1,632
    
    
    
    
    
    
    
    
    
    
    
    1,632Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,013
    
    
    
    32,013Other comprehensive income (loss):Realized gain on exchange rate forward
contracts, net of tax of $(102)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (171
    )
    
    
    
    
    
    
    (171
    )Unrealized gain on exchange rate forward
contracts, net of tax of $116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    203
    
    
    
    
    
    
    
    203Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,045Balance 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
    
    
    
    
    
    
    
    
    
    
    
    10,164Issuance of common stock under employee stock plans
    
    
    470,792
    
    
    
    47
    
    
    
    8,191
    
    
    
    
    
    
    
    
    
    
    
    8,238Equity-based compensation
    
    
    
    
    
    
    
    
    
    
    3,192
    
    
    
    
    
    
    
    
    
    
    
    3,192Tax benefit of exercise of non-qualified stock options
and vesting of restricted stock units
    
    
    
    
    
    
    
    
    
    
    1,783
    
    
    
    
    
    
    
    
    
    
    
    1,783Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,667
    
    
    
    37,667Other comprehensive income (loss):Unrealized loss on available-for-sale securities,
net of tax of $(669)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,120
    )
    
    
    
    
    
    
    (1,120
    )Realized gain on exchange rate forward
contracts, net of tax of $(163)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (286
    )
    
    
    
    
    
    
    (286
    )Unrealized loss on exchange rate forward
contracts, net of tax of $(1,666)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,782
    )
    
    
    
    
    
    
    (2,782
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,479Balance at October 31, 2008
    
    
    33,147,360
    
    
    $
    3,315
    
    
    $
    553,871
    
    
    $
    (3,985
    )
    
    $
    35,382
    
    
    $
    588,583
 See accompanying notes.
  53




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MARTEK BIOSCIENCES CORPORATION
 
  Year ended October 31,In thousands
    
    2008
    
    
    2007
    
    
    2006Operating activitiesNet income
    
    $
    37,667
    
    
    $
    32,013
    
    
    $
    14,938Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    28,633
    
    
    
    26,466
    
    
    
    21,672Provision for inventory obsolescence
    
    
    2,200
    
    
    
    900
    
    
    
    500Deferred tax provision
    
    
    16,636
    
    
    
    479
    
    
    
    8,308Equity-based compensation expense
    
    
    3,200
    
    
    
    2,744
    
    
    
    3,572Incremental tax benefit from exercise of non-qualified stock options and vesting of
restricted stock units
    
    
    (1,783
    )
    
    
    (507
    )
    
    
    (1,587
    )Loss from disposal and write-down of assets and other
    
    
    958
    
    
    
    1,104
    
    
    
    2,845Changes in operating assets and liabilities:Accounts receivable
    
    
    1,205
    
    
    
    (9,129
    )
    
    
    (5,143
    )Inventories
    
    
    7,648
    
    
    
    1,976
    
    
    
    (21,104
    )Other assets
    
    
    2,892
    
    
    
    1,968
    
    
    
    (4,113
    )Accounts payable
    
    
    (1,382
    )
    
    
    (3,545
    )
    
    
    5,002Accrued liabilities
    
    
    9,980
    
    
    
    (7,642
    )
    
    
    8,527Deferred revenue and other liabilities
    
    
    (1,306
    )
    
    
    (967
    )
    
    
    2,205Net cash provided by operating activities
    
    
    106,548
    
    
    
    45,860
    
    
    
    35,622Investing activitiesPurchases of investments, marketable securities and long-term auction rate security investments
    
    
    (16,925
    )
    
    
    (275
    )
    
    
    (19,600
    )Sales of investments, marketable securities and long-term auction rate security investments
    
    
    8,475
    
    
    
    6,850
    
    
    
    30,650Expenditures for property, plant and equipment
    
    
    (9,785
    )
    
    
    (8,279
    )
    
    
    (10,902
    )Repurchase from sale-leaseback transaction and other
    
    
    
    
    
    
    (3,010
    )
    
    
    (6,877
    )Capitalization of intangible and other assets
    
    
    (3,895
    )
    
    
    (6,010
    )
    
    
    (6,862
    )Net cash used in investing activities
    
    
    (22,130
    )
    
    
    (10,724
    )
    
    
    (13,591
    )Financing activitiesRepayments of notes payable and other long-term obligations
    
    
    (8,917
    )
    
    
    (1,013
    )
    
    
    (3,009
    )Repayments under revolving credit facility, net
    
    
    
    
    
    
    (36,000
    )
    
    
    (19,000
    )Proceeds from the issuance of common stock under employee stock plans
    
    
    8,238
    
    
    
    2,765
    
    
    
    2,922Incremental tax benefit from exercise of non-qualified stock options and vesting of
restricted stock units
    
