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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, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER: 0-22354
 MARTEK BIOSCIENCES CORPORATION
  DELAWARE
(STATE OR OTHER JURISDICTION OF 
INCORPORATION OR ORGANIZATION)
    
    52-1399362
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
 6480 DOBBIN ROAD, COLUMBIA, MARYLAND 21045
 REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (410) 740-0081
 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 TITLE OF EACH CLASS:
    
    NAME OF EACH EXCHANGE ON WHICH REGISTERED:Common Stock, $.10 Par Value
    
    The NASDAQ Stock Market
 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
 þ o
 o þ
 þ o
 o
  þ o o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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PART IItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    18Item 2.
    
    Properties
    
    
    27Item 3.
    
    Legal Proceedings
    
    
    28PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    30Item 6.
    
    Selected Financial Data
    
    
    31Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    33Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    43Item 8.
    
    Financial Statements and Supplementary Data
    
    
    44Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    66Item 9A.
    
    Controls and Procedures
    
    
    66PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    67Item 11.
    
    Executive Compensation
    
    
    67Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    67Item 13.
    
    Certain Relationships and Related Transactions
    
    
    67Item 14.
    
    Principal Accountant Fees and Services
    
    
    67PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    68Signatures
    
    
    70




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




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CONTRACT MANUFACTURING
  FLUORESCENT DETECTION PRODUCTS
  PRODUCTS AND PRODUCT CANDIDATES
 NUTRITIONAL OILS
 Infant Formula Applications
   The Journal of Pediatrics
 2




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
    
    A study conducted 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 long-chain polyunsaturated
fatty acids.
    
    A study conducted 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 conducted 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. Analysis revealed a positive
correlation between DHA levels in the mothers breast milk and the childs NBAS score.
    
    A study conducted by Dr. E. Birch and others published in April 2005 in the American
Journal of Clinical 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 conducted 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 conducted by Dr. D. Hoffman and others published in the June 2003 issue of The
Journal of Pediatricsreported that infants who were breast-fed from birth to between four
and six months of age and then weaned onto formula supplemented with DHA and ARA
experienced significantly improved visual development at one year of age compared to
infants who were breast-fed and then weaned onto formula without DHA and ARA. This study
used Marteks oils.
    
    A study conducted by Dr. E. Birch and others published in March 2002 in the American
Journal of Clinical Nutritionfound that infants who were breast-fed for six weeks and then
weaned to DHA and ARA supplemented infant formula had significantly better visual acuity at
17, 26 and 52 weeks of age and significantly better stereoacuity at 17 weeks of age than
infants who were weaned to non-supplemented formula. This study used Marteks oils.
  
    
    Global Standard for the Composition of Infant Formula: Recommendations of an ESPGHAN
Coordinated International Expert Group, authored by B. Koletzko and others published in
Journal of Pediatric Gastroenterology and Nutritionin November 2005, and
    
    Feeding Preterm Infants After Hospital Discharge: A Commentary by the ESPGHAN Committee
on Nutrition, authored by P. Aggett and others published in Journal of Pediatric
Gastroenterology and Nutritionin May 2006.
  Applications for Pregnant and Nursing Women
  3




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
    
    A study conducted 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 involved 227 breastfeeding mothers who were given a 200 mg capsule of lifesDHA or
placebo daily for 4 months beginning 5 days after delivery and revealed that children of
DHA-supplemented mothers scored significantly higher on the Bayley Psychomotor Development
Index (PDI), when compared to the children of the non-supplemented breastfeeding mothers.
The study also confirmed that DHA supplementation while breastfeeding effectively increases
DHA levels in the mothers milk as it noted that the mothers supplemented with DHA had 75%
more DHA in their breast milk than the control group and their infants had 35% higher DHA
blood levels than the control group infants. This study was partially funded by Martek.
    
    A statistical analysis of many previously reported studies was conducted by Dr. J. Cohen
and others. This analysis, published in November 2005 in the American Journal of
Preventive Medicine, described a risk/ benefit associated with the prenatal intake of DHA
on infant cognitive development. The analysis showed that an increase to maternal DHA
intake yielded modest improvement in child IQ.
    
    A study conducted by Dr. I. Helland and others published in January 2003 in Pediatrics
found that mothers who supplemented their diet with fatty acids rich in DHA during
pregnancy and nursing gave birth to children who scored higher on standardized intelligence
and achievement tests at four years of age than those whose mothers supplemented with fatty
acids that do not contain DHA. According to the study, data demonstrated that children born
to mothers who had taken cod liver oil, which is rich in DHA and other omega-3 fatty acids,
during pregnancy and nursing scored significantly higher (approximately 4.1 points) on the
Mental Processing Composite of the K-ABC test as compared to children whose mothers had
received corn oil.
    
    A study conducted by Dr. C. Smuts and others published in March 2003 in Obstetrics and
Gynecologyfound that expectant mothers at risk for preterm birth, who increased their
dietary intake of DHA during the last trimester of pregnancy through DHA enriched eggs,
increased their length of gestation by six days compared to mothers who received regular
eggs during late pregnancy. These researchers also published in the July/August 2004 issue
of Child Developmenttheir study results showing that infants whose mothers had high DHA
levels at birth had improved attention skills at 18 months of age.
  ® lifesDHA ® lifesDHA lifesDHA lifesDHA
 Cognitive Function, Cardiovascular Health and Other Human Applications
  DHA and cognitive function
 
    
    A study published by Dr. E. Schaefer and others in the Archives of Neurologyin November
2006 investigated the relationship of blood DHA levels and the development of dementia in
a prospective follow-up study of the participants in the Framingham Heart Study. The
results of the study noted that subjects with the highest levels of plasma DHA (top 20%)
had a significant reduction in the risk of developing dementia from all causes. The study
was partially funded by Martek.
    
    A scientific review on DHA performed by Dr. J. Marszalek and Dr. H. Lodish published in
June 2005 in Annual Review of Cell and Developmental Biologysuggests the significant role
that DHA plays in the maintenance of normal neurological function.
    
    The results of an in vitro study conducted by Dr. W. Lukiw and others published in
October 2005 in the Journal of Clinical 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.
 4




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
    
    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.
    
    In September 2004, the results of an animal study conducted by the Dr. F. Calon and
others and the UCLA School of Medicine and published in the journal Neuronnoted the
effects of Marteks DHA on the advancement of Alzheimers disease in laboratory mice. The
study found that a diet rich in DHA significantly lessened the memory loss and cell damage
associated with Alzheimers disease in laboratory mice. This laboratory extended these
findings during 2005 with additional data. In vitro research conducted by Dr. N. Bazan and
published in 2005 in Molecular Neurobiologydetected a metabolite of DHA that appears to
have a protective role in neural cell survival and Alzheimers disease.
    
    In July 2003, the results of a study conducted by Dr. M.C. Morris and others published
in the Archives of 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. A total of 815 subjects, aged 65 to 94, who were initially unaffected
by Alzheimers disease, participated in the study and were followed for an average of 3.9
years for the development of Alzheimers disease. The study showed that in those
individuals consuming the highest amounts of dietary DHA, the risk of developing
Alzheimers disease was reduced by up to 60 percent. The risk of developing Alzheimers
disease was not correlated with EPA consumption.
  DHA and cardiovascular health
 
    
    A study published by Dr. A. Erkkilä and others in the Journal of Lipid Researchin
September 2006 noted an important relationship between plasma DHA levels and the reduced
progression of cardiac disease. Specifically, women whose DHA levels were above the median
at enrollment had slower progression of coronary artery stenosis over a three-year period.
This effect was not seen with the other omega-3 fatty acids, ALA or EPA.
    
    A review conducted by Dr. C. Wang and others published in July 2006 in The American
Journal of Clinical 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 and
eicosapentaenoic acid (EPA) per week. They affirm that with appropriate medical advice,
use of supplements may be substituted for fish.
    
    The results of a study conducted by Dr. K. Maki and others and published in the Journal
of the American College of Nutritionin June 2005 demonstrated that lifesDHA lowered
triglycerides. These subjects consumed 1.5 grams DHA per day or a placebo for six weeks.
This study was sponsored by Martek.
    
    Dr. K. Stark and Dr. B. Holub reported in May 2004 in the American Journal of Clinical
Nutritionthat DHA supplementation of 32 postmenopausal women with 2.8 grams DHA from
Marteks DHA oil per day for 1 month resulted in a 20% reduction in triglycerides, a 6-10%
increase in HDL cholesterol (good cholesterol) and a 7% reduction in heart rate relative
to placebo, suggesting that DHA may favorably influence selected cardiovascular risk
factors in postmenopausal women.
    
    In May 2002, in the publication Circulation,the American Heart Association (AHA)
issued a Scientific Statement entitled Fish Consumption, Fish Oil, Omega-3 Fatty Acids,
and Cardiovascular Disease. The Scientific Statement outlines the findings of a
comprehensive report that examined the cardiovascular health benefit of omega-3 fatty
acids, specifically DHA and EPA, from fish sources. The report concluded that consumption
of such omega-3 fatty acids, either through diet or supplements, reduces the incidence of
cardiovascular disease. The statement refers to studies that have indicated the following
to be associated with the intake of omega-3 fatty acids:
 
    
    decreased risk of sudden death and arrhythmia;
    
    decreased thrombosis (blood clot);
    
    decreased triglyceride levels;
    
    decreased growth of atherosclerotic plaque;
 5




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
    
    improved arterial health; and
    
    lower blood pressure.
  
    
    A study published by D. Mozaffarian in October 2006 in the Journal of the American
Medical Associationreviewed the health effects of fish consumption. Based on the risks of
fish intake that must be considered in the context of the benefits, the author concludes
that the benefits of a modest fish consumption (1-2 servings/wk) outweigh the risks in
healthy adults. The author, however, cautions women of childbearing age to avoid
consumption of those species currently known to contain high levels of contaminants.
  Hypertension American Journal of Clinical Nutrition Diabetes Care European Journal of Clinical Nutrition
 
    
    reduces triglycerides and raises the HDL or good cholesterol;
    
    reduces blood pressure;
    
    reduces heart rate; and
    
    increases LDL and HDL cholesterol particle size.
 LifesDHA ® lifesDHA ® ® lifesDHA
   CONTRACT MANUFACTURING
  6




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MARTEK DETECTION PRODUCTS
  TECHNOLOGY
  Discovery
 Process Development and Product Formulation
  Product Safety and Efficacy Evaluation
 Scale-up and Commercial Production.
 7




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COLLABORATIVE AND LICENSING AGREEMENTS
      lifesDHA
   8




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PRODUCTION
       9




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SOURCES OF SUPPLY
  RESEARCH AND DEVELOPMENT
  SALES AND MARKETING
 ® lifesDHA ® lifesDHA lifesDHA lifesDHA
 LifesDHA ® lifesDHA ® lifesDHA lifesDHA
 
    
    Several egg producers, including Gold Circle Farms®, are producing eggs and liquid eggs
using lifesDHA. These eggs are sold in several grocery store chains in the U.S. and
Europe.
    
    Priégola is selling Simbi + Omega-3 yogurt with lifesDHA, which is now available in
major supermarket chains throughout Spain and is being marketed to children and adults for
its brain health benefits.
    
    Odwalla, Inc. is selling Odwalla Soymilk and the Soy Smart Chai Soymilk drink, both of
which feature lifesDHA, in the U.S.
    
    Dynamic Confections recently re-formulated the Botticelli Choco-Omeg® line of
nutritional bars to include lifesDHA. The bars are available at Canadian retailers.
    
