<PAGE>   1

--------------------------------------------------------------------------------


MARTEK BIOSCIENCES CORPORATION
SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                 Year Ended October 31,
                                             ----------------------------------------------------------
In thousands except per share data              2000         1999        1998         1997        1996
-------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA
Revenues
<S>                                          <C>        <C>          <C>         <C>          <C>
  Product sales and royalties                $  8,726   $   5,744    $   5,241   $   3,594    $     944
  Research and development contracts and
  grants                                          879         383          484         530          769
  License fees and other revenues                  72           6        1,165         293        2,244
                                             --------    --------     --------    --------     --------
  Total revenues                                9,677       6,133        6,890       4,417        3,957

Costs and expenses
  Cost of product sales and royalties           7,092       4,209        3,856       2,697          539
  Research and development                     12,517      10,309        9,787      11,051       10,294
  Selling, general and administrative           6,942       6,822        7,360       7,415        4,134
                                             --------    --------     --------    --------     --------
  Total costs and expenses                     26,551      21,340       21,003      21,163       14,967
                                             --------    --------     --------    --------     --------
  Loss from operations                        (16,874)    (15,207)     (14,113)    (16,746)     (11,010)
  Other income, net                             1,147         359          652       1,349        2,096
                                             --------    --------     --------    --------     --------
  Net loss                                   $(15,727)   $(14,848)    $(13,461)   $(15,397)    $ (8,914)
                                             ========    ========     ========    ========     ========
  Net loss per share, basic and diluted      $   (.91)   $   (.95)    $   (.94)   $  (1.14)    $   (.67)
                                             ========    ========     ========    ========     ========
  Weighted average common shares
   outstanding                                 17,335      15,581       14,330      13,559       13,281
                                             ========    ========     ========    ========     ========

</TABLE>


<TABLE>
<CAPTION>

                                                                     October 31,
                                          ------------------------------------------------------------------
                                                 2000        1999         1998        1997         1996
------------------------------------------------------------------------------------------------------------
<S>                                             <C>      <C>          <C>         <C>          <C>
BALANCE SHEET AND OTHER DATA
Cash, cash equivalents, short-term
  investments and marketable securities      $ 19,264    $ 16,331     $ 17,657    $ 20,674     $ 39,392
Working capital                                21,266      20,162       21,011      21,988       35,306
Total assets                                   45,442      39,145       40,747      41,340       57,123
Long-term debt                                     --         472        1,951       3,292        1,199
Accumulated deficit                           (89,625)    (73,898)     (59,049)    (45,588)     (30,191)
Total stockholders' equity                     35,455      35,172       35,294      34,686       49,417
Cash dividends declared--common stock              --          --           --          --           --

</TABLE>


6   ----------------------------------------------------------------------------
<PAGE>   2

--------------------------------------------------------------------------------

MANAGEMENT'S
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


      IN 1998 THE SEC ADOPTED NEW RULES REQUIRING PUBLIC COMPANIES LIKE MARTEK
TO WRITE CERTAIN DOCUMENTS IN PLAIN ENGLISH. EVEN THOUGH THE SEC DOES NOT
REQUIRE US TO PRESENT OUR MANAGEMENT'S DISCUSSION AND ANALYSIS IN PLAIN ENGLISH,
WE HAVE DECIDED TO DO SO. OUR GOAL IS TO DESCRIBE AND ANALYZE OUR FINANCIAL
STATEMENTS IN LANGUAGE THAT ALLOWS YOU TO UNDERSTAND THEM MORE EASILY.

CAUTIONARY NOTE

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 our:

   - expectations regarding future product introductions,
     distribution, sales, applications and potential marketing partnerships;

   - expectations regarding sales and royalties by and from our formula
     licensees;

   - expectations regarding FDA approval of our oils for inclusion in U.S.
     infant formula;

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

   - expectations regarding future research and development costs; and

   - expectations regarding additional capital expenditures needed in relation
     to our fermentation and oil processing activities.

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

   - "will,"

   - "should,"

   - "could,"

   - "anticipate,"

   - "believe,"

   - "plan,"

   - "estimate,"

   - "expect,"

   - "intend," and other similar expressions.

   All of these forward-looking statements involve risks and uncertainties.
They 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 the risks that could cause such
differences in this report as well as in our various filings with the Securities
and Exchange Commission ("SEC").

GENERAL

Martek Biosciences Corporation ("we," "Martek" or "the Company") was founded in
1985. We are leaders in the development and commercialization of products
derived from microalgae. Our leading products are nutritional oils used as
ingredients in infant formula and foods, and as ingredients in, and encapsulated
for use as, dietary supplements. Our nutritional oils are comprised of fatty
acid components, primarily docosahexaenoic acid, commonly known as DHA, and
arachidonic acid, commonly known as ARA. Many researchers believe that these
fatty acids may enhance mental and visual development in infants, and play a
pivotal role in brain function throughout life. Low levels of DHA in adults have
also been linked with a variety of health risks, including cardiovascular
problems, cancer, and various neurological and visual disorders. Additional
applications of our patented technology based upon microalgae include our algal
genomics technology and our currently marketed stable isotope and fluorescent
detection products and technologies that can be used by researchers as an aid in
drug discovery and diagnostics. In 1989, we began to realize revenues from sales
of our stable isotope products. In 1992, we realized our first revenues from
license fees related to our nutritional oils containing DHA and ARA and sales of
sample quantities of these oils. In 1995, we recognized our first product and
royalty revenues from sales of infant formula containing these oils, and in
1996, we began to realize revenues from the sale of Neuromins(R), a DHA dietary
supplement. In 1998, we first realized revenues from the sale of our new
phycobilisome fluorescent detection products. We currently have license
agreements with seven infant formula manufacturers representing over 60% of the
estimated $6 billion worldwide market for infant formula. Five of these
licensees are now marketing term infant formula products containing our oils in
fourteen countries and pre-term infant formula products containing our oils in
over 70 countries around the world.

   We have incurred losses in each year since our inception. At October 31,
2000, our accumulated deficit was $89,625,000. We expect to continue our
development, production optimization and product marketing activities and as a
result, expect our losses to continue for at least the next year, or until
significant sales of our nutritional oils and Neuromins(R) DHA products occur
and/or until significant royalties from sales of infant formula products
containing our oils are recognized. In addition, we expect to continue to
experience quarter-to-quarter and year-to-year fluctuations in revenues,
expenses and losses, some of which may be significant. The timing and extent of
such fluctuations will depend, in part, on the timing and receipt of
oils-related revenues. The extent and timing of future oils-related revenues are
largely dependent upon:

   - FDA and other regulatory approvals for products containing our oils;

   - market introductions of products by our licensees; and/or

-----------------------------------------------------------------------------  7
<PAGE>   3

--------------------------------------------------------------------------------

Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)

   - agreements with other future third-party collaborators. Because of this,
     the timing or likelihood of future profitability is largely dependent on
     factors over which we have no control.

MANAGEMENT OUTLOOK AND REGULATORY ISSUES

We believe that while quarterly results may show fluctuations in product sales,
the outlook for future revenue growth remains positive and that fiscal 2001
sales will surpass prior year levels. Specifically, we believe that for fiscal
2001 as a whole, term infant formulas containing our oils will be introduced in
additional countries and sales and royalties from our nutritional oils will
continue to grow.

   Five of our infant formula licensees have obtained the regulatory approval,
where required, to sell infant formula supplemented with our oils in over 70
countries for term or pre-term infant formula products. No company has yet
launched an infant formula containing our oils in the United States.