    
    1,783
    
    
    
    507
    
    
    
    1,587Net cash provided by (used in) financing activities
    
    
    1,104
    
    
    
    (33,741
    )
    
    
    (17,500
    )Net increase in cash and cash equivalents
    
    
    85,522
    
    
    
    1,395
    
    
    
    4,531Cash and cash equivalents, beginning of year
    
    
    16,973
    
    
    
    15,578
    
    
    
    11,047Cash and cash equivalents, end of year
    
    $
    102,495
    
    
    $
    16,973
    
    
    $
    15,578Supplemental cash flow disclosures:Interest paid
    
    $
    464
    
    
    $
    2,478
    
    
    $
    3,625Income taxes paid
    
    $
    2,902
    
    
    $
    530
    
    
    $
    280Issuance of shares related to OmegaTech contingent purchase price
    
    $
    10,164
    
    
    $
    
    
    
    $
    Accrual of contingent purchase price to be settled in shares of Martek common stock
    
    $
    
    
    
    $
    10,164
    
    
    $
    
 See accompanying notes.
  54




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. ORGANIZATION AND DESCRIPTION OF BUSINESS
    2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
 Use of Estimates
 Segment Information
 Revenue Recognition
  Shipping Income and Costs
  55




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##### Table of Contents



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
 Investments and Marketable Securities
   56




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##### Table of Contents



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
  57




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Impairment of Long-Lived Assets
 Recently Issued Accounting Pronouncements
     3. EQUITY-BASED COMPENSATION
   58




---



##### Table of Contents



Stock Options
  Year ended October 31,2008
    
    
    2007
    
    
    2006Expected volatility
    
    
    48.5
    %
    
    
    n/a
    
    
    
    61.1
    %Risk-free interest rate
    
    
    3.2
    %
    
    
    n/a
    
    
    
    4.7
    %Expected life of options
    
    2 years
    
    
    
    n/a
    
    
    5 yearsExpected dividend yield
    
    
    0
    %
    
    
    n/a
    
    
    
    0
    %Forfeiture rate
    
    
    0
    %
    
    
    n/a
    
    
    
    1
    %
 Expected Volatility
 Risk-Free Interest Rate
 Expected Life of Options
 Expected Dividend Yield
 Forfeiture Rate
  Weighted AverageNumber of
    
    
    
    
    
    
    Aggregate
    
    
    RemainingShares
    
    
    Weighted Average
    
    
    Intrinsic Value
    
    
    Contractual(in thousands)
    
    
    Price per Share
    
    
    (in thousands)
    
    
    Term (years)Options outstanding at November 1, 2007
    
    
    3,077
    
    
    $
    38.99Granted
    
    
    18
    
    
    $
    28.43Exercised
    
    
    (412
    )
    
    $
    21.71Cancelled and forfeited
    
    
    (96
    )
    
    $
    55.89Options outstanding at October 31, 2008
    
    
    2,587
    
    
    $
    41.04
    
    
    $
    7,572
    
    
    
    4.8Options exercisable at October 31, 2008
    
    
    2,573
    
    
    $
    41.02
    
    
    $
    7,563
    
    
    
    4.7Vested and expected to vest at October 31, 2008
    
    
    2,587
    
    
    $
    41.04
    
    
    $
    7,572
    
    
    
    4.8
    59




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##### Table of Contents



Restricted Stock Units
   Weighted AverageNumber of
    
    
    Aggregate
    
    
    RemainingShares
    
    
    Intrinsic Value
    
    
    Contractual(in thousands)
    
    
    (in thousands)
    
    
    Term (years)Restricted stock units outstanding at November 1, 2007
    
    
    264Granted
    
    
    223Vested
    
    
    (79
    )Cancelled and forfeited
    
    
    (22
    )Restricted stock units outstanding at October 31, 2008
    
    
    386
    
    
    $
    11,526
    
    
    
    6.6Vested and expected to vest at October 31, 2008
    
    
    361
    
    
    $
    10,758
    
    
    
    6.6
   4. DSM SUPPLY AND LICENSE AGREEMENT
    60




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##### Table of Contents



5. INVESTMENTS
     6. INVENTORIES
  October 31,2008
    
    
    2007Finished goods
    
    $
    45,871
    
    
    $
    57,852Work in process
    
    
    49,042
    
    
    
    48,721Raw materials
    
    
    4,640
    
    
    
    2,836Inventories, net
    
    $
    99,553
    
    
    $
    109,409
   61




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##### Table of Contents



7. PROPERTY, PLANT AND EQUIPMENT
  October 31,2008
    
    
    2007Land
    
    $
    2,320
    
    
    $
    2,320Building and improvements
    
    
    64,731
    
    
    