    Flora, Inc. recently launched Udos Choice® DHA Oil Blend, a flaxseed oil blend,
containing lifesDHA. Floras Udos Choice brand is a line of vegetarian, organic and
sustainable health oils.
    
    Italian dairy company Latteria Merano/Milchhof Meran recently launched Mente Viva
fortified drinkable yogurt with lifesDHA. This product is available in supermarkets
throughout Italy.
    
    Italian company Centrale Del Latte Di Brescia launched Sprintissimo fortified drinkable
yogurt with lifesDHA. This product is available in supermarkets throughout Italy.
    
    Life Science Nutritionals recently launched Nutri-Kids Nutrition-to-Go including
lifesDHA. This ready-to-drink milk product is available at select grocery and nutrition
retailers in the U.S. and Canada.
    
    General Mills has introduced Yoplait Kids® featuring lifesDHA. This yogurt product
will be available at U.S. retailers nationwide in mid-February 2007.
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lifesDHA
  COMPETITION
  Mortierella Alpina
 lifesDHA
   11




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
    
    our oils do not have the odor, stability, taste characteristics, or impurities that
may limit the usefulness of DHA derived from unencapsulated fish oil;
    
    our oils can be blended in a variety of mixtures in precise ratios for specific
applications, whereas the composition of fish oils may vary;
    
    each of our oils used in infant formula is comprised of a fatty acid blend that does not
contain certain other fatty acids in significant quantities such as eicosapentaenoic acid
(EPA), which may not be appropriate for consumption by infants.
    
    our oils do not contain substances found in certain fish oils such as methylmercury,
polychlorinated biphenyls (PCBs), dioxins and other toxic contaminants;
    
    our oils have a higher oxidative stability and longer shelf life than fish oil and are,
therefore, more amenable to the spray drying process required for powdered formula;
    
    our oils are not produced from animal sources and, therefore, should be more desirable
for use in food and beverage products requiring vegetable-sourced DHA;
    
    our oils are produced from renewable, sustainable natural resources, unlike fish oil;
    
    our DHA and ARA-enriched oils are in an easily digestible triglyceride form similar to
that found in breast milk, but different from the phospholipid form found in egg yolk
lipids; and
    
    our oils can be produced in large quantities under controlled conditions satisfying
strict regulatory scrutiny.
       PATENTS, LICENSES AND PROPRIETARY TECHNOLOGY
  12




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
    
    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.
      13




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GOVERNMENT REGULATION AND PRODUCT TESTING
    ® ®
       14




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EMPLOYEES
  15




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EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    PositionSteve Dubin
    
    
    53
    
    
    Chief Executive Officer and DirectorDavid M. Abramson
    
    
    53
    
    
    PresidentPeter L. Buzy
    
    
    47
    
    
    Chief Financial Officer, Treasurer and Executive
Vice President for Finance and AdministrationBarney B. Easterling
    
    
    61
    
    
    Senior Vice President, ManufacturingDavid M. Feitel
    
    
    43
    
    
    Senior Vice President and General CounselJames H. Flatt, Ph.D.
    
    
    47
    
    
    Senior Vice President, ResearchPeter A. Nitze
    
    
    48
    
    
    Chief Operating Officer and Executive Vice President
       16




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COMPANY
 http://www.martek.com
  17




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ITEM 1A. RISK FACTORS.
  A substantial portion of our nutritional oil products sales is made to four of our existing
customers under agreements with no minimum purchase requirements. If demand by these customers
for our nutritional oil products decreases, our revenues may materially decline.
  We are aware of several products that are currently available, and products under development,
that may present a serious competitive threat to our products. If we are unable to maintain a competitive differentiation from these products, our revenues may be adversely affected.
   
    
    The Ross Products Division of Abbott Laboratories, a significant Martek licensee and
customer, filed a generally recognized as safe notification on January 2, 2002 seeking Food
and Drug Administration (FDA) concurrence that its tuna oil source of DHA and its fungal
source of ARA, as manufactured by Suntory, are generally recognized as safe when used as
ingredients in infant formula. In April 2006, the FDA notified Ross Products that it had no
questions at that time regarding Ross conclusion that DHA-rich oil from tuna and ARA-rich
oil from Mortierella Alpinaare safe as sources of DHA and ARA in term and post-discharge
preterm infant formulas. While Ross Products has not announced any introduction of its
oils into infant formula in the U.S. nor are we aware of any plans by them or any of our
other licensees to do so, the GRAS notification removes a significant regulatory hurdle to
the introduction of competitive products in the U.S. If Ross Products introduces such
competitive products, we cannot be certain that the economic protection that we believe we
have via existing patents, royalty requirements of license agreements and market factors
will protect us from the financial impact of such product introductions.
    
    Reliant Pharmaceuticals is currently selling Omacor, a DHA/ EPA ethyl ester for
treatment of hyperlipidemia. Omacor is a lipid-regulating agent which includes both EPA
and DHA from fish oil. Reliant Pharmaceuticals has recently filed an application with the
FDA for an indication that will expand the use of Omacor. Other pharmaceutical
applications using omega-3 fatty acids may be expected.
    
    Suntory Limited, Cargill Inc., through a joint venture with a company in China, and
other independent Chinese manufacturers are producing and distributing a fungal source of
ARA. In addition, we are aware that there may be manufacturers in China attempting to
produce an algal source of DHA, but we are uncertain of the overall status and commercial
potential of these development efforts.
    
    Some infant formulas now on the market outside the United States, including those
marketed by certain of Marteks licensees, use DHA derived from other sources, such as fish
oil or eggs.
    
    In December 2005, Lonza Group LTD, a Swiss chemical and biotechnology group, acquired
from Nutrinova Specialties & Food Ingredients GmbH, a wholly-owned subsidiary of Celanese
Corporation, Nutrinovas business having as its product a DHA-rich microalgal oil. Since
the acquisition, Lonza has actively marketed its DHA oil to the food and beverage and
dietary supplement markets in the United States, Europe and China. Both Nutrinova and
Lonza are defendants in patent infringement actions involving our DHA patents that we have
brought in both the United States and Germany. In October 2006, the infringement action in
the United States was tried, and a verdict favorable to Martek was returned. The jury
found that Lonza infringed all the asserted claims of three Martek patents and that these
patents were valid. It also found that Lonza acted willfully in its infringement of one of
these patents. The judge will now determine if any of the jurys decisions were
inappropriate as a matter of law, whether Martek is entitled to a permanent injunction
against Lonza, and, if so, whether the permanent injunction should be stayed pending the
outcome of any appeal. These lawsuits are further described in Item 3 of Part I of this
Form 10-K, Legal Proceedings.
 18




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
    
    Other companies, several with greater financial resources than ours, are developing
plant-based DHA and other companies are developing chemically synthesized DHA.
    
    Several large companies, including BASF AG, DSM and Ocean Nutrition, and a number of
smaller companies, manufacture microencapsulated fish oil products. Although
microencapsulation of the oil resolves many of the odor, stability and taste issues found
with fish oil, a microencapsulated product currently is more costly than regular fish oil.
Fish oil-based products (i) are used as a DHA source by some infant formula companies, (ii)
currently dominate the adult DHA supplement market and (iii) are included in certain foods
on the market in various parts of the world. Because fish oil is generally less costly than
our DHA oil and continues to improve in quality and gain general market acceptance, fish
oil presents a substantial competitive threat.
 If we are unable to obtain or maintain patent protection or if our patents do not provide
protection against competitive products, our results of operations may be adversely affected.
     
    
    Aventis S.A. and Nagase & Co. Ltd. are challenging our European patent covering our
DHA-containing oils. At a hearing in October 2000, the Opposition Division of the European
Patent Office (EPO) revoked our patent on the grounds that it was not novel. We
immediately appealed this ruling, and in July 2002 we received a positive ruling from an
Appeal Board of the EPO, setting aside the prior decision to revoke this patent. The patent
was returned to the Opposition Division for a determination as to whether it has met the
legal requirement of inventive step. A hearing in August 2005 resulted in a ruling by the
Opposition Division that this requirement had been met and the validity of the patent was
upheld. Aventis appealed the decision to the Appeal Board of the EPO. Martek filed its
answer to Aventis grounds for appeal in July 2006. The appeal process is not expected to
be completed before the second half of 2007. Claim one of this patent is the basis of the
patent infringement suit against Nutrinova and Lonza in Germany, discussed below.
    
    With respect to our ARA patent issued by the EPO, BASF AG, Friesland Brands B.V., and
Suntory Limited filed their grounds for opposing this patent with the Opposition Division
of the EPO. At a hearing at the Opposition Division in April 2005, the Opposition Division
of the EPO upheld the patent in a form containing modified claims that are narrower than
the claims originally granted. In an effort to broaden the claims of the patent, we
appealed the decision. Suntory and BASF have also appealed. Friesland Brands B.V. has
withdrawn from the opposition. The patent in the form containing the claims that were
originally granted will remain in full force and effect throughout the appeal process. The
appeal process is not expected to be completed until late 2007 or early 2008. Further, in
order to broaden the scope of protection, Martek has pending patent applications and
intends to pursue new patent applications which would be based on the existing patent.
These pending and new applications, if granted, would provide important additional
protection. If the patent in the narrower form approved by the Opposition Division is
ultimately upheld and certain pending and new related patent applications are not granted
with the desired claim scope, it is likely that Marteks European intellectual property
position with respect to ARA would not afford much competitive protection.
    
    With respect to our blended oil (blend of DHA and ARA oils for use in various
applications, including infant formula) patent issued by the EPO, BASF AG and Suntory
Limited filed their grounds for opposing this patent with the Opposition Division of the
EPO. In November 2004, the Opposition Division of the EPO revoked Marteks European blended
oil patent as a result of these challenges. We immediately filed an appeal of this
decision; as a consequence, the blended oil patent has been reinstated and will remain in
full force and effect during the appeal. Both Suntory and BASF filed responses to our
appeal. Further written submissions were filed by Martek in January 2007. A hearing
before the Appeal Board of the EPO has been scheduled for February 2007. In the event that
the Appeal Board rules against Martek and revokes the patent, that decision would be final.
There would be no further recourse for Martek.
 19




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
    
    Prior to our purchase of OmegaTech, Aventis Research and Technologies GmbH & Co. KG, and
Nagase Limited challenged OmegaTechs European patent covering its DHA-containing oils. At
a hearing in December 2000, the Opposition Division of the EPO upheld some of the claims
and revoked other claims. OmegaTech immediately appealed this ruling, as did Aventis. At an
appeal hearing in May 2005, we received a favorable decision from the Appeal Board of the
EPO, which overturned the decision of the Opposition Division and returned the case to the
Opposition Division for review on the merits of the patent claims. Any decision made by
the Opposition Division can be appealed. Assuming an appeal, the review process is not
expected to be completed until 2009, during which time the patent will remain in full force
and effect.
    
    An EPO Opposition Division hearing was held on November 15, 2005, with respect to a
European DHA patent acquired by Martek as part of the OmegaTech purchase. The patent was
upheld in modified form. This patent is directed to processes for fermenting
Thraustochytriumand Schizochytriumunder low chloride conditions and the resulting
products. Nutrinova Nutrition Specialities & Food Ingredients GmbH is the only opponent,
and has appealed. The appeal process is not expected to be completed before late 2007.
    