   We believe that our DHA and ARA are GRAS when used as ingredients in infant
formulas and, as such, are exempt from the pre-market approval requirements for
food additives. In February 2000, we filed a GRAS Notification with the FDA for
the use of our DHA and ARA in infant formula. We believe that the FDA review of
the GRAS Notification should ultimately have a favorable outcome, but this
review likely will not be completed for at least another three to six months.
In addition, each of our licensees must file an infant formula pre-market
notification and meet the statutory and regulatory requirements established for
such notifications before launching an infant formula in the United States that
contains our oils. There can be no assurance that:

   - the FDA will take the position that DHA and ARA are GRAS ingredients and,
     therefore, exempt from the definition of food additives;

   - the FDA will complete its review of the GRAS Notification in the next three
     to six months;

   - a licensee will pursue the necessary regulatory steps to market an infant
     formula containing our DHA and ARA in the U.S.;

   - a licensee's infant formula pre-market notification will provide sufficient
     data to support the marketing of an infant formula containing our DHA and
     ARA; or

   - the regulatory process will not involve significantly longer delays that
     may materially and adversely affect the timing and introduction of infant
     formulas containing our products.

   Notwithstanding this continued uncertainty in the U.S. regulatory picture,
we anticipate that during the next twelve months, infant formula products
containing our oils will continue to be introduced in various countries around
the world and overall product sales, including sales from infant formula related
products, will increase over the prior year.

RESULTS OF OPERATIONS

REVENUES Our revenues decreased from $6,890,000 in 1998 to $6,133,000 in 1999, a
decrease of 11%, mainly due to the non-recurrence of a $1,125,000 license fee
which was recognized in 1998. In 2000, our revenues increased to $9,677,000, or
58% over 1999, primarily due to increased nutritional product sales and
royalties.

   Our total product sales and royalties increased $503,000 in 1999 over 1998,
and increased an additional $2,982,000 or 52%, in 2000 over 1999. Our sales of
nutritional products increased by $381,000 or 14% in 1999 over 1998 and
increased an additional $2,780,000 or 88% in 2000. Our royalties on sales of
infant formula products increased from $391,000 in 1998 to $394,000 in 1999, an
increase of 1%, and increased to $948,000, or 141%, in 2000. The increase in
our nutritional product sales and royalties is primarily due to increased sales
of oil to infant formula licensees. Our licensees launched premium term infant
formulas with our oils in seven additional countries in 2000, including Mexico
and China. We are optimistic that as market acceptance of these products grows,
more term infant formula launches will occur in additional countries around the
world.

   Our sales of stable isotopes and other products increased $119,000, or 6% in
1999 over 1998 and decreased by $352,000, or 16% in 2000 compared to 1999. The
decrease in 2000 is primarily due a change in our focus to higher margin
isotopes, de-emphasizing sales of low margin reagent products in markets where
prices have declined due to strong competition.

   Our revenues from research and development work decreased from $484,000 in
1998 to $383,000 in 1999, a decrease of 21%, and increased to $879,000 in 2000,
an increase of 129% compared to 1999. The decrease in 1999 was due to fewer
grants outstanding under which we are receiving funding. In 2000, our research
and development revenues increased primarily as a result of approximately
$650,000 in revenues from a third-party development project during the second
and third quarter at our Winchester plant.

   Our revenues from license fees and other sources decreased $1,159,000 in
1999 compared to 1998, mainly due to the non-recurrence of a license fee of
$1,125,000 that was recognized in 1998, and increased $66,000 in 2000 over 1999
due primarily to license fees recognized from our license agreement with Abbott
Laboratories, which was entered into on March 31, 2000.

COST OF PRODUCT SALES AND ROYALTIES Our cost of product sales and royalties
decreased to 73% of product sales and royalties in 1999, down from 74% in 1998,
and increased to 81% in 2000. These fluctuations are primarily due to the mix of
sales. Our cost of sales will increase when there is a higher percentage of
sales to infant formula licensees where future royalties will be received. Under
these royalty-bearing arrangements we sell product to our licensees at a low
initial transfer price, and there is an approximate three-to-four-month delay
after this initial sale of oil until royalties are received and recognized as
revenue. This creates a significantly higher cost of goods sold as a percentage
of revenues from product sales and royalties than

8   ----------------------------------------------------------------------------

<PAGE>   4

would be the case if we were to incorporate these royalties into the product
price and recognize the revenue at the time we initially sell product. We are
currently in the process of offering all of our infant formula licensees an
all-inclusive flat price for bulk oil, which would incorporate a slightly
discounted royalty up-front into our sales price. The overall economics of an
all-inclusive price closely match those of our existing royalty bearing
arrangements; however, the all-inclusive flat price eliminates margin
fluctuations that result from the delayed impact of royalty revenues. Had all of
our sales to licensees during 2000 been made using all-inclusive pricing, our
revenues would have been approximately $1,900,000 higher, resulting in a cost of
product sales and royalties of approximately 73% of revenues from product sales
and royalties.

      Our high cost of product sales and royalties reflects the fact that our
current inventory was manufactured during a period when we had not yet realized
production efficiencies due to the low volume of production and because we have
not yet optimized our production process. We believe that, in the future, as our
sales volumes increase and manufacturing efficiencies and economies of scale are
realized, our costs to produce DHA-rich oils and our costs to purchase ARA-rich
oils from our third-party supplier will decrease, resulting in a positive impact
on our gross profit margins.

RESEARCH AND DEVELOPMENT Our research and development costs increased by
$522,000, or 5%, in 1999 and further increased $2,208,000 or 21% in 2000. The
majority of these increases relate to the continuing refinement of our
fermentation and oil extraction processes and other R&D efforts related to
production of our oils at our Winchester plant. In addition, our research and
development costs for 2000 were impacted by approximately $420,000 of expenses
incurred relating to a third-party development project at our Winchester plant
during the second and third quarters. We believe that as sales volumes increase
and production optimization occurs, our development costs at our Winchester
plant will decrease, reducing our overall R&D expenditures.

SELLING, GENERAL AND ADMINISTRATIVE Our selling, general and administrative
expenses decreased by $538,000, or 7%, in 1999 compared to 1998, and increased
by $120,000 or 2%, in 2000 compared to 1999. These fluctuations are mainly due
to the timing of our various corporate administrative expenditures and sales and
marketing activities.

OTHER INCOME, NET Our net income from other sources decreased from $652,000 in
1998 to $359,000 in 1999, and increased to $1,147,000 in 2000. These
fluctuations are primarily due to the amount of interest earned on our
investments, which increased in 2000 due to our high average balance of cash
and short-term investments compared to prior years. We were able to maintain a
high level of interest-bearing investments in 2000 as a result of cash raised
in our February 2000 private placement as well as cash we received during the
year from warrant and option exercises.

NET LOSS As a result of the foregoing, our net loss increased from $13,461,000
in 1998 to $14,848,000 in 1999, an increase of 10%, and increased to $15,727,000
in 2000, an increase of 6% over 1999.

RECENTLY ISSUED ACCOUNTING GUIDANCE In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which requires
companies to recognize all derivative financial instruments as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
This Statement is effective for fiscal years beginning after June 15, 2000.
Adoption of this standard is not expected to have a significant impact on our
financial position, results of operations, cash flows, or the presentation of
our disclosures.

      In December 1999, the Staff of the SEC issued Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
summarizes certain of the Staff's views in applying generally accepted
accounting principles to revenue recognition in the financial statements,
including recognition of non-refundable license fees received upon entering into
licensing arrangements. Adoption of SAB 101 has not had a material impact on our
revenue recognition policies or on prior revenue generating transactions, and
will not have a material impact on our future financial position, cash flows or
results of operations.