    63,892Machinery and equipment
    
    
    262,831
    
    
    
    256,739Furniture and fixtures
    
    
    2,963
    
    
    
    3,143Computer hardware and software
    
    
    16,119
    
    
    
    13,929348,964
    
    
    
    340,023Less: accumulated depreciation and amortization
    
    
    (91,268
    )
    
    
    (70,459
    )257,696
    
    
    
    269,564Construction in progress
    
    
    8,204
    
    
    
    8,351Property, plant and equipment, net
    
    $
    265,900
    
    
    $
    277,915
   8. GOODWILL AND OTHER INTANGIBLE ASSETS
  October 31, 2008
    
    
    October 31, 2007Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedIntangible Asset
    
    Gross
    
    
    Amortization
    
    
    Net
    
    
    Gross
    
    
    Amortization
    
    
    NetTrademarks
    
    $
    2,153
    
    
    $
    (850
    )
    
    $
    1,303
    
    
    $
    2,098
    
    
    $
    (691
    )
    
    $
    1,407Patents
    
    
    22,533
    
    
    
    (7,795
    )
    
    
    14,738
    
    
    
    22,226
    
    
    
    (5,594
    )
    
    
    16,632Core technology
    
    
    1,708
    
    
    
    (683
    )
    
    
    1,025
    
    
    
    1,708
    
    
    
    (569
    )
    
    
    1,139Current products
    
    
    10,676
    
    
    
    (4,652
    )
    
    
    6,024
    
    
    
    10,676
    
    
    
    (3,940
    )
    
    
    6,736Licenses
    
    
    11,968
    
    
    
    (4,061
    )
    
    
    7,907
    
    
    
    10,996
    
    
    
    (2,590
    )
    
    
    8,40649,038
    
    
    
    (18,041
    )
    
    
    30,997
    
    
    
    47,704
    
    
    
    (13,384
    )
    
    
    34,320Goodwill
    
    
    51,592
    
    
    
    
    
    
    
    51,592
    
    
    
    51,564
    
    
    
    
    
    
    
    51,564$
    100,630
    
    
    $
    (18,041
    )
    
    $
    82,589
    
    
    $
    99,268
    
    
    $
    (13,384
    )
    
    $
    85,884
    62




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##### Table of Contents



9. ACCRUED LIABILITIES
  October 31,2008
    
    
    2007Compensation and employee benefits
    
    $
    14,789
    
    
    $
    9,398OmegaTech contingent share issuance
    
    
    
    
    
    
    10,167Unrealized loss on forward contracts
    
    
    4,577
    
    
    
    Customer-related
    
    
    3,422
    
    
    
    1,135Other
    
    
    6,031
    
    
    
    4,454$
    28,819
    
    
    $
    25,154
   10. NOTES PAYABLE AND LONG-TERM DEBT
    Fiscal Year2009
    
    $
    1102010
    
    
    1042011
    
    
    172012
    
    
    182013
    
    
    19Thereafter
    
    
    263$
    531
    63




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##### Table of Contents



11. RESTRUCTURING CHARGE
      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
    
    
    
    2,046Costs incurred
    
    
    
    
    
    
    
    
    
    
    853
    
    
    
    853Cash payments
    
    
    (1,946
    )
    
    
    
    
    
    
    (927
    )
    
    
    (2,873
    )Adjustments
    
    
    (26
    )
    
    
    
    
    
    
    
    
    
    
    (26
    )Liability for restructuring costs at October 31, 2007
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 12. COMMITMENTS AND CONTINGENCIES
 Leases
    Fiscal Year2009
    
    $
    1,1732010
    
    
    1,2312011
    
    
    4352012
    
    
    732013
    
    
    48Thereafter
    
    
    261$
    3,221
 Scientific Research Collaborations
  64




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##### Table of Contents



Purchase Commitments
 OmegaTech Contingent Purchase Price
  Patent Infringement Litigation
    Other
  65




---



##### Table of Contents



13. NET INCOME PER SHARE
   Year ended October 31,2008
    
    
    2007
    
    
    2006Net income
    
    $
    37,667
    
    
    $
    32,013
    
    
    $
    14,938Weighted average shares outstanding, basic
    
    
    32,951
    
    
    
    32,336
    
    
    
    32,113Effect of dilutive potential common shares:Stock options
    
    
    256
    
    
    
    223
    
    
    
    230Restricted stock units
    
    
    77
    
    
    
    34
    
    
    
    Total dilutive potential common shares
    
    
    333
    
    
    
    257
    
    
    
    230Weighted average shares outstanding, diluted
    
    
    33,284
    
    
    
    32,593
    
    
    