    In September 2003, we filed a patent infringement lawsuit in the U.S. District Court in
Delaware against Nutrinova Inc., Nutrinova Nutrition Specialties & Food Ingredients GmbH,
Celanese Ventures GmbH, and Celanese AG. Celanese Ventures GmbH and Celanese AG were
dropped from the lawsuit. In October 2006, after an almost two week trial in Wilmington,
Delaware, the jury returned a favorable verdict to Martek, deciding that all three of the
asserted Martek DHA patents were valid and infringed, and that one was willfully infringed.
The judge will now determine if any of the jurys decisions were inappropriate as a matter
of law, whether Martek is entitled to a permanent injunction against Lonza, and, if so,
whether the permanent injunction should be stayed pending the outcome of any appeal.
    
    We also filed a patent infringement suit involving Nutrinova Nutrition Specialties &
Food Ingredients GmbH and Celanese Ventures GmbH in Germany in January 2004. The complaint
alleges infringement of our European patent relating to DHA-containing oils. A hearing in
this case was held in a district court in Dusseldorf in April 2005 and the court delayed
its decision pending input from a court-appointed technical expert. The courts decision is
expected at some point in 2007. Lonza has also been added to this lawsuit.
    
    With respect to our ARA patent in South Korea, Suntory has filed an opposition. A
hearing on the matter was held in late January 2006 and the Korean Intellectual Property
Office Examiners have ruled against Martek. Martek has appealed. The appeal brief is due
in February 2007. The patent will remain in full force and effect during the pendency of
the appeal.
    
    Suntory has also initiated an invalidation case against our blended oil patent in South
Korea. Our response to Suntory was filed in February 2005, Suntory responded in March 2006
and Martek filed further submissions in May 2006. A hearing was held in July 2006. A
preliminary ruling was issued in October 2006, rejecting the fish oil plus microbial ARA
claims, but finding the fish oil plus microbial ARA and DHA claims to be acceptable. The
next ruling is expected in early 2007. The patent will remain in full force and effect
during the pendency of the appeal process.
    
    There are additional intellectual property oppositions pending against Martek that are
not considered material.
   If clinical trials do not continue to yield positive results on the benefits of DHA on cognitive
function, cardiovascular health or other health applications, our future revenues may be limited
in the food and beverage and the dietary supplement markets.
  20




---



##### 



If our oils are unable to be used in organic food and beverage products, the opportunity for
sales of our oils into the food and beverage market will be limited to non-organic products.
   Because food and beverage pricing is very competitive, the premium that our oils adds to the
cost of the food or beverage may never allow it to be priced at levels that will allow
acceptance by consumers.
  If we are unable to gain broad approvals for the incorporation of our oils into foods and
beverages worldwide, our future revenues in the food and beverage market may be limited.
   If it is determined that large amounts of eicosapentaenoic acid (EPA) must accompany DHA in
order to achieve optimal health benefits, we may never be able to gain large- scale entry into
the food and beverage market.
  Our oils are very sensitive to oxidation and may not be very compatible with many liquid or dry
foods that are currently on the market. If economical methods are not developed to successfully
incorporate our oils into various food and beverage applications, we may never be able to gain
large-scale entry into the food and beverage market.
  21




---



##### 



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.
  As we and our major suppliers increase production of our nutritional oils, we may experience
certain risks associated with the start-up/ ramp-up of commercial manufacturing that could have
a material adverse effect on our business, financial condition, and/ or results of operations.
   
    
    we may experience problems processing, handling and shipping the higher quantities of oil produced from our expanded facilities;
    
    the costs of expanding, operating and maintaining our production facilities may exceed our expectations;
    
    product defects may result;
    
    lower than anticipated fermentation success rates may result;
    
    lower downstream processing yields may result;
    
    environmental and safety problems may result from our production process; and
    
    regulatory issues relating to the scale-up and operation regarding our production processes may arise.
  We have significantly increased our manufacturing capacity and have incurred substantial costs
in doing so. If we are unable to increase our revenues from our nutritional oils produced at
these facilities, we may continue to experience excess production capacity and we may be unable
to recover these plant expansion costs, which could result in a write-down of certain production
assets.
  22




---



##### 



Failure to effectively manage our growth could disrupt our operations and prevent us from
generating the revenues and gross profit margins we expect.
  Experts differ in their opinions on the importance of DHA and/or ARA in infant formula and the
levels of DHA and/or ARA required to achieve health benefits for babies. Some experts feel that
they are not necessary ingredients for infant development. If clinical trials do not continue
to yield positive results, certain favorable regulatory guidelines are not enacted or current
favorable regulatory guidelines are amended, our future revenues in the infant formula market
may be limited.
    Our opportunity in the U.S. infant formula market may be limited by the renewal rate of
supplemented formulas into the Women, Infants and Children program or if the eligibility
requirements for participating in the program are made more restrictive.
  Our business would be harmed if we fail to comply with applicable good manufacturing practices
as required by the FDA.
  23




---



##### 



Our manufacturing process involves the handling of hazardous materials and emission of regulated
waste. If we fail to properly handle these hazardous materials and/ or waste emissions,
substantial costs and harm to our business could result.
   Our corporate compliance program cannot guarantee that we are in compliance with all potentially
applicable federal and state regulations.
  Our business exposes us to potential product liability claims and recalls, which could adversely
impact our financial condition or performance.
  We may need additional capital in the future to continue our research and development efforts,
to conduct product testing, including preclinical and clinical trials, and to market our
products. We may also need additional capital to expand our production capacity if market
demand for our products continues to grow.
   24




---



##### 



The market price of our common stock may experience a high level of volatility due to factors
such as the volatility in the market for biotechnology stocks generally, and the short-term
effect of a number of possible events.
  
    
    announcements of technical innovations, new commercial products and product launches by us or our competitors;
    
    announcements of use of competitors DHA and/or ARA products by our customers;
    
    arrangements or strategic partnerships by us or our competitors;
    
    announcements of license agreements, acquisitions or strategic alliances;
    
    announcements of sales by us or our competitors;
    
    patent or other intellectual property achievements or adverse developments;
    
    quarterly fluctuations in our revenues and results of operations;
    
    failure to enter into favorable third-party manufacturing agreements;
    
    regulatory decisions (approvals or disapprovals) or changes concerning our products and our competitors products;
    
    events related to threatened, new or existing litigation, or the results thereof;
    
    changes in our estimates of financial performance or changes in recommendations by securities analysts; and
    
    general market conditions for growth companies and bioscience companies.
   If significant shares eligible for future sales are sold, the result may depress our stock price
by increasing the supply of our shares in the market at a time when demand may be limited.
   Changes in foreign currency exchange rates or interest rates could result in losses.
  25




---



##### 



We are a defendant in a putative class action lawsuit which, if determined adversely, could
have a material adverse affect on us.
   26




---



##### 



ITEM 2. PROPERTIES.
     27




---



##### 



ITEM 3. LEGAL PROCEEDINGS
     Thraustochytrium Schizochytrium
      28




---



##### 



In re Martek Biosciences Corp. Securities
Litigation
  29




---



##### 



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 2005
    
    High
    
    LowNovember 1, 2004  January 31, 2005
    
    $
    53.85
    
    
    $
    38.50February 1, 2005  April 30, 2005
    
    $
    70.50
    
    
    $
    32.00May 1, 2005  July 31, 2005
    
    $
    46.23
    
    
    $
    33.57August 1, 2005  October 31, 2005
    
    $
    52.48
    
    
    $
    28.20
 Fiscal 2006
    
    High
    
    LowNovember 1, 2005  January 31, 2006
    
    $
    32.00
    
    
    $
    23.14February 1, 2006  April 30, 2006
    
    $
    37.22
    
    
    $
    27.56May 1, 2006  July 31, 2006
    
    $
    30.75
    
    
    $
    21.70August 1, 2006  October 31, 2006
    
    $
    30.84
    
    
    $
    20.15
  30




---



##### 



ITEM 6.
    
    SELECTED FINANCIAL DATA.
   Year ended October 31,In thousands, except per share data
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Consolidated Statements of Operations DataRevenues:Product sales
    
    $
    255,838
    
    
    $
    203,765
    
    
    $
    170,565
    
    
    $
    112,298
    
    
    $
    46,055Contract manufacturing sales
    
    
    14,816
    
    
    
    14,087
    
    
    
    13,928
    
    
    
    2,439
    
    
    
    Total revenues
    
    
    270,654
    
    
    
    217,852
    
    
    
    184,493
    
    
    
    114,737
    
    
    
    46,055Cost of revenues:Cost of product sales
    
    
    144,457
    
    
    
    120,865
    
    
    
    103,423
    
    
    
    66,347
    
    
    
    29,794Cost of contract manufacturing sales
    
    
    14,676
    
    
    
    12,516
    
    
    
    11,570
    
    
    
    2,192
    
    
    
    Idle capacity costs
    
    
    9,620
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total cost of revenues
    
    
    168,753
    
    
    
    133,381
    
    
    
    114,993
    
    
    
    68,539
    
    
    
    29,794Gross margin
    
    
    101,901
    
    
    
    84,471
    
    
    
    69,500
    
    
    
    46,198
    
    
    
    16,261Operating expenses:Research and development (1)
    
    
    24,823
    
    
    
    20,468
    
    
    
    18,596
    
    
    
    13,154
    
    
    
    12,188Selling, general and administrative (1)
    
    
    41,614
    
    
    
    33,404
    
    
    
    25,804
    
    
    
    16,275
    
    
    
    11,804Restructuring charge
    
    
    4,729
    
    
    
    
    
    
    
    
    
    
    
    (250
    )
    
    
    1,266Other operating expenses
    
    
    1,158
    
    
    
    7,654
    
    
    
    4,000
    
    
    
    1,943
    
    
    
    406Acquired in-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,788Total operating expenses
    
    
    72,324
    
    
    
    61,526
    
    
    
    48,400
    
    
    
    31,122
    
    
    
    41,452Income (loss) from operations
    
    
    29,577
    
    
    
    22,945
    
    
    
    21,100
    
    
    
    15,076
    
    
    
    (25,191
    )Interest and other income (expense), net
    
    
    (1,528
    )
    
    
    1,125
    
    
    
    772
    
    
    
    916
    
    
    
    958Income (loss) before income tax provision (benefit)
    
    
    28,049
    
    
    
    24,070
    
    
    
    21,872
    
    
    
    15,992
    
    
    
    (24,233
    )Income tax provision (benefit) (1)
    
    
    10,238
    
    
    
    8,786
    
    
    
    (25,176
    )
    
    
    
    
    
    
    Net income (loss)
    
    $
    17,811
    
    
    $
    15,284
    
    
    $
    47,048
    
    
    $
    15,992
    
    
    $
    (24,233
    )Net income (loss) per share, basic
    
    $
    0.55
    
    
    $
    0.49
    
    
    $
    1.62
    
    
    $
    0.63
    
    
    $
    (1.10
    )Net income (loss) per share, diluted
    
    $
    0.55
    
    
    $
    0.48
    
    
    $
    1.55
    
    
    $
    0.58
    
    
    $
    (1.10
    )Shares used in computing basic earnings per share
    
    
    32,113
    
    
    
    31,164
    
    
    
    29,033
    
    
    
    25,510
    
    
    
    21,982Shares used in computing diluted earnings per share
    
    
    32,343
    
    
    
    32,032
    
    
    
    30,386
    
    
    
    27,417
    
    
    
    21,982(1)   Includes the following amounts related to equity-based compensation
expense:Research and development
    
    
    1,143
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling, general and administrative
    
    
    2,129
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income tax provision (benefit)
    