COLLABORATIVE AND LICENSING AGREEMENTS

We have entered into licensing agreements with seven infant formula
manufacturers, including Abbott Laboratories, Mead Johnson & Company (a
subsidiary of Bristol-Myers Squibb Company), American Home Products
(Wyeth-Ayerst division), Numico, Maabarot and Novartis, that together comprise
over 85% of the U.S. and 60% of the worldwide infant formula markets. We have
contractually agreed not to disclose the name of our seventh licensee, an infant
formula manufacturer with less than 3% of the worldwide market who has yet to
purchase any products from us. Under all of these agreements, we received
up-front license fees, will receive a transfer price on sales of our oils to our
licensees and will receive ongoing royalties based on our licensees' sales of
infant formula products containing our oils. The agreements have terms exceeding
20 years, contain no future funding commitments on our part or that of our
licensees, and may be terminated by our licensees upon proper notification. We
recognized royalty revenues relating to our license agreements of $948,000 in
2000, $394,000 in 1999, and $391,000 in 1998.

      Pursuant to our most recent license agreement with Abbott Laboratories
entered into on March 31, 2000, we received total consideration of $4.5 million,
which represents license fees and royalty prepayments. We recorded these
non-refundable payments as unearned revenue at October 31, 2000, and will
recognize the license fees as revenue on a straight-line basis over the
twenty-five-year term of the agreement. We will recognize the non-refundable
royalty prepayment, as well as potential ongoing royalties, as revenue when
products are introduced by

----------------------------------------------------------------------------   9

<PAGE>   5
--------------------------------------------------------------------------------

Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)

Abbott in accordance with the terms of the agreement. The license agreement may
be terminated by Abbott upon proper notification subsequent to the first
anniversary of the date upon which Abbott has made all payments to us in
accordance with the agreement. We recognized approximately $70,000 in license
fee revenue and no royalty revenues from this agreement during fiscal year 2000.

MANUFACTURING, SUPPLY AND PURCHASE AGREEMENTS

In January, 1997, we entered into an agreement with DSM Food Specialties ("DSM,"
formerly Royal Gist-Brocades B.V.) under which they became our exclusive
contract supplier for nutritional oils containing ARA. DSM is a multi-billion
dollar international group of companies that is active worldwide in the fields
of life science, product performance materials and chemicals. At October 31,
2000 we had outstanding inventory purchase commitments to DSM totaling
approximately $4 million. During DSM's production start-up period, when our
purchases of ARA-rich oils were relatively low, our agreement with them provided
for maximum sales-price levels to us. Depending on the value of oil that we
purchase from them in future periods, our cost of ARA should decrease, provided
that they recover approximately $1-$2 million in certain start-up and
development costs that they incurred in 1997 through 1999.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations primarily from:

   - the issuance and sale of equity securities;

   - product sales and receipt of license fees;

   - the exercise of stock options and warrants;

   - debt financing; and

   - revenues received under research and development contracts and grants.

   Since our inception, we have raised approximately $125 million from public
and private sales of our equity securities, as well as option and warrant
exercises. We raised approximately $13.8 million in a private placement of stock
in May, 1999 and $10.25 million in February, 2000 related to a 1998 equity
funding commitment.

   Through October 31, 2000, we have incurred an accumulated deficit of
$89,625,000. Our balance of cash and cash equivalents at October 31, 2000 was
$2,682,000. In addition, at October 31, 2000, we had $16,582,000 in short-term
investments and marketable securities. These investments and securities, which
consist of U.S. Government securities with average maturities of less than six
months, are available to meet our future cash needs. Our cash, cash equivalents,
short-term investments and marketable securities increased $2,933,000 in 2000,
primarily due to the funds received from the private placement of our common
stock and warrants in February 2000.

   In the future we will require substantial additional funds to:

   - continue our research and development programs;

   - conduct pre-clinical and clinical studies;

   - maintain compliance with our loan covenants; and

   - commercialize our nutritional oils, Neuromins(R) DHA, and our other
     products under development.

   The ultimate amount of funding that we will require will depend, in part,
on whether we seek independently, or with other parties through collaborative
agreements, to develop, manufacture and market our products. Our capital
requirements will depend, among other things, on one or more of the following
factors:

   - growth in our infant formula and 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 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 cost of capital expenditures at our manufacturing facilities;

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

   - the costs of marketing and commercializing our products.

   The continued development and optimization of our production facility has
had, and will continue to have, a material effect upon our liquidity and capital
resources. We expect additional plant modifications costing at least $1.5
million in fiscal 2001. Plant expenditures beyond 2001 will depend in part on
our production capacity needs, and the extent of development and implementation
of process improvements.

   We believe that our existing capital resources will provide us adequate
capital for at least the next 12 months. However, we believe that additional
funds will be needed in the longer term to continue our research and
development, manufacturing and marketing efforts. We intend to seek additional
funding through:

   - equity issuances;

   - asset-based borrowing;

   - product sales and license fee arrangements;

   - additional lease financing;

   - collaborative arrangements with partners; and/or

   - commercial and government research and development contracts and grants.

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

10   ---------------------------------------------------------------------------

<PAGE>   6

MARTEK BIOSCIENCES CORPORATION BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                        October 31,
                                                                        --------------------------------------
                                                                                2000               1999
--------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                   <C>
ASSETS
Current assets
  Cash and cash equivalents                                                $  2,682,013       $  1,180,098
  Short-term investments and marketable securities (Note 3)                  16,581,699         15,151,210
  Accounts receivable                                                         2,520,148          1,646,148
  Inventories (Note 4)                                                        5,125,872          5,216,265
  Other current assets                                                        1,883,321            470,728
                                                                           ------------       ------------
Total current assets                                                         28,793,053         23,664,449
Property, plant and equipment, net (Note 5)                                  16,146,306         15,468,836
Other assets, net                                                               502,747             12,044
                                                                           ------------       ------------
                                                                           $ 45,442,106       $ 39,145,329
                                                                           ============       ============


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Accounts payable                                                         $    948,505       $    693,464

  Accrued liabilities                                                         3,979,244          1,328,950
  Current portion of notes payable (Note 6)                                     471,907          1,479,333
  Current portion of unearned revenue (Note 8)                                2,127,571                 --
                                                                           ------------       ------------
Total current liabilities                                                     7,527,227          3,501,747
Long-term portion of notes payable (Note 6)                                          --            471,907
Long-term portion of unearned revenue (Note 8)                                2,460,209                 --
Commitments (Note 7)

Stockholders' equity (Note 9)
  Preferred stock, $.01 par value; 4,700,000 shares authorized;
       none issued or outstanding                                                    --                 --
  Series A junior participating preferred stock, $.01 par value;
    300,000 shares authorized; none issued or outstanding                            --                 --
  Common stock, $.10 par value; 30,000,000 shares authorized;
    17,806,079 and 16,492,229 shares issued and outstanding at
       October 31, 2000 and 1999, respectively                                1,780,608          1,649,223
  Additional paid-in capital                                                123,474,556        107,446,950
  Deferred compensation                                                        (173,156)                --
  Accumulated other comprehensive loss (Note 3)                                  (2,388)           (26,942)
  Accumulated deficit                                                       (89,624,950)       (73,897,556)
                                                                           ------------       ------------
  Total stockholders' equity                                                 35,454,670         35,171,675
                                                                           ------------       ------------
                                                                           $ 45,442,106       $ 39,145,329
                                                                           ============       ============

</TABLE>

See accompanying notes.