    32,343Net income per share, basic
    
    $
    1.14
    
    
    $
    0.99
    
    
    $
    0.47Net income per share, diluted
    
    $
    1.13
    
    
    $
    0.98
    
    
    $
    0.46
  14. STOCKHOLDER RIGHTS PLAN
    15. INCOME TAXES
  Year ended October 31,2008
    
    
    2007
    
    
    2006Current provision:Federal
    
    $
    768
    
    
    $
    530
    
    
    $
    280State
    
    
    2,250
    
    
    
    43
    
    
    
    11Deferred provision:Federal
    
    
    15,520
    
    
    
    850
    
    
    
    8,098State
    
    
    1,116
    
    
    
    236
    
    
    
    199Income tax provision
    
    $
    19,654
    
    
    $
    1,659
    
    
    $
    8,588
  66




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##### Table of Contents



Year ended October 31,2008
    
    
    2007
    
    
    2006Federal income tax expense at 35%
    
    $
    20,062
    
    
    $
    11,785
    
    
    $
    8,234State taxes, net of Federal benefit
    
    
    1,981
    
    
    
    351
    
    
    
    210Previously unrecognized research
and development tax credits
    
    
    (1,608
    )
    
    
    
    
    
    
    Change in valuation allowance
    
    
    (66
    )
    
    
    (10,841
    )
    
    
    Other
    
    
    (715
    )
    
    
    364
    
    
    
    144Income tax provision
    
    $
    19,654
    
    
    $
    1,659
    
    
    $
    8,588
  October 31,2008
    
    
    2007Deferred tax assets:Accruals and reserves
    
    $
    4,006
    
    
    $
    1,546Net operating loss carryforwards and credits
    
    
    51,639
    
    
    
    61,484Forward contracts and investments
    
    
    2,496
    
    
    
    Deferred revenue
    
    
    3,702
    
    
    
    4,064Equity-based compensation
    
    
    2,457
    
    
    
    2,100Other
    
    
    508
    
    
    
    318Total assets
    
    
    64,808
    
    
    
    69,512Deferred tax liabilities:Property, plant and equipment
    
    
    (19,467
    )
    
    
    (11,476
    )Patents and trademarks
    
    
    (1,417
    )
    
    
    (1,257
    )Acquired intangibles
    
    
    (2,647
    )
    
    
    (2,813
    )Goodwill
    
    
    (1,437
    )
    
    
    (1,096
    )Other
    
    
    
    
    
    
    (14
    )Total liabilities
    
    
    (24,968
    )
    
    
    (16,656
    )Total deferred tax asset
    
    
    39,840
    
    
    
    52,856Valuation allowance
    
    
    (1,484
    )
    
    
    (1,550
    )Deferred tax asset, net of valuation allowance
    
    
    38,356
    
    
    
    51,306Less: current deferred tax asset
    
    
    (24,821
    )
    
    
    (14,549
    )Long-term deferred tax asset
    
    $
    13,535
    
    
    $
    36,757
    67




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##### Table of Contents



Unrecognized tax benefits at November 1, 2007
    
    $
    711Gross increasestax positions in prior period
    
    
    1,390Gross decreasestax positions in prior period
    
    
    Gross increasestax positions in the current period
    
    
    Settlements with taxing authorities
    
    
    (352
    )Lapse of statute of limitations
    
    
    Unrecognized tax benefits at October 31, 2008
    
    $
    1,749
   16. EMPLOYEE 401(K) PLAN
  17. QUARTERLY FINANCIAL INFORMATION (unaudited)
  1st
    
    
    2nd
    
    
    3rd
    
    
    4thQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter2008Total revenues
    
    $
    82,881
    
    
    $
    90,726
    
    
    $
    88,403
    
    
    $
    90,352Cost of revenues
    
    
    48,785
    
    
    
    53,343
    
    
    
    51,708
    
    
    
    53,012Income from operations
    
    
    13,302
    
    
    
    14,357
    
    
    
    14,603
    
    
    
    13,922Net income
    
    
    8,669
    
    
    
    9,202
    
    
    
    9,332
    
    
    
    10,464
    (1)Net income per share, basic
    
    
    0.26
    
    
    
    0.28
    
    
    
    0.28
    
    
    
    0.32
    (1)Net income per share, diluted
    
    
    0.26
    
    
    
    0.28
    
    
    
    0.28
    
    
    
    0.31
    (1)2007Total revenues
    
    $
    70,261
    
    
    $
    76,686
    
    
    $
    77,846
    
    
    $
    82,020Cost of revenues
    
    
    46,392
    
    
    
    50,009
    
    
    
    47,898
    
    
    
    49,020Income from operations
    
    
    4,758
    
    
    
    8,077
    
    
    
    9,905
    
    
    
    12,021Net income
    
    
    2,750
    
    
    