    
    (1,194
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 31




---



##### 



October 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Consolidated Balance Sheets and Other DataCash, cash equivalents, short-term investments and marketable securities
    
    $
    26,828
    
    
    $
    33,347
    
    
    $
    42,650
    
    
    $
    96,971
    
    
    $
    22,419Working capital
    
    
    120,182
    
    
    
    124,208
    
    
    
    68,195
    
    
    
    106,218
    
    
    
    30,457Total assets
    
    
    600,846
    
    
    
    578,485
    
    
    
    501,398
    
    
    
    295,523
    
    
    
    124,312Long-term debt, notes payable and other long-term obligations
    
    
    46,277
    
    
    
    66,115
    
    
    
    97,175
    
    
    
    10,441
    
    
    
    Long-term portion of deferred revenue
    
    
    9,335
    
    
    
    8,959
    
    
    
    9,140
    
    
    
    8,992
    
    
    
    2,246Accumulated deficit
    
    
    (31,425
    )
    
    
    (49,236
    )
    
    
    (64,520
    )
    
    
    (111,568
    )
    
    
    (127,560
    )Total stockholders equity
    
    
    495,448
    
    
    
    469,205
    
    
    
    346,164
    
    
    
    243,964
    
    
    
    105,977Cash dividends declared  common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 32




---



##### 



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 This Managements Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements concerning our business and operations, including, among other things,
statements concerning the following:
 
    
    expectations regarding future revenue growth, gross margin and overall profitability;
    
    expectations regarding product introductions and growth in nutritional product sales;
    
    expectations regarding potential collaborations and acquisitions
    
    expectations regarding demand for products with our nutritional oils;
    
    expectations regarding sales to and by our infant formula licensees and supplemented infant formula market penetration levels;
    
    expectations regarding marketing of our oils by our infant formula licensees;
    
    expectations regarding continued interest by and agreements with food, beverage and supplement companies;
    
    expectations regarding growing consumer recognition of the key health benefits of DHA and ARA;
    
    expectations regarding competitive products;
    
    expectations regarding future efficiencies and improvements in manufacturing
processes and the cost of production of our nutritional oils;
    
    expectations regarding future purchases of third-party manufactured oils;
    
    expectations regarding the amount of production capacity and our ability to meet future demands for our nutritional oils;
    
    expectations regarding the amount of inventory held by us or our customers;
    
    expectations regarding production capacity utilization and the effects of excess production capacity;
    
    expectations regarding future selling, general and administrative and research and development costs;
    
    expectations regarding future capital expenditures;
    
    expectations regarding levels of consumption through governmental programs of infant
formula products containing our nutritional oils;
    
    expectations regarding possibly significant expenses to defend putative securities
class action lawsuits alleging false and material misstatements and omissions of
material facts concerning our business and prospects; and
    
    expectations regarding our ability to protect our intellectual property.
 Forward-looking statements include those statements containing words such as the following:
 
    
    will,
    
    should,
    
    could,
    
    anticipate,
    
    believe,
    
    plan,
    
    estimate,
    
    expect,
    
    intend, and other similar expressions.
 All of these forward-looking statements involve risks and uncertainties. They and other
forward-looking statements in this Form 10-K are all made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. We wish to caution you that our actual
results may differ significantly from the results we discuss in our forward-looking statements. We
discuss some of the risks that could cause such differences in Item 1A. Risk Factors in this report
on Form 10-K and in our various other filings with the Securities and Exchange Commission. Our
forward-looking statements speak only as of the date of this document, and we do not intend to
update these statements to reflect events or circumstances that occur after that date.
 GENERAL
 lifesDHA ® lifesDHA ® ®
  33




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##### 



®
  lifesDHA
 
    
    Mead Johnson launched Expecta LIPIL®, a DHA supplement for pregnant and nursing women containing lifesDHA.
    
    PBM Products launched a beverage containing lifesDHA that is formulated for diabetics
and people with atypical glucose tolerance.
    
    GlaxoSmithKline launched a second powdered drink mix containing lifesDHA in India. The
product, Junior Horlicks, is formulated for a childs developing brain and nervous system.
GlaxoSmithKline had previously launched an adult DHA beverage.
    
    Sciele Pharma, Inc. launched OptiNate and Mission Pharmacal launched Citracal® Prenatal
+ DHA. Both of these products are prescription prenatal supplements containing lifesDHA.
    
    Vincent Foods, LLC is selling Oh Mama! nutrition bars containing lifesDHA, which also
target pregnant and nursing women.
    
    Several egg producers, including Gold Circle Farms®, are producing eggs and liquid eggs
using lifesDHA. These eggs are sold in several grocery store chains in the U.S. and
Europe.
    
    Priégola is selling Simbi + Omega-3 yogurt with lifesDHA, which is now available in
major supermarket chains throughout Spain and is being marketed to children and adults for
its brain health benefits.
    
    Odwalla, Inc. is selling Odwalla Soymilk and the Soy Smart Chai Soymilk drink, both of
which feature lifesDHA, in the U.S.
    
    Dynamic Confections recently re-formulated the Botticelli Choco-Omeg® line of
nutritional bars to include lifesDHA. The bars are available at Canadian retailers.
    
    Flora, Inc. recently launched Udos Choice® DHA Oil Blend, a flaxseed oil blend,
containing lifesDHA. Floras Udos Choice brand is a line of vegetarian, organic and
sustainable health oils.
    
    Italian dairy company Latteria Merano/Milchhof Meran recently launched Mente Viva
fortified drinkable yogurt with lifesDHA. This product is available in supermarkets
throughout Italy.
    
    Italian company Centrale Del Latte Di Brescia launched Sprintissimo fortified drinkable
yogurt with lifesDHA. This product is available in supermarkets throughout Italy.
    
    NutraBella is selling Bellybar nutrition bars containing lifesDHA.
    
    Life Science Nutritionals recently launched Nutri-Kids Nutrition-to-Go including
lifesDHA. This ready-to-drink milk product is available at select grocery and nutrition
retailers in the U.S. and Canada.
    
    General Mills has introduced Yoplait Kids® featuring lifesDHA. This yogurt product
will be available at U.S. retailers nationwide in mid-February 2007.
 lifesDHA
  
    
    the timing of infant formula market introductions by our customers both domestically and internationally;
    
    the timing of our customers production and ordering patterns;
    
    the timing and extent of stocking and destocking of inventory by our customers,
including the potential that customers will move to just in time inventory purchasing now
that we have reached a base finished goods inventory level;
    
    the timing and extent of our customers plant maintenance shutdowns;
    
    the timing and extent of introductions of DHA into various child and/or adult applications;
    
    the continued acceptance of products containing our oils under WIC programs in the U.S.;
    
    the continued acceptance of these products by consumers and continued demand by our customers;
    
    the ability by us and our third-party manufacturers to produce adequate levels of our nutritional oils on a consistent basis;
    
    our ability to protect against competitive products through our patents;
 34




---



##### 




    
    competition from alternative sources of DHA and ARA; and
    
    agreements with other future third-party collaborators to market our products or develop new products.
  MANAGEMENT OUTLOOK
 lifesDHA
   PRODUCTION
     35




---



##### 



CRITICAL ACCOUNTING POLICIES AND
THE USE OF ESTIMATES
  Valuation of Long-lived Assets
 Revenue Recognition
  Deferred Income Taxes
 36




---



##### 



Inventory
 Equity-Based Compensation Expense
  Restructuring Charge
 Patent Cost Capitalization
 RESULTS OF OPERATIONS
 Revenues
  Year ended October 31,2006
    
    2005
    
    2004Product sales
    
    $
    255,838
    
    
    $
    203,765
    
    
    $
    170,565Contract manufacturing sales
    
    
    14,816
    
    
    
    14,087
    
    
    
    13,928Total revenues
    
    $
    270,654
    
    
    $
    217,852
    
    
    $
    184,493
  37




---



##### 



Cost of Revenues
  Year ended October 31,2006
    
    2005
    
    2004Cost of product sales
    
    $
    144,457
    
    
    $
    120,865
    
    
    $
    103,423Cost of contract manufacturing sales
    
    
    14,676
    
    
    
    12,516
    
    
    
    11,570Idle capacity costs
    
    
    9,620
    
    
    
    
    
    
    
    Total cost of revenues
    
    $
    168,753
    
    
    $
    133,381
    
    
    $
    114,993
     Operating Expenses
  Year ended October 31,2006
    
    2005
    
    2004Research and development
    
    $
    24,823
    
    
    $
    20,468
    
    
    $
    18,596Selling, general and administrative
    
    
    41,614
    
    
    
    33,404
    
    
    
    25,804Restructuring charge
    
    
    4,729
    
    
    
    
    
    
    
    Other operating expenses
    
    
    1,158
    
    
    
    7,654
    
    
    
    4,000Total operating expenses
    
    $
    72,324
    
    
    $
    61,526
    
    
    $
    48,400
 Research and Development
  38




---



##### 



Selling, General and Administrative
  Restructuring Charge
 Other Operating Expenses
 Interest and Other Income, Net
  Interest Expense
  Income Tax Provision (Benefit)
    Net Income
    39




---



##### 



RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS
   LIQUIDITY AND CAPITAL RESOURCES
  
    
    cash generated from operations;
    
    proceeds from the sale of equity securities;
    
    cash received from the exercise of stock options and warrants; and
    
    debt financing.
    40




---



##### 



Less than
    
    
    1-3
    
    
    3-5
    
    
    More thanIn thousands
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsNotes payable(1)
    
    $
    11,368
    
    
    $
    1,163
    
    
    $
    9,043
    
    
    $
    370
    
    
    $
    792Borrowings under revolving credit facility
    
    
    36,000
    
    
    
    
    
    
    
    
    
    
    
    36,000
    
    
    
    Operating lease obligations(2)
    
    
    4,422
    
    
    
    1,013
    
    
    
    1,895
    
    
    
    1,172
    
    
    
    342Unconditional purchase obligations(3), (4)
    
    
    35,667
    
    
    
    4,289
    
    
    
    31,378
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    87,457
    
    
    $
    6,465
    
    
    $
    42,316
    
    
    $
    37,542
    
    
    $
    1,134


|    |  |                                                                                                                                                                                                            
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Minimum payments above include interest and principal due under these notes.                                                                                                                               
|   
|(2) |  | Does not include lease payments on equipment formerly subject to operating lease
at our Kingstree facility that we repurchased for $3.9 million in November 2006.                                          
|   
|(3) |  | Primarily includes future inventory purchases from DSM pursuant to the guarantee
described below in Off-Balance Sheet Arrangements.                                                                      
|   
|(4) |  | Does not include $750,000 license payment for plant-based DHA technology due upon
execution of an amendment to collaboration agreement between Martek and a Canadian
biotechnology company in January 2007.











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


41




---



##### 





OFF-BALANCE SHEET ARRANGEMENTS








42



---



##### 



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
    43




---



##### 



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
    
    PAGEManagements Report on Internal Control Over Financial Reporting
    
    45Report of Ernst &Young LLP, Independent Registered Public Accounting Firm
    
    46Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on
Internal Control Over Financial Reporting
    
    47Consolidated Balance Sheets as of October 31, 2006 and 2005
    
    48Consolidated Statements of Income for the years ended
October 31, 2006, 2005 and 2004
    
    49Consolidated Statements of Stockholders Equity for the years
ended October 31, 2006, 2005 and 2004
    
    50Consolidated Statements of Cash Flows for the years ended
October 31, 2006, 2005 and 2004
    
    51Notes to Consolidated Financial Statements
    
    52
 44




---



##### 



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
   Internal ControlIntegrated Framewor Internal ControlIntegrated Framework
  /s/ Steve Dubin

Steve Dubin
Chief Executive Officer and Director
    
    
    
    /s/ Peter L. Buzy

Peter L. Buzy
Chief Financial Officer, Treasurer and
Executive Vice President
for Finance and AdministrationJanuary 9, 2007
    
    
    
    January 9, 2007
 45




---



##### 



REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Internal
ControlIntegrated Framework
   
 46




---



##### 



REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
 
 Internal ControlIntegrated Framework
    .
   