---------------------------------------------------------------------------   11

<PAGE>   7

--------------------------------------------------------------------------------

MARTEK BIOSCIENCES CORPORATION
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                          Year ended October 31,
                                                  -------------------------------------------------------------
                                                             2000               1999              1998
---------------------------------------------------------------------------------------------------------------
<S>                                                     <C>               <C>                <C>
REVENUES (NOTE 8)
 Product sales and royalties:
   Nutritional product sales                            $   5,923,583     $   3,143,512      $  2,762,844
   Stable isotope and other product sales                   1,854,195         2,206,133         2,086,791
   Royalties                                                  947,851           394,003           391,215
                                                         ------------      ------------      ------------
      Total product sales and royalties                     8,725,629         5,743,648         5,240,850
 Research and development contracts and grants                879,294           383,415           483,948
 License fees and other revenues                               72,050             6,000         1,165,000
                                                         ------------      ------------      ------------
Total revenues                                              9,676,973         6,133,063         6,889,798

COSTS AND EXPENSES
  Cost of product sales and royalties                       7,091,700         4,208,488         3,855,675
  Research and development                                 12,517,063        10,309,452         9,786,829
  Selling, general and administrative                       6,942,383         6,822,440         7,360,019
                                                         ------------      ------------      ------------
Total costs and expenses                                   26,551,146        21,340,380        21,002,523
                                                         ------------      ------------      ------------
Loss from operations                                      (16,874,173)      (15,207,317)      (14,112,725)

OTHER INCOME (EXPENSE)
  Miscellaneous income                                         99,634           132,358            96,021
  Interest income                                           1,240,535           806,238         1,076,587
  Interest expense                                           (193,390)         (579,387)         (521,198)
                                                         ------------      ------------      ------------
                                                            1,146,779           359,209           651,410
                                                         ------------      ------------      ------------
Net loss                                                $ (15,727,394)    $ (14,848,108)    $ (13,461,315)
                                                         ============      ============      ============
Net loss per share, basic and diluted                   $        (.91)    $        (.95)     $       (.94)
                                                         ============      ============      ============
Weighted average common shares outstanding                 17,335,403        15,580,791        14,329,825
                                                         ============      ============      ============
</TABLE>

See accompanying notes.

12   ---------------------------------------------------------------------------

<PAGE>   8

--------------------------------------------------------------------------------

MARTEK BIOSCIENCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                        Additional
                                   Common Stock      Common Stock        Paid-in           Deferred
                                      Shares            Amount           Capital         Compensation
-----------------------------------------------------------------------------------------------------
<S>                                <C>               <C>               <C>               <C>
BALANCE AT OCTOBER 31, 1997         13,673,659        $1,367,366       $ 78,907,450              --
  Issuance of common
    stock and warrants
    in private placement,
    net of issuance costs              655,563            65,556          9,944,000              --
  Exercise of stock options
    and warrants                       550,212            55,021          3,991,809              --
  Net loss                                  --                --                 --              --
  Other comprehensive
    income:
    Unrealized gain
     on investments                         --                --                 --              --

        Comprehensive loss
-----------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1998         14,879,434         1,487,943         92,843,259              --
  Issuance of common
    stock and warrants
    in private placement,
    net of issuance costs            1,528,935           152,894         13,592,001              --
  Exercise of stock options
    and other                           83,860             8,386          1,011,690              --
  Net loss                                  --                --                 --              --
  Other comprehensive
     income:
    Unrealized loss
     on investments                         --                --                 --              --

        Comprehensive loss
-----------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1999         16,492,229         1,649,223        107,446,950              --
  Issuance of common
    stock and warrants
    in private placement,
    net of issuance costs              845,652            84,565         10,127,932              --
  Exercise of stock options,
    warrants and other                 468,198            46,820          5,553,804              --
  Deferred compensation
    on stock options                        --                --            345,870        (345,870)
  Amortization of
    deferred compensation                   --                --                 --         172,714
  Net loss                                  --                --                 --              --
  Other comprehensive
     income:
    Unrealized gain
     on investments                         --                --                 --              --

        Comprehensive loss
-----------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 2000         17,806,079        $1,780,608       $123,474,556       $(173,156)
-----------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                    Accumulated
                                       Other
                                   Comprehensive      Accumulated
                                   Income (Loss)        Deficit              Total
--------------------------------------------------------------------------------------
<S>                                <C>               <C>                 <C>
BALANCE AT OCTOBER 31, 1997          $ (1,129)       $(45,588,133)       $ 34,685,554
  Issuance of common
    stock and warrants
    in private placement,
    net of issuance costs                  --                  --          10,009,556
  Exercise of stock options
    and warrants                           --                  --           4,046,830
  Net loss                                 --         (13,461,315)        (13,461,315)
  Other comprehensive
    income:
    Unrealized gain
     on investments                    13,104                  --              13,104
                                                                         ------------
        Comprehensive loss                                                (13,448,211)
--------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1998            11,975         (59,049,448)         35,293,729
  Issuance of common
    stock and warrants
    in private placement,
    net of issuance costs                  --                  --          13,744,895
  Exercise of stock options
    and other                              --                  --           1,020,076
  Net loss                                 --         (14,848,108)        (14,848,108)
  Other comprehensive
     income:
    Unrealized loss
     on investments                   (38,917)                 --             (38,917)
                                                                         ------------
        Comprehensive loss                                                (14,887,025)
--------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1999           (26,942)        (73,897,556)         35,171,675
  Issuance of common
    stock and warrants
    in private placement,
    net of issuance costs                  --                  --          10,212,497
  Exercise of stock options,
    warrants and other                     --                  --           5,600,624
  Deferred compensation
    on stock options                       --                  --                  --
  Amortization of
    deferred compensation                  --                  --             172,714
  Net loss                                 --         (15,727,394)        (15,727,394)
  Other comprehensive
     income:
    Unrealized gain
     on investments                    24,554                  --              24,554
                                                                         ------------
        Comprehensive loss                                                (15,702,840)
--------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 2000          $ (2,388)       $(89,624,950)       $ 35,454,670
--------------------------------------------------------------------------------------
</TABLE>

See accompanying notes.


---------------------------------------------------------------------------   13

<PAGE>   9

--------------------------------------------------------------------------------

MARTEK BIOSCIENCES CORPORATION
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                          Year ended October 31,
                                                           -----------------------------------------------------
                                                               2000                 1999                1998
----------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                 <C>                 <C>
OPERATING ACTIVITIES
  Net loss                                                 $(15,727,394)       $(14,848,108)       $(13,461,315)
  Adjustments to reconcile net loss to
    net cash used in operating activities:
    Depreciation and amortization                             1,558,571           1,461,159           1,368,789
    Other non-cash items                                        434,169             348,600             174,300
    Changes in operating assets and liabilities:
      Accounts receivable                                      (874,000)           (309,880)           (155,577)
      Inventories                                                90,393            (214,275)         (2,096,538)
      Other assets                                           (1,910,233)             36,601              71,733
      Accounts payable                                          255,041              97,820            (412,463)
      Accrued liabilities                                     2,650,294            (237,002)            525,103
      Unearned revenue                                        4,587,780                  --                  --
                                                           ------------        ------------        ------------
Net cash used in operating activities                        (8,935,379)        (13,665,085)        (13,985,968)