    4,869
    
    
    
    6,126
    
    
    
    18,268
    (2)Net income per share, basic
    
    
    0.09
    
    
    
    0.15
    
    
    
    0.19
    
    
    
    0.56
    (2)Net income per share, diluted
    
    
    0.08
    
    
    
    0.15
    
    
    
    0.19
    
    
    
    0.55
    (2)
 (1)
    
    In the fourth quarter of fiscal 2008, Martek recognized an income tax benefit of $1.6 million
related primarily to certain previously unrecognized research and development tax credits (see Note
15).(2)
    
    In the fourth quarter of fiscal 2007, Martek recognized an income tax benefit of $10.8 million
related to the reversal of valuation allowance (see Note 15).  68




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 ITEM 9A. CONTROLS AND PROCEDURES.
 a)
    
    Evaluation of Disclosure Controls and Procedures. As of the end of the period covered
by this report, we carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures pursuant to
Exchange Act rules 13a-15(e) and 15d-15(e). Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end of the
period covered by this report, the disclosure controls and procedures were effective.b)
    
    Internal Control Over Financial Reporting.The report called for by Item 308(a) of
Regulation S-K is incorporated herein by reference to Managements Report on Internal
Control Over Financial Reporting, included in Part II, Item 8. Financial Statements and
Supplementary Data of this Annual Report on Form 10-K. The attestation report called for
by Item 308(b) of Regulation S-K is incorporated herein by reference to the attestation
report of Ernst & Young LLP, our independent registered public accounting firm, on
managements assessment of internal control over financial reporting, included in Part II,
Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
There was no change in our internal control over financial reporting during our last fiscal
quarter that materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
 
 ITEM 9B. OTHER INFORMATION.
   69




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
  Election of Directors
Board Committees
Section 16(a) Beneficial Ownership Reporting Compliance
 http://www.martek.com
 
 ITEM 11. EXECUTIVE COMPENSATION.
  Directors Compensation  Executive Compensation
 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
  Beneficial Ownership of Common Stock  Equity Compensation Plan Information
 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
  Transactions with Related Persons  Director Independence
 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  Independent Auditors
  70




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
    Schedule II Valuation and Qualifying Accounts  Years Ended October 31, 2008 and 2007
    
    
    72
     71




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##### Table of Contents



Balance atBeginning of
    
    
    
    
    
    
    
    
    
    
    Balance at End ofDescription
    
    Year
    
    
    Additions
    
    
    Deductions
    
    
    YearYear ended October 31, 2008:Deferred tax
valuation allowance
    
    $
    1,550
    
    
    $
    
    
    
    $
    (66
    )
    
    $
    1,484Reserve for
inventory
obsolescence
    
    $
    1,300
    
    
    $
    2,200
    
    
    $
    (900
    )
    
    $
    2,600Year ended October 31, 2007:Deferred tax
valuation allowance
    
    $
    18,586
    
    
    $
    
    
    
    $
    (17,036
    )
    
    $
    1,550Reserve for
inventory
obsolescence
    
    $
    1,600
    
    
    $
    900
    
    
    $
    (1,200
    )
    
    $
    1,300
  72




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##### Table of Contents



SIGNATURES
  MARTEK BIOSCIENCES CORPORATIONBy: /s/ Steve DubinSteve DubinChief Executive Officer and Director  Signatures
    
    Title
    
    Date/s/ Steve Dubin

Steve Dubin
    
    Chief Executive Officer and
Director (Principal
Executive Officer)
    
    December 29, 2008/s/ Peter L. Buzy

Peter L. Buzy
    
    Chief Financial Officer, Treasurer and Executive 
Vice President for Finance and Administration
(Principal Financial Officer and Accounting Officer)
    
    December 29, 2008/s/ James R. Beery

James R. Beery
    
    Director
    
    December 29, 2008/s/ Harry J. DAndrea

Harry J. DAndrea
    
    Director
    
    December 29, 2008/s/ Michael G. Devine

Michael G. Devine
    
    Director
    
    December 29, 2008/s/ Robert J. Flanagan

Robert J. Flanagan
    
    Director
    
    December 29, 2008/s/ Polly B. Kawalek

Polly B. Kawalek
    
    Director
    
    December 29, 2008/s/ Jerome C. Keller

Jerome C. Keller
    
    Director
    
    December 29, 2008/s/ Douglas J. MacMaster, Jr.

Douglas J. MacMaster, Jr.
    