 47




---



##### 



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

2006
    
    

2005AssetsCurrent assetsCash and cash equivalents
    
    $
    15,578
    
    
    $
    11,047Short-term investments and marketable securities
    
    
    11,250
    
    
    
    22,300Accounts receivable, net
    
    
    32,746
    
    
    
    27,603Inventories, net
    
    
    100,320
    
    
    
    91,535Other current assets
    
    
    10,074
    
    
    
    5,929Total current assets
    
    
    169,968
    
    
    
    158,414Property, plant and equipment, net
    
    
    291,445
    
    
    
    290,733Deferred tax asset
    
    
    39,969
    
    
    
    48,201Goodwill
    
    
    48,603
    
    
    
    48,490Other intangible assets, net
    
    
    36,828
    
    
    
    31,129Other assets, net
    
    
    14,033
    
    
    
    1,518Total assets
    
    $
    600,846
    
    
    $
    578,485Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    21,663
    
    
    $
    16,661Accrued liabilities
    
    
    24,098
    
    
    
    13,692Current portion of notes payable and other long-term obligations
    
    
    1,231
    
    
    
    3,113Current portion of deferred revenue
    
    
    2,794
    
    
    
    740Total current liabilities
    
    
    49,786
    
    
    
    34,206Long-term debt under revolving credit facility
    
    
    36,000
    
    
    
    55,000Notes payable and other long-term obligations
    
    
    10,277
    
    
    
    11,115Long-term portion of deferred revenue
    
    
    9,335
    
    
    
    8,959Total liabilities
    
    
    105,398
    
    
    
    109,280CommitmentsStockholders equityPreferred stock, $.01 par value, 4,700,000 shares authorized; none issued or outstanding
    
    
    
    
    
    
    Series A junior participating preferred stock, $.01 par value; 300,000 shares authorized; none issued or outstanding
    
    
    
    
    
    
    Series B junior participating preferred stock, $.01 par value; 300,000 shares authorized; none issued or outstanding
    
    
    
    
    
    
    Common stock, $.10 par value; 100,000,000 shares authorized; 32,156,162 and 32,026,595 shares issued and
outstanding, respectively
    
    
    3,216
    
    
    
    3,203Additional paid-in capital
    
    
    523,486
    
    
    
    515,237Accumulated other comprehensive income
    
    
    171
    
    
    
    1Accumulated deficit
    
    
    (31,425
    )
    
    
    (49,236
    )Total stockholders equity
    
    
    495,448
    
    
    
    469,205Total liabilities and stockholders equity
    
    $
    600,846
    
    
    $
    578,485
 See accompanying notes.
 48




---



##### 



MARTEK BIOSCIENCES CORPORATION
  Year ended October 31,In thousands, except share and per share data
    
    2006
    
    
    2005
    
    
    2004Revenues:Product sales
    
    $
    255,838
    
    
    $
    203,765
    
    
    $
    170,565Contract manufacturing sales
    
    
    14,816
    
    
    
    14,087
    
    
    
    13,928Total revenues
    
    
    270,654
    
    
    
    217,852
    
    
    
    184,493Cost of revenues:Cost of product sales
    
    
    144,457
    
    
    
    120,865
    
    
    
    103,423Cost of contract manufacturing sales
    
    
    14,676
    
    
    
    12,516
    
    
    
    11,570Idle capacity costs
    
    
    9,620
    
    
    
    
    
    
    
    Total cost of revenues
    
    
    168,753
    
    
    
    133,381
    
    
    
    114,993Gross margin
    
    
    101,901
    
    
    
    84,471
    
    
    
    69,500Operating expenses:Research and development (1)
    
    
    24,823
    
    
    
    20,468
    
    
    
    18,596Selling, general and administrative (1)
    
    
    41,614
    
    
    
    33,404
    
    
    
    25,804Restructuring charge
    
    
    4,729
    
    
    
    
    
    
    
    Other operating expenses
    
    
    1,158
    
    
    
    7,654
    
    
    
    4,000Total operating expenses
    
    
    72,324
    
    
    
    61,526
    
    
    
    48,400Income from operations
    
    
    29,577
    
    
    
    22,945
    
    
    
    21,100Interest and other income, net
    
    
    1,490
    
    
    
    1,428
    
    
    
    777Interest expense
    
    
    (3,018
    )
    
    
    (303
    )
    
    
    (5
    )Income before income tax provision (benefit)
    
    
    28,049
    
    
    
    24,070
    
    
    
    21,872Income tax provision (benefit) (1)
    
    
    10,238
    
    
    
    8,786
    
    
    
    (25,176
    )Net income
    
    $
    17,811
    
    
    $
    15,284
    
    
    $
    47,048Net income per shareBasic
    
    $
    0.55
    
    
    $
    0.49
    
    
    $
    1.62Diluted
    
    $
    0.55
    
    
    $
    0.48
    
    
    $
    1.55Weighted average common shares outstandingBasic
    
    
    32,113,301
    
    
    
    31,164,149
    
    
    
    29,033,241Diluted
    
    
    32,343,015
    
    
    
    32,031,503
    
    
    
    30,385,707(1)   Includes the following amounts related to
equity-based compensation expense:Research and development
    
    
    1,143
    
    
    
    
    
    
    
    Selling, general and administrative
    
    
    2,129
    
    
    
    
    
    
    
    Income tax provision (benefit)
    
    
    (1,194
    )
    
    
    
    
    
    
    
 See accompanying notes.
 49




---



##### 



MARTEK BIOSCIENCES CORPORATION
  AccumulatedAdditional
    
    
    OtherCommon Stock
    
    
    Paid-in
    
    
    Comprehensive
    
    
    AccumulatedIn thousands, except share data
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Income
    
    
    Deficit
    
    
    TotalBalance at October 31, 2003
    
    
    28,041,323
    
    
    $
    2,804
    
    
    $
    352,728
    
    
    $
    
    
    
    $
    (111,568
    )
    
    $
    243,964Issuance of common stock, net of issuance costs
    
    
    176,885
    
    
    
    18
    
    
    
    11,272
    
    
    
    
    
    
    
    
    
    
    
    11,290Exercise of stock options and warrants
    
    
    1,272,919
    
    
    
    127
    
    
    
    20,817
    
    
    
    
    
    
    
    
    
    
    
    20,944Equity-based compensation
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    28Tax benefit of exercise of non-qualified stock options
    
    
    
    
    
    
    
    
    
    
    22,822
    
    
    
    
    
    
    
    
    
    
    
    22,822Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,048
    
    
    
    47,048Other comprehensive income:Unrealized gain on exchange rate forward
contract, net of tax of $0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    68Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,116Balance at October 31, 2004
    
    
    29,491,127
    
    
    
    2,949
    
    
    
    407,667
    
    
    
    68
    
    
    
    (64,520
    )
    
    
    346,164Issuance of common stock, net of issuance costs
    
    
    1,756,614
    
    
    
    176
    
    
    
    81,268
    
    
    
    
    
    
    
    
    
    
    
    81,444Exercise of stock options
    
    
    778,854
    
    
    
    78
    
    
    
    18,592
    
    
    
    
    
    
    
    
    
    
    
    18,670Equity-based compensation
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    36Tax benefit of exercise of non-qualified stock options
    
    
    
    
    
    
    
    
    
    
    7,674
    
    
    
    
    
    
    
    
    
    
    
    7,674Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,284
    
    
    
    15,284Other comprehensive income:Unrealized loss on exchange rate forward
contract, net of tax of $0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67
    )
    
    
    
    
    
    
    (67
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,217Balance at October 31, 2005
    
    
    32,026,595
    
    
    
    3,203
    
    
    
    515,237
    
    
    
    1
    
    
    
    (49,236
    )
    
    
    469,205Exercise of stock options and warrants
    
    
    129,567
    
    
    
    13
    
    
    
    2,909
    
    
    
    
    
    
    
    
    
    
    
    2,922Equity-based compensation
    
    
    
    
    
    
    
    
    
    
    3,753
    
    
    
    
    
    
    
    
    
    
    
    3,753Tax benefit of exercise of non-qualified stock options
    
    
    
    
    
    
    
    
    
    
    1,587
    
    
    
    
    
    
    
    
    
    
    
    1,587Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,811
    
    
    
    17,811Other comprehensive income:Unrealized gain on exchange rate forward
contract, net of tax of $102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    170
    
    
    
    
    
    
    
    170Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,981Balance at October 31, 2006
    
    
    32,156,162
    
    
    $
    3,216
    
    
    $
    523,486
    
    
    $
    171
    
    
    $
    (31,425
    )
    
    $
    495,448
 See accompanying notes.
 50




---



##### 



MARTEK BIOSCIENCES CORPORATION
  Year ended October 31,In thousands
    
    2006
    
    
    2005
    
    
    2004Operating activitiesNet income
    
    $
    17,811
    
    
    $
    15,284
    
    
    $
    47,048Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    17,149
    
    
    
    16,494
    
    
    
    8,687Provision for inventory obsolescence
    
    
    500
    
    
    
    2,000
    
    
    
    500Deferred tax provision (benefit)
    
    
    10,238
    
    
    
    8,786
    
    
    
    (25,176
    )Equity-based compensation expense
    
    
    3,272
    
    
    
    
    
    
    
    Incremental tax benefit from exercise of non-qualified stock options
    
    
    (1,587
    )
    
    
    
    
    
    
    Loss from disposal and write-down of assets and other
    
    
    2,845
    
    
    
    1,131
    
    
    
    169Changes in operating assets and liabilities:Accounts receivable
    
    
    (5,143
    )
    
    
    9,689
    
    
    
    (17,128
    )Inventories
    
    
    (20,804
    )
    
    
    (63,156
    )
    
    
    (15,525
    )Other assets
    
    
    (4,393
    )
    
    
    1,413
    
    
    
    1,324Accounts payable
    
    
    5,002
    
    
    
    (10,303
    )
    
    
    9,150Accrued liabilities
    
    
    8,527
    
    
    
    2,947
    
    
    
    1,552Deferred revenue and other liabilities
    
    
    2,205
    
    
    
    (1,429
    )
    
    
    (511
    )Net cash provided by (used in) operating activities
    
    
    35,622
    
    
    
    (17,144
    )
    
    
    10,090Investing activitiesSale (purchase) of short-term investments and marketable securities, net
    
    
    11,050
    
    
    
    (9,095
    )
    
    
    53,842Expenditures for property, plant and equipment
    
    
    (10,902
    )
    
    
    (57,181
    )
    
    
    (180,409
    )(Repurchase) proceeds from sale-leaseback transaction and other
    
    
    (6,877
    )
    
    
    4,272
    
    
    
    10,895Capitalization of intangible and other assets
    
    
    (6,862
    )
    
    
    (4,989
    )
    
    
    (9,383
    )Net cash used in investing activities
    
    
    (13,591
    )
    
    
    (66,993
    )
    
    
    (125,055
    )Financing activitiesRepayments of notes payable and other long-term obligations
    