INVESTING ACTIVITIES
  Purchase of short-term investments and
      marketable securities                                 (26,970,935)        (21,175,362)        (27,979,091)
  Proceeds from sale of short-term investments
      and marketable securities                              25,565,000          19,144,160          33,530,000
  Purchase of property, plant and equipment                  (2,229,104)           (696,946)         (1,612,406)
                                                           ------------        ------------        ------------
Net cash (used in) provided by investing activities          (3,635,039)         (2,728,148)          3,938,503

FINANCING ACTIVITIES
  Repayment of notes payable                                 (1,479,333)         (1,340,919)         (1,313,769)
  Proceeds from the exercise of warrants and options          5,339,169             671,476           3,872,530
  Proceeds from the issuance of
      common stock and warrants in private placement         10,212,497          13,744,895          10,009,556
                                                           ------------        ------------        ------------
Net cash provided by financing activities                    14,072,333          13,075,452          12,568,317
                                                           ------------        ------------        ------------
Net increase (decrease) in cash and cash equivalents          1,501,915          (3,317,781)          2,520,852
Cash and cash equivalents at beginning of year                1,180,098           4,497,879           1,977,027
                                                           ------------        ------------        ------------
Cash and cash equivalents at end of year                   $  2,682,013        $  1,180,098        $  4,497,879
                                                           ============        ============        ============
</TABLE>

See accompanying notes.


14   ---------------------------------------------------------------------------

<PAGE>   10
--------------------------------------------------------------------------------

NOTES TO
FINANCIAL STATEMENTS

1. ORGANIZATION

Martek Biosciences Corporation (the "Company") develops, manufactures and sells
products primarily derived from microalgae. The Company is currently selling
nutritional supplements for infant formula and other nutritional product
applications, products for use in basic structural molecular research and
structure-based drug design and diagnostic products. The Company is developing
additional nutritional and diagnostic products as well as pharmaceutical
discovery technologies. A portion of the Company's research and development
efforts is performed under various contracts and grants. The Company sells to a
broad range of companies and academic and research institutions worldwide.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

CONTRACTS AND GRANTS A significant portion of contract and grant revenues are
derived from Small Business Innovation Research ("SBIR") grants. SBIR grants are
intended to aid small businesses in meeting federal research and development
needs while stimulating technological innovation. In addition, such grants are
used to increase private-sector commercialization of innovations derived from
federal research and development.

       As a result of such funding, the U.S. government will have certain rights
in the technology developed with the funding. These rights include a
nonexclusive, paid-up, worldwide license under such inventions for any
governmental purpose. In addition, the government has the right to require the
Company to grant an exclusive license under any of such inventions to a third
party if the government determines that (1) adequate steps have not been taken
to commercialize such inventions, (2) such action is necessary to meet public
health or safety needs, or (3) such action is necessary to meet requirements for
public use under federal regulations. Federal law requires any licensor of an
invention that was partially funded by federal grants to obtain a covenant from
its exclusive licensee to substantially manufacture products using the invention
in the United States.

       The Company's revenue from SBIR research and development contracts and
grants amounted to $185,000 in 2000, $101,000 in 1999 and $255,000 in 1998.

       Costs for products, contracts and grants, and research and development
are based on direct costs incurred plus an allocation of indirect costs, which
include such items as utilities, insurance and administrative labor and
supplies. Total allocated indirect costs for the years ended October 31, 2000,
1999 and 1998 were $124,000, $154,000 and $103,000, respectively. Estimated
losses on contracts, if any, are recorded as they become known.

SEGMENT INFORMATION The Company currently operates in one business segment, that
being the development and commercialization of novel products from microalgae.
The Company is managed and operated as one business. The entire business is
comprehensively managed by a single management team that reports to the Chief
Executive Officer. The Company does not operate separate lines of business or
separate business entities with respect to its products or product candidates.
Accordingly, the Company does not accumulate discrete financial information with
respect to separate product areas and does not have separately reportable
segments as defined by SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information."

REVENUE RECOGNITION Revenues on cost reimbursement and fixed price contracts are
generally recognized on the percentage of completion method of accounting as
costs are incurred. Revenue is recognized on product sales when goods are
shipped. Revenue from licensing agreements is recognized generally over the term
of the agreement, or in certain circumstances, when milestones are met. Revenue
recognized in the accompanying Statements of Operations is not subject to
repayment. Revenue received that is related to future performance under such
contracts is deferred and recognized as revenue when earned. At October 31,
2000, the Company had approximately $2.1 million in short-term and $2.5 million
in long-term unearned revenue relating to third-party license agreements.

       Approximately 2% in 2000, 6% in 1999 and 6% in 1998 of the Company's
total revenues were generated from U.S. government contracts, subcontracts and
SBIR grants.

FOREIGN CURRENCY TRANSACTIONS Foreign currency transactions are translated into
U.S. dollars at prevailing rates. Gains or losses resulting from foreign
currency transactions are included in current period income or loss as incurred.
Currently, all material transactions of the Company are denominated in U.S.
dollars, and the Company has not entered into any material transactions that are
denominated in foreign currencies.

CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS Financial instruments,
which potentially subject the Company to concentrations of credit risk, consist
principally of accounts receivable. The Company's reserve for uncollectable
accounts at October 31, 2000 and 1999 was not material. The Company grants
credit to customers based on evaluations of their financial condition, generally
without requiring collateral. Concentrations of credit risk with respect to
accounts receivable are present due to the small number of customers comprising
the Company's customer base. However, the credit risk is reduced through the


---------------------------------------------------------------------------   15

<PAGE>   11
--------------------------------------------------------------------------------

Notes to Financial Statements (continued)

Company's efforts to monitor its exposure for credit losses and maintain
allowances for anticipated losses. One customer accounted for approximately 30%
of the Company's sales for fiscal 2000 and 15% for the years ended October 31,
1999 and 1998.

RESEARCH AND DEVELOPMENT Research and development costs are charged to
operations as incurred and include contract and grant-related costs of $527,000
in 2000, $464,000 in 1999 and $446,000 in 1998.

ADVERTISING COSTS All advertising costs are expensed when incurred. Advertising
costs expensed for the years ended October 31, 2000, 1999 and 1998 approximated
$1,223,000, $1,650,000 and $1,765,000, respectively.

INCOME TAXES Net operating loss carryforwards differ for financial statement and
income tax purposes due principally to revenue recognition methods used for
income tax purposes. Under the liability method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.

FAIR VALUE OF FINANCIAL INSTRUMENTS The Company considers the recorded cost of
its financial assets and liabilities, which consists primarily of cash and cash
equivalents, short-term investments and marketable securities, accounts
receivable, accounts payable and long-term debt, to approximate the fair value
of the respective assets and liabilities at October 31, 2000.

STOCK-BASED COMPENSATION The Company has adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." SFAS
No. 123 allows companies to either account for stock-based compensation under
the new provisions of SFAS No. 123 or under the provisions of APB No. 25,
"Accounting for Stock Issued to Employees." The Company has elected to continue
accounting for its stock-based compensation in accordance with the provisions of
APB No. 25, but will disclose the pro forma effects on net income (loss) as if
the fair value of the options had been expensed. See Note 9 of Notes to
Financial Statements for further information.

NET LOSS PER SHARE Net loss per share is computed using the weighted average
number of shares of common stock outstanding during the period. Common
equivalent shares from stock options and warrants are excluded as their effect
is antidilutive.

COMPREHENSIVE INCOME (LOSS) Under SFAS No. 130, the Company is required to
display comprehensive income (loss) and its components as part of the financial
statements. Comprehensive income (loss) is comprised of net earnings (loss) and
other comprehensive income (loss), which includes certain changes in equity that
are excluded from net income (loss). The Company includes unrealized holding
gains and losses on available-for-sale securities in other comprehensive income
(loss).