    Director
    
    December 29, 2008/s/ Robert H. Mayer

Robert H. Mayer
    
    Director
    
    December 29, 2008/s/ Eugene H. Rotberg

Eugene H. Rotberg
    
    Director
    
    December 29, 2008
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##### Table of Contents



EXHIBIT INDEX
 EXHIBITNUMBER#
    
    DESCRIPTION3.01
    
    
    Revised Restated Certificate of Incorporation.3.02
    
    
    Certificate of Amendment to the Restated Certificate of Incorporation (filed as Exhibit 3.1
to the Companys Registration Statement on Form S-3, File No. 33-89760, filed March 15, 1995,
and incorporated by reference herein).3.03
    
    
    Certificate of Elimination of Series A Junior Participating Preferred Stock (filed as Exhibit
3.2 to the Companys current report on Form 8-K, File No. 0-22354, filed on February 8, 2006,
and incorporated by reference herein).3.04
    
    
    Certificate of Amendment to the Restated Certificate of Incorporation of the Company (filed
as exhibit 3.07 to the Companys quarterly report on Form 10-Q, File No. 0-22354, for the
quarter ended January 31, 2002, and incorporated by reference herein).3.05
    
    
    Amended By-Laws of Registrant (filed as exhibit 3.1 to the Companys current report on Form
8-K, File No. 0-22354, filed on September 22, 2008, and incorporated by reference herein).3.06
    
    
    Certificate of Designation, Preferences and Rights of Series B Junior Participating Preferred
Stock (filed as Exhibit 3.1 to the Companys current report on Form 8-K, File No. 0-22354,
filed on February 8, 2006, and incorporated by reference herein).3.07
    
    
    Certificate of Elimination of Series B Junior Participating Preferred Stock.**4.01
    
    
    Specimen Stock Certificate for Common Stock.10.01
    
    
    Form Indemnification Agreement for directors.10.02
    
    
    Form of Proprietary Information, Inventions and Non-Solicitation Agreement.10.03
    
    
    License Agreement, dated September 10, 1992, between the Company and Bestuurcentrum Der
Verenigde Bedrijven Nutricia B.V. (filed as Exhibit 10.01 to the Companys current report on
Form 8-K, File No. 0-22354, dated December 15, 2006 and incorporated by reference herein).*10.03
    A
    
    Exhibits to September 10, 1992 License Agreement between the Company and Bestuurcentrum Der
Verenigde Bedrijven Nutricia B.V.*10.04
    
    
    License Agreement, dated October 28, 1992, between the Company and Mead Johnson & Company
(filed as Exhibit 10.02 to the Companys current report on Form 8-K, File No. 0-22354, dated
December 15, 2006 and incorporated by reference herein).*10.04
    A
    
    Exhibits to October 28, 1992 License Agreement between the Company and Mead Johnson &
Company.*10.05
    
    
    Supply Agreement with Mead Johnson & Company dated May 17, 2006 (filed as Exhibit 10.01 to
the Companys quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended April 30,
2006, and incorporated by reference herein).*10.06
    
    

License Agreements, dated January 28, 1993 between the Company and American Home Products
Corporation represented by the Wyeth-Ayerst Division (Domestic Version) and American Home
Products Corporation represented by its agent Wyeth-Ayerst International (International
Version) (filed as Exhibit 10.03 to the Companys current report on Form 8-K, File No.
0-22354, dated December 15, 2006 and incorporated by reference herein).*10.06
    A
    
    Exhibits to January 28, 1993 License Agreements between the Company and American Home
Products Corporation represented by the Wyeth-Ayerst Division (Domestic Version) and American
Home Products Corporation represented by its agent Wyeth-Ayerst International (International
Version).*10.07
    
    
    Supply Agreement, executed on October 31, 2008 but made effective as of November 21, 2008,
by and between AHP Manufacturing B.V. trading as Wyeth Nutritionals Ireland and the Company.
** ^
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##### Table of Contents



EXHIBITNUMBER#
    
    DESCRIPTION10.08
    
    
    License Agreement, dated March 31, 2000 between the Company and Abbott Laboratories (filed
as Exhibit 10.30 to the Companys quarterly report on Form 10-Q for the quarter ended April
30, 2000, and incorporated by reference herein).*10.09
    
    
    Supply Agreement, executed October 5, 2007 and effective January 1, 2007, by and between
Abbott Nutrition, a division of Abbott Laboratories, and the Company (filed as Exhibit 10.49
to the Companys annual report on Form 10-K, File No. 0-22354, for the year ended October 31,
2007, and incorporated by reference herein). ^10.10
    
    
    License and Supply Agreement, dated June 13, 2003 between the Company and Nestec Ltd. (filed
as exhibit 10.50 to the Companys quarterly report on Form 10-Q, File No. 0-22354, for the
quarter ended April 30, 2003, and incorporated by reference herein).*10.11
    
    
    License and Supply Agreement, executed February 13, 2008 and effective January 1, 2008, by
and between Numico Trading B.V. and the Company (filed as Exhibit 10.01 to the Companys
quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended January 31, 2008, and
incorporated by reference herein). *10.12
    