    
    (3,009
    )
    
    
    (4,875
    )
    
    
    (2,748
    )(Repayments) borrowings under revolving credit facility, net
    
    
    (19,000
    )
    
    
    (30,000
    )
    
    
    85,000Proceeds from the issuance of common stock, net of issuance costs
    
    
    
    
    
    
    81,444
    
    
    
    11,290Proceeds from the exercise of stock options and warrants
    
    
    2,922
    
    
    
    18,670
    
    
    
    20,944Incremental tax benefit from exercise of non-qualified stock options
    
    
    1,587
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    500
    
    
    
    Net cash (used in) provided by financing activities
    
    
    (17,500
    )
    
    
    65,739
    
    
    
    114,486Net increase (decrease) in cash and cash equivalents
    
    
    4,531
    
    
    
    (18,398
    )
    
    
    (479
    )Cash and cash equivalents, beginning of year
    
    
    11,047
    
    
    
    29,445
    
    
    
    29,924Cash and cash equivalents, end of year
    
    $
    15,578
    
    
    $
    11,047
    
    
    $
    29,445Supplemental cash flow disclosures:Interest paid
    
    $
    3,625
    
    
    $
    3,528
    
    
    $
    2,084Income taxes paid
    
    $
    280
    
    
    $
    
    
    
    $
    Notes payable issued in acquisition of land
    
    $
    
    
    
    $
    800
    
    
    $
    Purchase of DSM license through long-term obligation
    
    $
    
    
    
    $
    
    
    
    $
    6,000
 See accompanying notes.
 51




---



##### 



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
 52




---



##### 



Foreign Currency Transactions and Hedging Activities
  Research and Development
 Advertising
 Other Operating Expenses
 Deferred Income Taxes
 Equity-Based Compensation
 Net Income Per Share
 Comprehensive Income
 Cash and Cash Equivalents
 Short-Term Investments and Marketable Securities
   53




---



##### 



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
 54




---



##### 



Impairment of Long-Lived Assets
 Recently Issued Accounting Pronouncements
  3. EQUITY-BASED COMPENSATION
    Year ended October 31,2006
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    17,811
    
    
    $
    15,284
    
    
    $
    47,048Deduct: Total equity-based employee compensation expense
    determined under fair value-based methods for all awards
    
    
    
    
    
    
    (58,349
    )
    
    
    (17,920
    )Pro forma net income (loss)
    
    $
    17,811
    
    
    $
    (43,065
    )
    
    $
    29,128Net income (loss) per share:Basic  as reported
    
    $
    0.55
    
    
    $
    0.49
    
    
    $
    1.62Basic  pro forma
    
    $
    0.55
    
    
    $
    (1.38
    )
    
    $
    1.00Diluted  as reported
    
    $
    0.55
    
    
    $
    0.48
    
    
    $
    1.55Diluted  pro forma
    
    $
    0.55
    
    
    $
    (1.38
    )
    
    $
    0.96
 55




---



##### 



Year ended October 31,2006
    
    2005
    
    2004Expected volatility
    
    
    61.1
    %
    
    
    62.7
    %
    
    
    78.9
    %Risk-free interest rate
    
    
    4.7
    %
    
    
    3.9
    %
    
    
    3.9
    %Expected life of options
    
    5 years
    
    5 years
    
    5 yearsExpected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Forfeiture rate
    
    
    1
    %
    
    
    2
    %
    
    
    2
    %
 Expected Volatility
 Risk-Free Interest Rate
 Expected Life of Options
 Expected Dividend Yield
 Forfeiture Rate
  Stock
Option Plans
    56




---



##### 



Weighted AverageRemainingNumber of
    
    
    Weighted Average
    
    
    Aggregate
    
    
    ContractualShares
    
    
    Price/Share
    
    
    Intrinsic Value
    
    
    Term (years)Options outstanding at October 31, 2003
    
    
    4,294
    
    
    $
    22.55Options exercisable at October 31, 2003
    
    
    2,514
    
    
    $
    18.45Granted
    
    
    1,067
    
    
    $
    59.60Exercised
    
    
    (1,240
    )
    
    $
    16.39Cancelled
    
    
    (71
    )
    
    $
    36.39Options outstanding at October 31, 2004
    
    
    4,050
    
    
    $
    33.91Options exercisable at October 31, 2004
    
    
    2,138
    
    
    $
    26.33Granted
    
    
    700
    
    
    $
    48.69Exercised
    
    
    (779
    )
    
    $
    23.98Cancelled
    
    
    (47
    )
    
    $
    44.79Options outstanding at October 31, 2005
    
    
    3,924
    
    
    $
    38.39Options exercisable at October 31, 2005
    
    
    3,438
    
    
    $
    40.14Granted
    
    
    59
    
    
    $
    31.71Exercised
    
    
    (98
    )
    
    $
    24.92Cancelled
    
    
    (171
    )
    
    $
    40.21Options outstanding at October 31, 2006
    
    
    3,714
    
    
    $
    38.56
    
    
    $
    6,483
    
    
    
    6.2Options exercisable at October 31, 2006
    
    
    3,466
    
    
    $
    39.32
    
    
    $
    6,049
    
    
    
    6.2
   OPTIONS OUTSTANDING
    
    OPTIONS EXERCISABLEWeightedAverageRemaining
    
    Weighted
    
    
    
    
    
    WeightedContractual
    
    Average
    
    
    
    
    
    AverageRange of
    
    Options
    
    Life
    
    Exercise
    
    Options
    
    ExerciseExercise Prices
    
    Outstanding
    
    (years)
    
    Price
    
    Exercisable
    
    Price$6.25  $9.37
    
    
    32,675
    
    
    
    2.5
    
    
    $
    7.35
    
    
    
    32,675
    
    
    $
    7.35$9.38  $14.07
    
    
    128,529
    
    
    
    3.3
    
    
    $
    11.84
    
    
    
    128,529
    
    
    $
    11.84$14.08  $21.12
    
    
    602,839
    
    
    
    4.2
    
    
    $
    16.48
    
    
    
    537,129
    
    
    $
    16.39$21.13  $31.69
    
    
    1,151,962
    
    
    
    6.0
    
    
    $
    27.68
    
    
    
    1,046,994
    
    
    $
    27.85$31.70  $47.55
    
    
    170,075
    
    
    
    7.8
    
    
    $
    39.40
    
    
    
    115,635
    
    
    $
    41.78$47.56  $68.08
    
    
    1,628,369
    
    
    
    7.2
    
    
    $
    57.07
    
    
    
    1,605,369
    
    
    $
    57.133,714,449
    
    
    
    6.2
    
    
    $
    38.56
    
    
    
    3,466,331
    
    
    $
    39.32
 
  57




---



##### 



4. DSM SUPPLY AND LICENSE AGREEMENT
  5. SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES
  6. INVENTORIES
  October 31,2006
    
    
    2005Finished goods
    
    $
    43,928
    
    
    $
    34,328Work in process
    
    
    66,968
    
    
    
    55,073Raw materials
    
    
    3,024
    
    
    
    3,634Total inventories
    
    
    113,920
    
    
    
    93,035Less: inventory reserve
    
    
    (1,600
    )
    
    
    (1,500
    )Total inventories, net
    
    
    112,320
    
    
    
    91,535Less: long-term portion
    
    
    (12,000
    )
    
    
    Inventories, net
    
    $
    100,320
    
    
    $
    91,535
  58




---



##### 



7. PROPERTY, PLANT AND EQUIPMENT
  October 31,2006
    
    
    2005Land
    
    $
    2,320
    
    
    $
    2,318Building and improvements
    
    
    53,177
    
    
    
    45,515Machinery and equipment
    
    
    152,635
    
    
    
    164,039Furniture and fixtures
    
    
    2,716
    
    
    
    3,161Computer hardware and software
    
    
    8,602
    
    
    
    8,085219,450
    
    
    
    223,118Less: accumulated depreciation and amortization
    
    
    (29,674
    )
    
    
    (26,764
    )189,776
    
    
    
    196,354Construction in progress
    
    
    10,984
    
    
    
    56,840Assets held for future use, net
    
    
    90,685
    
    
    
    37,539Property, plant and equipment, net
    
    $
    291,445
    
    
    $
    290,733
   8. GOODWILL AND OTHER INTANGIBLE ASSETS
  October 31, 2006
    
    
    October 31, 2005Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedIntangible Asset
    
    Gross
    
    
    Amortization
    
    
    Net
    
    
    Gross
    
    
    Amortization
    
    
    NetTrademarks
    
    $
    2,053
    
    
    $
    (545
    )
    
    $
    1,508
    
    
    $
    2,026
    
    
    $
    (401
    )
    
    $
    1,625Patents
    
    
    19,233
    
    
    
    (1,835
    )
    
    
    17,398
    
    
    
    11,741
    
    
    
    (1,734
    )
    
    
    10,007Core technology
    
    
    1,708
    
    
    
    (455
    )
    
    
    1,253
    
    
    
    1,708
    
    
    
    (342
    )
    
    
    1,366Current products
    
    
    10,676
    
    
    
    (3,228
    )
    
    
    7,448
    
    
    
    10,676
    
    
    
    (2,516
    )
    
    
    8,160Licenses
    
    
    11,091
    
    
    
    (1,870
    )
    
    
    9,221
    
    
    
    11,091
    
    
    
    (1,120
    )
    
    
    9,971Goodwill
    
    
    48,603
    
    
    
    
    
    
    
    48,603
    
    
    
    48,490
    
    
    
    
    
    
    
    48,490$
    93,364
    
    
    $
    (7,933
    )
    
    $
    85,431
    
    
    $
    85,732
    
    
    $
    (6,113
    )
    
    $
    79,619
   59




---



##### 



9. ACCRUED LIABILITIES
  October 31,2006
    
    
    2005Salaries and employee benefits
    
    $
    12,328
    
    
    $
    7,214Inventory receipt obligations
    
    
    3,094
    
    
    
    1,544Other
    
    
    8,676
    
    
    
    4,934$
    24,098
    
    
    $
    13,692
 10. NOTES PAYABLE AND LONG-TERM DEBT
    Fiscal Year2007
    
    $
    6702008
    
    
    6862009
    
    
    7,7772010
    
    
    1832011
    
    
    100Subsequent to 2011
    
    
    626$
    10,042
   11. RESTRUCTURING CHARGE
   60




---



##### 



EmployeeSeparation
    
    
    AssetCosts
    
    
    Write-down
    
    
    Other
    
    
    TotalInitial charge in the fourth quarter of fiscal 2006
    
    $
    2,032
    
    
    $
    2,568
    
    
    $
    129
    
    
    $
    4,729Cash payments
    
    
    (60
    )
    
    
    
    
    
    
    (55
    )
    
    
    (115
    )Asset write-down
    
    
    
    
    
    
    (2,568
    )
    
    
    
    
    
    
    (2,568
    )Liability for restructuring costs at October 31, 2006
    
    $
    1,972
    
    
    $
    
    
    
    $
    74
    
    
    $
    2,046
 12. COMMITMENTS AND CONTINGENCIES
 Leases
    Fiscal Year2007
    
    $
    1,0132008
    
    
    9972009
    
    
    8982010
    
    
    9152011
    
    
    257After 2011
    
    
    342$
    4,422
 Scientific Research Collaborations
  61




---



##### 



Purchase Commitments
 OmegaTech Milestone
  Patent Infringement Litigation
 Class Action Lawsuit
 Other
 13. LICENSE AGREEMENTS
  62