INVENTORIES Inventories are stated at the lower of cost or market, reflect
appropriate reserves for potential obsolete, slow-moving or otherwise impaired
material, and include appropriate elements of material, labor and indirect costs
and are valued using a weighted average approach that approximates the first-in,
first-out method. The Company analyzes both historical and projected sales
volumes and, when needed, reserves for questionable inventory that is either
obsolete, slow moving or impaired. Inventories include products and materials
held for sale as well as products and materials that can alternatively be used
in the Company's research and development activities. Inventories identified for
research and development activities are expensed in the period in which such
inventories are designated for such use.

OTHER ASSETS Other assets consist primarily of capitalized patent costs of
approximately $465,000. These costs are amortized over the remaining life of the
related patents. Patent-related amortization expense was approximately $7,000 in
2000 and accumulated patent amortization totalled $7,000 at October 31, 2000.

PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, including leasehold
improvements, are stated at cost and depreciated or amortized using the
straight-line method, based on useful lives which are twenty years for the
Company's fermentation plant, fifteen years for the Company's oil processing
plant, generally ten years for machinery and equipment, five years for furniture
and fixtures, and the shorter of the useful life or the lease term for leasehold
improvements.

IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets and
certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. Recoverability measurement and
estimating of undiscounted cash flows is done at the lowest possible level for
which there are identifiable assets. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. To date, the Company has not incurred any impairment expenses.

STATEMENTS OF CASH FLOWS Cash equivalents consist of highly liquid investments
with an original maturity of three months or less and are stated at market
value.

       Interest paid by the Company amounted to approximately $197,000 in 2000,
$408,000 in 1999 and $349,000 in 1998. For the years ended October 31, 2000,
1999 and 1998 the Company paid no income taxes.

RECLASSIFICATION Certain amounts in the prior years' financial


16   ---------------------------------------------------------------------------
<PAGE>   12

--------------------------------------------------------------------------------

statements have been reclassified to conform to the 2000 presentation.

3. SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES

The Company has classified all debt securities as available-for-sale.
Available-for-sale securities are carried at specific identification and have
average maturities of less than six months. Unrealized gains and losses on these
securities are reported as accumulated other comprehensive income (loss), which
is a separate component of stockholders' equity. The amount of unrealized
holding loss on these available-for-sale securities was $2,388 and $26,942 at
October 31, 2000 and 1999, respectively. Realized gains and losses and declines
in value judged to be other-than-temporary on available-for-sale securities are
included in other income, based on the specific identification method. There
were no realized gains or losses recorded for the years ended October 31, 2000,
1999, or 1998. Available-for-sale securities consisted of U.S. government
obligations totaling $16,581,699 and $15,151,210 for the years ended October 31,
2000 and 1999, respectively. At October 31, 2000 and 1999, the estimated fair
value of these securities approximated cost.

4. INVENTORIES

Inventories consisted of the following:

<TABLE>
<CAPTION>
                                                            October 31,
                                          2000                 1999
-----------------------------------------------------------------------
<S>                                    <C>                 <C>
Finished products                       $3,849,817          $2,443,051
Work in process                          1,035,496           2,683,477
Raw materials                              520,559             326,737
Less inventory reserve                    (280,000)           (237,000)
                                       -----------         -----------
                                        $5,125,872          $5,216,265
                                       ===========         ===========
</TABLE>

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                            October 31,
                                          2000                 1999
-----------------------------------------------------------------------
<S>                                    <C>                 <C>
Land                                   $   149,860         $   149,860
Building and improvements                1,742,123           1,742,123
Machinery and equipment                 20,879,114          18,847,913
Furniture and fixtures                     833,163             734,360
Leasehold improvements                     496,086             396,986
                                       -----------         -----------
                                        24,100,346          21,871,242
Less accumulated depreciation
  and amortization                       7,954,040           6,402,406
                                       -----------         -----------
                                       $16,146,306         $15,468,836
                                       ===========         ===========
</TABLE>

       Depreciation and amortization expense amounted to $1,552,000, $1,461,000
and $1,369,000 for the years ended October 31, 2000, 1999 and 1998,
respectively.

6. NOTES PAYABLE

At October 31, 2000, the Company had an outstanding term loan with a balance due
of $471,907. The term loan bears interest at a rate of 8.61% and is
collateralized solely by the Company's Winchester fermentation facility. A
second term loan, which was used to finance the Company's Winchester extraction
facility, was paid down in full in July 2000.

       Future minimum payments on the Company's outstanding term loan total
$471,907 and are payable in fiscal 2001.

7. COMMITMENTS

FACILITIES LEASES The Company leases its premises under an operating lease
agreement which expires in November 2004. The terms of the lease call for annual
rent escalations of 3%. The Company has an option to extend the lease for five
additional years at 95% of the then-prevailing fair rental value. Rent expense
was approximately $403,000 in 2000, $372,000 in 1999 and $329,000 in 1998. The
Company received sublease income of approximately $98,000, $122,000 and $75,000
for the years ended October 31, 2000, 1999 and 1998, respectively. Future
minimum lease payments under the lease, assuming the Company will not exercise
any additional cancellation or expansion rights it has under the lease, at
October 31, 2000, were as follows:

<TABLE>
<S>                                  <C>
                            2001     $   416,000
                            2002         429,000
                            2003         441,000
                  2004 and after         455,000
                                      ----------
                                      $1,741,000
                                      ==========
</TABLE>

SCIENTIFIC RESEARCH COLLABORATIONS The Company has entered into various
collaborative research and license agreements. Under the agreements, the Company
is required to fund research or to collaborate on the development of potential
products. Existing agreements have committed the Company to fund up to
approximately $100,000 for such future development activities. Certain of these
agreements also commit the Company to pay royalties upon the sale of certain
products resulting from such collaborations.

SBIR GRANTS The Company had commitments at October 31, 2000 to fund up to $1.5
million of Phase III SBIR technology commercialization expenses, provided the
technology under existing Phase II SBIR grants yields commercial opportunities
favorable to the Company.

       Costs under U.S. government contracts are subject to audit by the
appropriate U.S. government agency. Management believes that cost disallowances,
if any, arising from audits of costs charged to government contracts through
October 31, 2000, would not have a material effect on the financial statements.

LOAN COVENANTS The Company is required to meet certain covenants in relation to
its outstanding term loan. These covenants, which outline minimum cash, current
ratio and net worth requirements, have all been met by the Company at October
31, 2000.

PURCHASE COMMITMENTS The Company currently contracts with a third-party supplier
to produce its arachidonic acid oil.


---------------------------------------------------------------------------   17
<PAGE>   13
--------------------------------------------------------------------------------

Notes to Financial Statements (continued)

At October 31, 2000, the Company had outstanding inventory purchase commitments
to this supplier totalling approximately $4 million.

OTHER The Company was not a party to any material legal proceedings.

8. LICENSE AGREEMENTS

The Company has licensed certain technologies and recognized license fee revenue
under various agreements. Potentially refundable license fees are recorded as
unearned revenue and are not recognized as revenue until the earnings process is
complete and amounts are not subject to refund. Non-refundable license fees are
recorded as unearned revenue and amortized on a straight-line basis over the
term of the agreement. During 2000, the Company received license fee payments of
approximately $4.6 million, of which approximately $72,000 was recognized as
license fee revenue, and the remainder recorded as unearned revenue at October
31, 2000. Certain agreements include royalty payments, which are based upon a
percentage of product sales. Royalties in the amount of $948,000, $394,000 and
$391,000 were earned in the years ended October 31, 2000, 1999 and 1998,
respectively.