    
    ARA Alliance, Purchase and Production Agreement by and between the Company and DSM Food
Specialties B.V. (filed as Exhibit 10.63 to the Companys quarterly report on Form 10-Q, as
amended, File No. 0-22354, for the quarter ended April 30, 2004, and incorporated by reference
herein). *10.13
    
    
    First Amendment to ARA Alliance, Purchase, and Production Agreement (filed as Exhibit 10.01
to the Companys quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended
January 31, 2006, and incorporated by reference herein). *10.14
    
    
    Second Amendment to the ARA Alliance, Purchase, and Production Agreement by and between DSM
Food Specialties B.V. and the Company (filed as Exhibit 10.01 to the Companys quarterly
report on Form 10-Q, File No. 0-22354, for the quarter ended July 31, 2007, and incorporated
by reference herein).*10.15
    
    
    Letter Agreement, effective May 21, 2008, by and between DSM Food Specialties B.V. and the
Company (filed as Exhibit 10.01 to the Companys quarterly report on Form 10-Q, File No.
0-22354, for the quarter ended July 31, 2008, and incorporated by reference herein) .*10.16
    
    
    Amended and Restated Loan and Security Agreement by and among the Company, as Borrower, and
the Lenders party thereto and Manufacturers and Traders Trust Company, as Administrative Agent
and Sole Book Runner, and Bank of America, NA, as Syndication Agent, and SunTrust Bank, as
Documentation Agent, dated September 30, 2005 (filed as Exhibit 10.1 to the Companys current
report on Form 8-K, File No. 0-22354, filed on October 6, 2005 and incorporated by reference
herein).10.16
    A
    
    Form of Revolving Loan Promissory Note (filed as Exhibit 10.1A to the Companys current
report on Form 8-K, File No. 0-22354, filed on October 6, 2005 and incorporated by reference
herein).10.16
    B
    
    Form of Guaranty Agreement (filed as Exhibit 10.1B to the Companys current report on Form
8-K, File No. 0-22354, filed on October 6, 2005 and incorporated by reference herein).10.16
    C
    
    Form of Security Agreement from Guarantors (filed as Exhibit 10.1C to the Companys current
report on Form 8-K, File No. 0-22354, filed on October 6, 2005 and incorporated by reference
herein).10.16
    D
    
    Form of Stock Pledge Agreement (filed as Exhibit 10.1D to the Companys current report on
Form 8-K, File No. 0-22354, filed on October 6, 2005 and incorporated by reference herein).10.16
    E
    
    Form of Lender Assignment and Acceptance Agreement (filed as Exhibit 10.1E to the Companys
current report on Form 8-K, File No. 0-22354, filed on October 6, 2005 and incorporated by
reference herein).10.17
    
    
    Second Modification Agreement effective as of September 30, 2005 by and between
Manufacturers and Traders Trust Company, as Administrative Agent, the lenders named therein,
Martek Biosciences Corporation, Martek Biosciences Boulder Corporation, and Martek Biosciences
Kingstree Corporation (filed as Exhibit 10.2 to the Companys current report on Form 8-K, File
No. 0-22354, filed on October 6, 2005 and incorporated by reference herein).
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##### Table of Contents



EXHIBITNUMBER#
    
    DESCRIPTION10.18
    
    
    Settlement Agreement and Release, dated October 15, 2007, by and between the Company, Robert
Zuccaro, on his own behalf and as Stockholders Representative of certain former interest
holders of OmegaTech, Inc. (filed as Exhibit 10.50 to the Companys annual report on Form
10-K, File No. 0-22354, for the year ended October 31, 2007, and incorporated by reference
herein).10.19
    
    
    Martek Biosciences Corporation 1997 Stock Option Plan (filed as Exhibit 4.1(e) to the
Companys Registration Statement on Form S-8, File No. 333-27671, filed May 22, 1997, and
incorporated by reference herein). +10.20
    
    
    Martek Biosciences Corporation 2001 Stock Option Plan (filed as Exhibit 10.01 to the
Companys Registration Statement on Form S-8, File No. 333-74092, filed on November 28, 2001,
and incorporated by reference herein). +10.21
    
    
    Martek Biosciences Corporation Amended And Restated Management Cash Bonus Incentive Plan
effective April 25, 2002 (filed as Exhibit 10.36 to the Companys quarterly report on Form
10-Q, File No.0-22354, for the quarter ended April 30, 2002, and incorporated by reference
herein). +10.22
    
    
    OmegaTech, Inc. 1996 Stock Option Plan, as amended on April 26, 2001 (filed as Exhibit 10.37
to the Companys quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended April
30, 2002, and incorporated by reference herein). +10.23
    