---



##### 



14. NET INCOME PER SHARE
   Year ended October 31,2006
    
    
    2005
    
    
    2004Net income
    
    $
    17,811
    
    
    $
    15,284
    
    
    $
    47,048Weighted average shares outstanding, basic
    
    
    32,113
    
    
    
    31,164
    
    
    
    29,033Effect of dilutive potential common shares:Stock options
    
    
    230
    
    
    
    849
    
    
    
    1,315Warrants
    
    
    
    
    
    
    19
    
    
    
    38Total dilutive potential common shares
    
    
    230
    
    
    
    868
    
    
    
    1,353Weighted average shares outstanding, diluted
    
    
    32,343
    
    
    
    32,032
    
    
    
    30,386Net income per share, basic
    
    $
    0.55
    
    
    $
    0.49
    
    
    $
    1.62Net income per share, diluted
    
    $
    0.55
    
    
    $
    0.48
    
    
    $
    1.55
  15. STOCKHOLDERS EQUITY
 Issuance
of Common Stock
   Stockholder Rights Plan
      63




---



##### 



16. INCOME TAXES
  Year ended October 31,2006
    
    
    2005
    
    
    2004Federal income tax expense at 35%
    
    $
    9,817
    
    
    $
    8,425
    
    
    $
    7,656State taxes, net of Federal benefit
    
    
    251
    
    
    
    283
    
    
    
    828Change in valuation allowance
    
    
    
    
    
    
    
    
    
    
    (33,593
    )Other
    
    
    170
    
    
    
    78
    
    
    
    (67
    )Total provision (benefit)
    
    $
    10,238
    
    
    $
    8,786
    
    
    $
    (25,176
    )
    October 31,2006
    
    
    2005Deferred tax assets:Accruals and reserves
    
    $
    1,815
    
    
    $
    1,408Patents and trademarks
    
    
    309
    
    
    
    528Net operating loss carryforwards
    
    
    66,437
    
    
    
    77,833Deferred revenue
    
    
    4,271
    
    
    
    3,494Equity-based compensation
    
    
    1,306
    
    
    
    Other
    
    
    79
    
    
    
    214Total assets
    
    
    74,217
    
    
    
    83,477Deferred tax liabilities:Property, plant and equipment
    
    
    (10,513
    )
    
    
    (5,958
    )Acquired intangibles
    
    
    (3,051
    )
    
    
    (3,507
    )Goodwill
    
    
    (816
    )
    
    
    (559
    )Other
    
    
    (101
    )
    
    
    Total liabilities
    
    
    (14,481
    )
    
    
    (10,024
    )Total deferred tax asset
    
    
    59,736
    
    
    
    73,453Valuation allowance
    
    
    (18,586
    )
    
    
    (23,832
    )Deferred tax asset, net of valuation allowance
    
    
    41,150
    
    
    
    49,621Less: current deferred tax asset
    
    
    (1,181
    )
    
    
    (1,420
    )Long-term deferred tax asset
    
    $
    39,969
    
    
    $
    48,201
 64




---



##### 



17. EMPLOYEE 401(K) PLAN
  18. QUARTERLY FINANCIAL INFORMATION (unaudited)
  1st
    
    2nd
    
    3rd
    
    4thQuarter
    
    Quarter
    
    Quarter
    
    Quarter2006Total revenues
    
    $
    62,892
    
    
    $
    70,218
    
    
    $
    70,358
    
    
    $
    67,186Cost of revenues
    
    
    38,209
    
    
    
    42,975
    
    
    
    43,875
    
    
    
    43,694Income from operations
    
    
    9,295
    
    
    
    10,280
    
    
    
    8,717
    
    
    
    1,285
    (1)Net income
    
    
    5,583
    
    
    
    6,288
    
    
    
    5,299
    
    
    
    641
    (1)Net income per share, basic
    
    
    0.17
    
    
    
    0.20
    
    
    
    0.16
    
    
    
    0.02Net income per share, diluted
    
    
    0.17
    
    
    
    0.19
    
    
    
    0.16
    
    
    
    0.022005Total revenues
    
    $
    66,489
    
    
    $
    55,831
    
    
    $
    39,489
    (2)
    
    $
    56,043Cost of revenues
    
    
    38,906
    
    
    
    35,377
    
    
    
    25,690
    
    
    
    33,408Income (loss) from operations
    
    
    11,137
    
    
    
    4,951
    
    
    
    (587
    )(2)
    
    
    7,444Net income (loss)
    
    
    7,072
    
    
    
    3,433
    
    
    
    (109
    )(2)
    
    
    4,888Net income (loss) per share, basic
    
    
    0.24
    
    
    
    0.11
    
    
    
    (0.00
    )
    
    
    0.15Net income (loss) per share, diluted
    
    
    0.23
    
    
    
    0.11
    
    
    
    (0.00
    )
    
    
    0.15
 
 (1)
    
    In the fourth quarter of fiscal 2006, Martek recognized a charge of $4.7 million related to the
restructuring of plant operations (see Note 11).(2)
    
    In the third quarter of fiscal 2005, revenues declined due to a build-up of inventory by
certain customers. 65




---



##### 



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 of this 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 of this 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.
 66




---



##### 



PART III
 ITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
  Election of Directors
Board Committees
Section 16(a) Beneficial Ownership Reporting Compliance
 http://www.martek.com
 ITEM 11.
    
    EXECUTIVE COMPENSATION.
  Directors Fees
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.
  Certain Relationships and Related Transactions
 ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  Independent Auditors
 67




---



##### 



PART IV
 ITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
    Schedule II Valuation and Qualifying Accounts- Years Ended October 31, 2006 and 2005
    
    
    
    
    
    69
    68




---



##### 



In thousandsBalance at
    
    
    
    
    
    
    
    
    
    Balance atDescription
    
    Beginning of Year
    
    Additions
    
    Deductions
    
    End of YearYear ended October 31, 2006:Deferred tax
valuation allowance
    
    $
    23,832
    
    
    $
    
    
    
    $
    (5,246
    )
    
    $
    18,586Reserve for
inventory
obsolescence
    
    $
    1,500
    
    
    $
    500
    
    
    $
    (400
    )
    
    $
    1,600Year ended October 31, 2005:Deferred tax
valuation allowance
    
    $
    22,077
    
    
    $
    1,755
    
    
    $
    
    
    
    $
    23,832Reserve for
inventory
obsolescence
    
    $
    1,000
    
    
    $
    2,000
    
    
    $
    (1,500
    )
    
    $
    1,500
 69




---



##### 



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)
    
    January 16, 2007/s/ Peter L. Buzy

Peter L. Buzy
    
    Chief Financial
Officer, Treasurer
and Executive Vice
President for
Finance and
Administration
(Principal
Financial Officer
and Accounting
Officer)
    
    January 16, 2007/s/ James R. Beery

James R. Beery
    
    Director
    
    January 16, 2007/s/ Harry J. DAndrea

Harry J. DAndrea
    
    Director
    
    January 16, 2007/s/ Robert J. Flanagan

Robert J. Flanagan
    
    Director
    
    January 16, 2007/s/ Polly B. Kawalek

Polly B. Kawalek
    
    Director
    
    January 16, 2007/s/ Jerome C. Keller

Jerome C. Keller
    
    Director
    
    January 16, 2007/s/ Henry Linsert, Jr.

Henry Linsert, Jr.
    
    Director
    
    January 16, 2007
 70




---



##### 



Signatures
    
    Title
    
    Date/s/ Douglas J. MacMaster, Jr.

Douglas J. MacMaster, Jr.
    
    Director
    
    January 16, 2007/s/ John H. Mahar

John H. Mahar
    
    Director
    
    January 16, 2007/s/ Eugene H. Rotberg

Eugene H. Rotberg
    
    Director
    
    January 16, 2007
 71




---



##### 



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 27, 2006, and incorporated
by reference herein).3.06
    
    Certificate of Designation, Preferences and Rights of
Series B Junior Participating Preferred Stock (filed as
Exhibit 3.1 to the Companys current report on Form
8-K, File No. 0-22354, filed on February 8, 2006, and
incorporated by reference herein).4.01
    
    Specimen Stock Certificate for Common Stock.4.02
    
    Rights Agreement, dated as of February 7, 2006, between
the Company and Registrar and Transfer Company, as
Rights Agent (filed as Exhibit 4.1 to the Companys
current report on Form 8-K, File No. 0-22354, filed on
February 8, 2006, and incorporated by reference
herein).10.01
    
    Form Indemnification Agreement for directors.10.02
    
    1986 Stock Option Plan, as amended. +10.03
    
    Form of Proprietary Information, Inventions and
Non-Solicitation Agreement.10.04
    
    Lease, commencement date October 15, 1992, between the
Company and Aetna Life Insurance Company, as modified
on August 5, 1993.10.05
    
    License Agreement, dated September 10, 1992, between
the Company and Bestuurcentrum Der Verenigde Bedrijven
Nutricia B.V. (filed as Exhibit 10.01 to the Companys
current report on Form 8-K, File No. 0-22354, dated
December 15, 2006 and incorporated by reference
herein).*10.05A
    
    Exhibits to September 10, 1992 License Agreement
between the Company and Bestuurcentrum Der Verenigde
Bedrijven Nutricia B.V.*10.06
    
    License Agreement, dated October 28, 1992, between the
Company and Mead Johnson & Company (filed as Exhibit
10.02 to the Companys current report on Form 8-K, File
No. 0-22354, dated December 15, 2006 and incorporated
by reference herein).*10.06A
    
    Exhibits to October 28, 1992 License Agreement between
the Company and Mead Johnson & Company.*10.07
    
    License Agreement, dated January 28, 1993 between the
Company and American Home Products Corporation
represented by the Wyeth-Ayerst Division (Domestic
Version) and American Home Products Corporation
represented by its agent Wyeth-Ayerst International
(International Version) (filed as Exhibit 10.03 to the
Companys current report on Form 8-K, File No. 0-22354,
dated December 15, 2006 and incorporated by reference
herein).*10.07A
    
    Exhibits to January 28, 1993 License Agreements between
the Company and American Home Products Corporation
represented by the Wyeth-Ayerst Division (Domestic
Version) and American Home Products Corporation
represented by its agent Wyeth-Ayerst International
(International Version).*10.08
    
    Lease Modification Agreement, dated October 14, 1993
between the Company and Aetna Life Insurance Company.
 1




---



##### 



EXHIBITNUMBER#
    
    DESCRIPTION10.09
    
    Second Lease Modification Agreement, dated September
27, 1994, between the Company and Aetna Life Insurance
Company (filed as Exhibit 10.20 to the Companys annual
report on Form 10-K, File No. 0-22354, for the year
ended October 31,1995, and incorporated by reference
herein).10.10
    
    Directors Stock Option Plan (filed as Exhibit 4.1(b)
to the Companys Registration Statement on Form S-8,
File No. 33-79222, filed May 23, 1994, and incorporated
by reference herein). +10.11
    
    Martek Biosciences Corporation 1997 Stock Option Plan
(filed as Exhibit 4.1(e) to the Companys Registration
Statement on Form S-8, File No. 333-27671, filed May
22, 1997, and incorporated by reference herein). +10.12
    
    Third Amendment of Lease, dated August 1, 1997 between
the Company and M.O.R Columbia Limited Partnership
(filed as Exhibit 10.25 to the Companys annual report
on Form 10-K, File No. 0-22354, for the year ended
October 31, 1997, and incorporated by reference
herein).10.13
    