9. CAPITAL ACCOUNTS

PRIVATE PLACEMENT OF COMMON STOCK On April 27, 1998, 655,563 shares of the
Company's common stock and warrants to purchase 196,670 shares of common stock
were issued in a private placement resulting in net proceeds to the Company of
approximately $10 million. The warrants are exercisable for a period of three
years from the date of issuance at a price of $18.76. The investors also agreed
to a two-year funding commitment to provide up to an additional $10.25 million
in financing in the form of common stock and warrants, which was drawn down by
the Company in February 2000. In consideration for the additional $10.25 million
two-year funding commitment, the Company issued warrants to purchase up to
51,250 shares of common stock on April 27, 1999 at $7.51 per share. The cost of
approximately $350,000 associated with the additional warrants has been
calculated using the Black-Scholes option pricing model and is included in
interest expense for the year ended October 31, 1999. With the exception of the
two-year funding commitment, there were no future performance obligations on
behalf of the Company or the investors in connection with the 1998 private
placement.

       On May 28, 1999, 1,528,935 shares of the Company's common stock, and
warrants to purchase 458,679 shares of common stock were issued in a private
placement, resulting in net proceeds to the Company of approximately $13.7
million. The stock was issued at a thirty-day average trading price of $9.03 per
share. The warrants are exercisable for a period of three years from date of
issuance at $10.84 per share. There were no future performance obligations on
behalf of the Company or the investors in connection with the 1999 private
placement.

       On February 8, 2000, the Company exercised its option to close a $10.25
million private financing in which 845,652 shares of the Company's common stock
and warrants to purchase 253,695 shares of common stock were issued to a group
of accredited investors pursuant to a 1998 private placement funding commitment.
The stock was issued at a thirty-day average trading price of $12.12 per share.
The warrants are exercisable for a period of three years from date of issuance
at $14.55 per share.

STOCK OPTION PLAN Options to purchase common stock under the Company's stock
option plan ("Option Plan") are granted at prices as determined by the Board of
Directors, but shall not be less than the fair market value of the Company's
common stock on the date of grant. The options are qualified and nonqualified
and generally vest over a period of up to five years. The exercise dates and
expiration of options (up to a maximum of ten years from the date of grant) are
determined by the Company's Board of Directors.

       Details of shares under option were as follows:

<TABLE>
<CAPTION>
                                                                       Weighted
                                  Number of           Option           Average
                                    Shares          Price/Share       Price/Share
---------------------------------------------------------------------------------
<S>                               <C>               <C>               <C>
BALANCE AT OCTOBER 31, 1997        1,757,280        $2.00-$34.25       $   14.29
Granted                              340,750        $8.63-$15.50       $   13.07
Exercised                           (195,785)       $2.00-$13.50       $    2.78
Forfeited                           (129,375)       $2.00-$34.25       $   19.97
                                  ----------        ------------       ---------
BALANCE AT OCTOBER 31, 1998        1,772,870        $8.00-$34.25       $   14.90
Granted                              859,450         $6.25-$9.63       $    6.75
Exercised                            (83,860)        $8.00-$9.88       $    8.01
Forfeited                           (380,400)       $6.25-$34.25       $    9.60
                                  ----------        ------------       ---------
BALANCE AT OCTOBER 31, 1999        2,168,060        $6.25-$34.25       $   13.16
Granted                              939,550        $8.00-$23.25       $   13.74
Exercised                           (242,295)       $6.25-$18.00       $    9.94
Forfeited                            (52,455)       $6.25-$34.25       $   15.27
                                  ----------        ------------       ---------
BALANCE AT OCTOBER 31, 2000        2,812,860        $6.25-$34.25       $   13.40
</TABLE>

       Details of exercisable options were as follows:

<TABLE>
<CAPTION>
                                  Exercisable        Weighted Average
                                    Options           Exercise Price
-------------------------------------------------------------------------
<S>                               <C>                <C>
October 31, 1998                   1,040,020             $13.32
October 31, 1999                   1,099,400              14.99
October 31, 2000                   1,388,970              14.80
</TABLE>

       The Company issued 31,000 options to non-employees during the year ended
October 31, 2000. These options have vesting periods of between 0-24 months. The
fair value of these options has been recorded as deferred compensation and is
being amortized over the performance period, which is generally 12 months. Under
variable plan accounting, the value of the unvested options will be re-measured
and recognized in income at each reporting date until fully vested.

       A total of 707,905 shares of common stock were available for future
grants under the Option Plan at October 31, 2000. The weighted average
contractual life for all options outstanding under the Option Plan at October
31, 2000 was 7.8 years.



18   ---------------------------------------------------------------------------
<PAGE>   14
--------------------------------------------------------------------------------
       Detailed information on the options outstanding on October 31, 2000 by
price range are set forth below:

<TABLE>
<CAPTION>
                                             Weighted
                                 Weighted     Average                  Weighted
                                 Average     Remaining                  Average
    Price         Options        Exercise   Contractual    Shares      Exercise
    Range       Outstanding       Price        Life      Exercisable    Price
-------------------------------------------------------------------------------
<S>             <C>              <C>        <C>          <C>           <C>
$  6.25-9.88       930,820        $ 7.14       7.91        395,810      $ 7.35
$10.25-14.44     1,117,690        $12.28       8.17        547,530      $12.38
$15.50-25.50       581,650        $19.41       7.69        271,770      $18.86
$32.88-34.25       182,700        $33.06       5.40        173,860      $33.03
                 ---------                               ---------
                 2,812,860                               1,388,970
                 =========                               =========
</TABLE>

DIRECTORS' STOCK OPTION PLAN In 1994, the Company established a Directors' Stock
Option Plan ("Directors' Plan"). The Directors' Plan provided for the award of
stock options to nonemployee directors. At October 31, 2000, 140,800 options
were outstanding and no additional options were available for future grant under
the Directors' Plan. The weighted average contractual life for all options
outstanding under the Directors' Plan at October 31, 2000 was 5.8 years. No
awards were made under the Director's Plan after 1998. During 2000, Directors of
the Company received option grants under the Company's Option Plan.

PRO FORMA DISCLOSURE The Company applies APB 25 in accounting for its stock
option incentive plan and, accordingly, recognizes compensation expense for the
difference between the fair value of the underlying common stock and the grant
price of the option at the date of the grant. The effects of applying SFAS No.
123 on 2000 and 1999 pro forma net loss and per share calculations as stated
below are not necessarily representative of effects on reported net income and
earnings per share for future years due to such things as the vesting period of
the stock options and the potential for issuance of additional stock options in
future years. Had compensation expense for the Company's stock option incentive
plan been determined based on the estimated fair value at the grant dates for
awards under the plan consistent with the methodology prescribed under SFAS No.
123, the Company's net loss in 2000, 1999 and 1998 would have been approximately
$21.4 million, $18.9 million and $17.2 million, or $1.24, $1.22 and $1.20 per
share, respectively. The weighted average fair value of the options granted
during 2000 is estimated at $9.50 per share for options whose exercise price
equals fair market value on the date of the grant, using the Black-Scholes
option-pricing model with the following assumptions: dividend yield 0%,
volatility of 66.3%, risk-free interest rate of 5.5% and average expected life
of approximately 7 years.