    
    Employment Agreement dated April 25, 2002 between the Company and James Flatt (filed as
Exhibit 10.39 to the Companys quarterly report on Form 10-Q, File No. 0-22354, for the
quarter ended April 30, 2002, and incorporated by reference herein). +10.24
    
    
    Martek Biosciences Corporation 2002 Stock Incentive Plan (filed as Exhibit 1 to the
Companys Definitive Proxy, Schedule 14A, File No. 0-22354, filed on February 8, 2002 and
incorporated by reference herein). +10.25
    
    
    Martek Biosciences Corporation 2003 New Employee Stock Option Plan (filed as Exhibit 10.55
to the Companys quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended July
31, 2003, and incorporated by reference herein). +10.26
    
    
    Form of Nonqualified Stock Option Award Agreement under Martek Biosciences Corporation 2003
New Employee Stock Option Plan (filed as Exhibit 10.46 to the Companys annual report on Form
10-K, File No. 0-22354, for the year ended October 31, 2004, and incorporated by reference
herein). +10.27
    
    
    Form of Nonqualified Stock Option Award Agreement under Martek Biosciences Corporation 2004
Stock Incentive Plan (filed as Exhibit 10.47 to the Companys annual report on Form 10-K, File
No. 0-22354, for the year ended October 31, 2004, and incorporated by reference herein). +10.28
    
    
    Martek Biosciences Corporation Amended and Restated 2004 Stock Incentive Plan (filed as
Appendix A to the Companys Definitive Proxy, Schedule 14A, File No. 0-22354, filed on
February 8, 2005 and incorporated by reference herein). +10.29
    
    
    Form of Nonqualified Stock Option Agreement under Martek Biosciences Corporation Amended and
Restated 2004 Stock Incentive Plan (filed as Exhibit 10.03 to the Companys Registration
Statement on Form S-8, File No. 333-125802, filed June 14, 2005, and incorporated by
reference herein). +10.30
    
    
    Form of Employment Agreement between the Company and Peter L. Buzy dated November 10, 2006
(filed as Exhibit 10.42 to the Companys annual report on Form 10-K, File No. 0-22354, for the
year ended October 31, 2006, and incorporated by reference herein). +10.31
    
    
    Form of Employment Agreement between the Company and Steve Dubin dated December 21, 2006.
(filed as Exhibit 10.43 to the Companys annual report on Form 10-K, File No. 0-22354, for the
year ended October 31, 2006, and incorporated by reference herein). +10.32
    
    
    Form of Employment Agreement between the Company and Peter A. Nitze dated November 10, 2006
(filed as Exhibit 10.44 to the Companys annual report on Form 10-K, File No. 0-22354, for the
year ended October 31, 2006, and incorporated by reference herein). +
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##### Table of Contents



EXHIBITNUMBER#
    
    DESCRIPTION10.33
    
    
    Form of Employment Agreement between the Company and David Abramson dated November 10, 2006
(filed as Exhibit 10.45 to the Companys annual report on Form 10-K, File No. 0-22354, for the
year ended October 31, 2006, and incorporated by reference herein). +10.34
    
    
    Form of Restricted Stock Unit Agreement for executives under the Martek Bioscience
Corporation Amended and Restated 2004 Stock Incentive Plan (filed as Exhibit 10.01 to the
Companys quarterly report on
Form 10-Q, File No. 0-22354, for the quarter ended January 31,
2007, and incorporated by reference herein). +10.35
    
    
    Form of Restricted Stock Unit Agreement for directors under the Martek Bioscience
Corporation Amended and Restated 2004 Stock Incentive Plan (filed as Exhibit 10.02 to the
Companys quarterly report on Form 10-Q, File No. 0-22354, for the quarter ended January 31,
2007, and incorporated by reference herein). +21.01
    
    
    Subsidiaries of the Registrant. **23.01
    
    
    Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.**31.01
    
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).**31.02
    
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).**32.01
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **32.02
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
 *
    
    Confidential treatment was granted by the Securities and Exchange Commission for certain
portions of these agreements. The confidential portions were filed separately with the Commission.**
    
    Filed herewith.^
    
    Confidential treatment was requested for certain portions of this agreement. The confidential
portions were filed separately with the Commission.#
    
    Unless otherwise noted, all Exhibits are incorporated by reference as an Exhibit to
the Registrants Registration Statement on Form S-1 (No. 33-68522). The registrant will
furnish a copy of any exhibit upon receipt of a written request and the payment of a specified
reasonable fee which fee shall be limited to the registrants reasonable expenses in
furnishing such exhibit.+
    
    Denotes management contract or compensatory arrangement required to be filed as an exhibit to
this form.  77