    Fourth Amendment of Lease, dated August 5, 1998 between
the Company and M.O.R Columbia Limited Partnership
(filed as Exhibit 10.26 to the Companys annual report
on Form 10-K, File No. 0-22354, for the year ended
October 31, 1998, and incorporated by reference
herein).10.14
    
    License Agreement, dated March 31, 2000 between the
Company and Abbott Laboratories (filed as Exhibit 10.30
to the Companys quarterly report on Form 10-Q for the
quarter ended April 30, 2000, and incorporated by
reference herein).10.15
    
    Martek Biosciences Corporation 2001 Stock Option Plan
(filed as Exhibit 10.01 to the Companys Registration
Statement on Form S-8, filed on November 16, 2001, and
incorporated by reference herein). +10.16
    
    Common Stock and Warrant Purchase Agreement, dated
February 28, 2001 by and among the Company and the
Selling Stockholders (filed as Exhibit 99.2 to the
Companys current report on Form 8-K, File No. 0-22354,
dated March 2, 2001 and incorporated by reference
herein).10.17
    
    Common Stock Purchase Agreement, dated December 17,
2001 by and among the Company and The Gordon S. Macklin
Family Trust (filed as Exhibit 10.34 to the Companys
annual report on Form 10-K, File No. 0-22354, for the
year ended October 31, 2001, and incorporated by
reference herein).10.18
    
    Form of Common Stock Purchase Agreement, dated December
17, 2001 by and among the Company and the Selling
Stockholders Trust (filed as Exhibit 10.35 to the
Companys annual report on Form 10-K, File No. 0-22354,
for the year ended October 31, 2001, and incorporated
by reference herein).10.19
    
    Martek Biosciences Corporation Amended And Restated
Management Cash Bonus Incentive Plan effective April
25, 2002 (filed as Exhibit 10.36 to the Companys
quarterly report on Form 10-Q, File No.0-22354, for the
quarter ended April 30, 2002, and incorporated by
reference herein). +10.20
    
    OmegaTech, Inc. 1996 Stock Option Plan, as amended on
April 26, 2001 (filed as Exhibit 10.37 to the Companys
quarterly report on Form 10-Q, File No. 0-22354, for
the quarter ended April 30, 2002, and incorporated by
reference herein). +10.21
    
    Employment Agreement dated April 25, 2002 between the
Company and James Flatt (filed as Exhibit 10.39 to the
Companys quarterly report on Form 10-Q, File No.
0-22354, for the quarter ended April 30, 2002, and
incorporated by reference herein). +10.22
    
    Settlement Terms Related to Arbitration of License
Agreement Dated September 15, 1993 between Pharmacia
Corporation, on behalf of Monsanto, and OmegaTech dated
May 10, 2000 (filed as Exhibit 10.41 to the Companys
quarterly report on Form 10-Q, File No. 0-22354, for
the quarter ended April 30, 2002, and incorporated by
reference herein).*10.23
    
    Agreement and Plan of Merger, dated March 25, 2002, by
and among the Company, OmegaTech, Inc. and OGTAQ Corp.
(filed as Exhibit 99.2 to the Companys current report
on Form 8-K, File No. 0-22354, filed on May 3, 2002 and
incorporated by reference herein).10.24
    
    First Amendment to the Agreement and Plan of Merger
dated as of March 25, 2002 by and among OmegaTech,
Inc., the Company, and OGTAQ Corp., dated April 24,
2002 by and among the Company, OmegaTech, Inc., OGTAQ
Corp. and Robert Zuccaro, in his capacity as the
Stockholders Representative (filed as Exhibit 99.3 to
the Companys current report on Form 8-K, File No.
0-22354, filed on May 3, 2002 and incorporated by
reference herein).
 2




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##### 



EXHIBITNUMBER#
    
    DESCRIPTION10.25
    
    Martek Biosciences Corporation 2002 Stock Incentive
Plan (filed as Exhibit 1 to the Companys Definitive
Proxy, Schedule 14A, filed on February 8, 2002 and
incorporated by reference herein). +10.26
    
    Second Amendment to the Agreement and Plan of Merger
dated as of March 25, 2002, as amended on April 24,
2002, by and among OmegaTech, Inc., the Company and
OGTAQ Corp., entered into as of July 27, 2002 by and
among Martek, Martek Biosciences Boulder Corporation
(formerly called OmegaTech, Inc.) and Robert Zuccaro,
in his capacity as the Stockholders Representative.
(filed as Exhibit 99.2 to the Companys current report
on Form 8-K, File No. 0-22354, filed on July 31, 2002
and incorporated by reference herein).10.27
    
    Amendment No. 3 to Settlement Terms Related to
Arbitration of License Agreement dated as of December
20, 2002 by and among Monsanto Company and Martek
Biosciences Boulder Corporation. (filed as Exhibit
10.48 to the Companys annual report on Form 10-K, File
No. 0-22354, for the year ended October 31, 2002, and
incorporated by reference herein).10.28
    
    License and Supply Agreement, dated June 13, 2003
between the Company and Nestec Ltd. (filed as exhibit
10.50 to the Companys quarterly report on Form 10-Q,
File No. 0-22354, for the quarter ended July 31, 2003,
and incorporated by reference herein).10.29
    
    Martek Biosciences Corporation 2003 New Employee Stock
Option Plan (filed as Exhibit 10.55 to the Companys
quarterly report on Form 10-Q, File No. 0-22354, for
the quarter ended July 31, 2003, and incorporated by
reference herein). +10.30
    
    Promissory Note payable to the order of Genencor
International, Inc., a Delaware Corporation, dated
January 26, 2004 (filed as Exhibit 10.61 to the
Companys annual report on Form 10-K, File No. 0-22354,
for the year ended October 31, 2003, and incorporated
by reference herein).10.31
    
    ARA Alliance, Purchase and Production Agreement by and
between the Company and DSM Food Specialties B.V.
(filed as Exhibit 10.63 to the Companys quarterly
report on Form 10-Q, as amended, File No. 0-22354, for
the quarter ended April 30, 2004, and incorporated by
reference herein). *10.32
    
    Sixth Amendment of Lease, dated May 13, 2004, by and
between M.O.R. CBC LLC and the Company (filed as
Exhibit 10.64 to the Companys quarterly report on Form
10-Q, File No. 0-22354, for the quarter ended April 30,
2004, and incorporated by reference herein).10.33
    
    Form of Stock Option Award Agreement under Martek
Biosciences Corporation 2003 New Employee Stock Option
Plan (filed as Exhibit 10.46 to the Companys annual
report on Form 10-K, File No. 0-22354, for the year
ended October 31, 2004, and incorporated by reference
herein). +10.34
    
    Form of Stock Option Award Agreement under Martek
Biosciences Corporation 2004 Stock Incentive Plan
(filed as Exhibit 10.47 to the Companys annual report
on Form 10-K, File No. 0-22354, for the year ended
October 31, 2004, and incorporated by reference
herein). +10.35
    
    Martek Biosciences Corporation Amended and Restated
2004 Stock Incentive Plan (filed as Appendix A to the
Companys Definitive Proxy, Schedule 14A, filed on
February 8, 2005 and incorporated by reference herein).
+10.36
    
    Form of Nonqualified Stock Option Agreement under
Martek Biosciences Corporation Amended and Restated
2004 Stock Incentive Plan (filed as Exhibit 10.1 to the
Companys Registration Statement on Form S-8, File No.
333-125802, filed June 14, 2005, and incorporated by
reference herein).10.37
    
    Amended and Restated Loan and Security Agreement by and
among the Company, as Borrower, and the Lenders party
thereto and Manufacturers and Traders Trust Company, as
Administrative Agent and Sole Book Runner, and Bank of
America, NA, as Syndication Agent, and SunTrust Bank,
as Documentation Agent, dated September 30, 2005 (filed
as Exhibit 10.1 to the Companys current report on Form
8-K, File No. 0-22354, filed on October 6, 2005 and
incorporated by reference herein).10.37A
    
    Form of Revolving Loan Promissory Note (filed as
Exhibit 2.1.1 to 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).
 3




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##### 



EXHIBITNUMBER#
    
    DESCRIPTION10.37B
    
    Form of Guaranty Agreement (filed as Exhibit 3.8(a) to
Exhibit 10.2 to the Companys current report on Form
8-K, File No. 0-22354, filed on October 6, 2005 and
incorporated by reference herein).10.37C
    
    Form of Security Agreement from Guarantors (filed as
Exhibit 3.8(b) to Exhibit 10.2 to the Companys current
report on Form 8-K, File No. 0-22354, filed on October
6, 2005 and incorporated by reference herein).10.37D
    
    Form of Stock Pledge Agreement (filed as Exhibit 3.9
to Exhibit 10.2 to the Companys current report on Form
8-K, File No. 0-22354, filed on October 6, 2005 and
incorporated by reference herein).10.37E
    
    Form of Lender Assignment and Acceptance Agreement (filed as Exhibit 10.1.2.(c) to Exhibit 10.2 to the
Companys current report on Form 8-K, File No. 0-22354,
filed on October 6, 2005 and incorporated by reference
herein).10.38
    
    Second Modification Agreement effective as of September
30, 2005 by and between Manufacturers and Traders Trust
Company, as Administrative Agent, the lenders named
therein, Martek Biosciences Corporation, Martek
Biosciences Boulder Corporation, and Martek Biosciences
Kingstree Corporation (filed as Exhibit 10.2 to the
Companys current report on Form 8-K, File No. 0-22354,
filed on October 6, 2005 and incorporated by reference
herein).10.39
    
    First Amendment to ARA Alliance, Purchase, and
Production Agreement (filed as Exhibit 10.01 to the
Companys quarterly report on Form 10-Q, File No.
0-22354, for the quarter ended January 31, 2006, and
incorporated by reference herein). *10.40
    
    Supply Agreement with Mead Johnson & Company dated May
17, 2006 (filed as Exhibit 10.01 to the Companys
quarterly report on Form 10-Q, File No. 0-22354, for
the quarter ended April 30, 2006, and incorporated by
reference herein).*10.41
    
    Letter Agreement between the Company and Henry Pete
Linsert, Jr. dated May 18, 2006 (filed as Exhibit 10.02
to the Companys quarterly report on Form 10-Q, File
No. 0-22354, for the quarter ended April 30, 2006, and
incorporated by reference herein). +10.42
    
    Form of Employment Agreement between the Company and Peter L.
Buzy dated November 10, 2006. **+10.43
    
    Form of Employment Agreement between the Company and Steve
Dubin dated December 21, 2006. **+10.44
    
    Form of Employment Agreement between the Company and Peter A.
Nitze dated November 10, 2006. **+10.45
    
    Form of Employment Agreement between the Company and David
Abramson dated November 10, 2006. **+10.46
    
    Form of Restricted Stock Unit Agreement for executives
under the Martek Bioscience Corporation Amended and
Restated 2004 Stock Incentive Plan. **+10.47
    
    Form of Restricted Stock Unit Agreement for directors
under the Martek Bioscience Corporation Amended and
Restated 2004 Stock Incentive Plan. **+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.**
 4




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##### 



*
    
    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.#
    
    Unless otherwise noted, all Exhibits are incorporated by reference as an
Exhibit to the Registrants Registration Statement on Form S-1 (No. 33-68522). The
registrant will furnish a copy of any exhibit upon receipt of a written request and the
payment of a specified reasonable fee which fee shall be limited to the registrants
reasonable expenses in furnishing such exhibit.+
    
    Denotes management contract or compensatory arrangement required to be filed as an exhibit to
this form. 5