STOCKHOLDER RIGHTS PLAN In January 1996, the Board of Directors adopted a
Stockholder Rights Plan ("Rights Plan") in which preferred stock purchase rights
("Rights") have been granted as a dividend at the rate of one Right for each
share of the Company's common stock held of record at the close of business on
February 7, 1996. Each Right provides the holder the opportunity to purchase
1/1000th of a share of Series A Junior Participating Preferred Stock under
certain circumstances at a price of $150 per share of such preferred stock. All
rights expire on February 7, 2006.

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

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

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

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

10. INCOME TAXES

At October 31, 2000, the Company had net operating loss carryforwards of
approximately $105,599,000 for income tax reporting purposes that expire in
years 2001 through 2020. The tax benefit of approximately $17,033,000 of net
operating losses related to stock options will be credited to equity when the
benefit is realized through utilization of the net operating loss carryforwards.

       Section 382 of the Internal Revenue Code limits the utilization of net
operating losses when ownership changes, as defined by that section, are greater
than 50%. The Company has had significant ownership changes over the past six
years, including an initial public offering of its common stock in December 1993
and a follow-on offering of its stock in October 1995, which may have caused
these limitations to apply. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting and the amounts used for income tax reporting. The Company's
total net deferred tax assets, which resulted primarily from net operating
losses, were $42,239,000 and $35,309,000 at October 31, 2000 and 1999,
respectively.


---------------------------------------------------------------------------   19
<PAGE>   15
-------------------------------------------------------------------------------
Notes to Financial Statements (continued)

Because of the uncertainty with the ultimate realization of these net deferred
tax assets, they were fully reserved for by a valuation allowance at October 31,
2000 and 1999.

11. EMPLOYEE 401(K) PLAN

The Company maintains an employee 401(k) plan. The plan, which covers all
employees 21 years of age or older, stipulates that participating employees may
elect an amount between 1% and 15% of their total compensation to contribute to
the plan, not to exceed the maximum allowable by Internal Revenue Service
regulations. As of October 31, 2000, the Company had not contributed to the
plan.

12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Quarterly financial information for fiscal 2000 and 1999 is presented in the
following table:

(In thousands, except per share data)

<TABLE>
<CAPTION>
                               1st           2nd            3rd             4th
                             Quarter       Quarter        Quarter         Quarter
---------------------------------------------------------------------------------
<S>                         <C>            <C>            <C>            <C>
2000
Total revenues              $ 1,791        $ 2,368        $ 2,449        $ 3,070
Loss from operations         (3,887)        (4,422)        (4,149)        (4,416)
Net loss                     (3,783)        (4,101)        (3,789)        (4,055)
Net loss per share,
    basic and diluted         (0.23)         (0.24)         (0.21)         (0.23)

1999
Total revenues              $ 1,553        $ 1,500        $ 1,318        $ 1,763
Loss from operations         (3,706)        (3,661)        (3,722)        (4,117)
Net loss                     (3,623)        (3,620)        (3,620)        (3,984)
Net loss per share,
    basic and diluted         (0.24)         (0.24)         (0.23)         (0.24)
</TABLE>

REPORT OF INDEPENDENT AUDITORS

BOARD OF DIRECTORS
MARTEK BIOSCIENCES CORPORATION

We have audited the accompanying balance sheets of Martek Biosciences
Corporation as of October 31, 2000 and 1999, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended October 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Martek Biosciences Corporation
at October 31, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 2000, in
conformity with accounting principles generally accepted in the United States.


                                                   /s/ ERNST & YOUNG LLP


McLean, Virginia
December 8, 2000



                          Neuromins(R) is a registered trademark of the Company.

                                        (C) 2001 Martek Biosciences Corporation.
                                                            All rights reserved.


20   ---------------------------------------------------------------------------


<PAGE>   16

BOARD OF DIRECTORS

Henry Linsert, Jr.
Chairman and Chief Executive Officer

Richard J. Radmer, Ph.D.
President and Chief Scientific Officer

Jules Blake, Ph.D.
Former Vice President, Corporate
     Scientific Affairs of Colgate-Palmolive Co.

Ann L. Johnson, M.D.
Mills Peninsula Hospital
     Psychiatrist/Psychopharmacologist

Gordon S. Macklin
Former Chairman of Hambrecht & Quist Group
Former President of the
     National Association of Securities Dealers, Inc.

Douglas J. MacMaster, Jr.
Former Senior Vice President of Merck & Co., Inc.

John H. Mahar
President of Hillside Management

Sandra Panem, Ph.D.
Former President of Vector Fund Management, L.P.

Eugene H. Rotberg
Former Executive Vice President of
     Merrill Lynch & Co. and Treasurer of World Bank

William D. Smart
Former President of Ross Laboratories and
     Corporate Vice President of Abbott Laboratories

EXECUTIVE OFFICERS

Henry Linsert, Jr.
Chairman and Chief Executive Officer

Richard J. Radmer, Ph.D.
President and Chief Scientific Officer

Peter L. Buzy
Chief Financial Officer and Treasurer

George P. Barker
Senior Vice President, General Counsel and Secretary

Thomas C. Fisher
Senior Vice President, Operations

Jerome C. Keller
Senior Vice President, Sales and Marketing

David J. Kyle, Ph.D.
Senior Vice President, Research and Development

CORPORATE INFORMATION

HEADQUARTERS
Martek Biosciences Corporation
6480 Dobbin Road
Columbia, Maryland 21045
410.740.0081

LEGAL COUNSEL
Hogan & Hartson L.L.P.
Baltimore, Maryland

INDEPENDENT AUDITORS
Ernst & Young LLP
McLean, Virginia

TRANSFER AGENT
Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
800.368.5948

STOCK DESCRIPTION AND FORM 10-K

The Company's common stock commenced trading on the NASDAQ National Market
System under the symbol MATK on November 23, 1993. Prior to that date, there was
no established market for the Company's common stock. As of December 31, 2000,
there were approximately 170 holders of record of the Company's common stock. No
cash dividends have been paid on the common stock and the Company does not
anticipate paying any cash dividend in the foreseeable future. The following
table sets forth, for the calendar periods indicated, the range of high and low
sale prices for the Company's common stock as reported by NASDAQ:

PRICE RANGE OF COMMON STOCK

<TABLE>
<CAPTION>
Fiscal 1999                                      High         Low
-------------------------------------------------------------------------
<S>                                              <C>          <C>
November 1, 1998 - January 31, 1999              $ 8 7/8      $  7 3/16
February 1, 1999 - April 30, 1999                $ 8          $  5 1/2
May 1, 1999 - July 31, 1999                      $10 5/8      $  8 1/8
August 1, 1999 - October 31, 1999                $10 7/16     $  5 5/8

Fiscal 2000                                      High         Low
-------------------------------------------------------------------------
November 1, 1999 - January 31, 2000              $15 3/8      $ 7 3/8
February 1, 2000 - April 30, 2000                $32          $11
May 1, 2000 - July 31, 2000                      $24 1/2      $13 7/8
August 1, 2000 - October 31, 2000                $24 7/8      $15 3/4
</TABLE>

SHAREHOLDERS MAY OBTAIN, AT NO CHARGE, A COPY OF MARTEK BIOSCIENCES
CORPORATION'S FORM 10-K, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, AT
THE COMPANY'S WEBSITE WWW.MARTEKBIO.COM OR BY WRITING TO:

INVESTOR RELATIONS
MARTEK BIOSCIENCES CORPORATION
6480 DOBBIN ROAD
COLUMBIA, MD 21045

<PAGE>   17
[MARTEK LOGO]

Martek Biosciences Corporation
6480 Dobbin Road, Columbia, Maryland 21045
410.740.0081

Call toll-free for product ordering
information: 1.800.662.6339

www.martekbio.com