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EXHIBIT 99.01


CAUTIONARY STATEMENTS FOR PURPOSES OF THE
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995

We desire to take advantage of the safe
harbor provisions of the Private Securities Litigation
Reform Act of 1995. Many of the following important factors
discussed below have been discussed in our prior SEC filings.

You should be cautioned that the following
important factors have affected, and in the future could affect,
our actual results. There may also be additional factors not
discussed in this report that could also affect future results.
These factors could cause our future financial results to differ
materially from those expressed in any forward-looking
statements made by us. Forward-looking statements may relate to
such matters as:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | our ability to generate future revenues;                                                
|
| |  | the commercialization of our products;                                                  
|
| |  | the expansion of our production facilities;                                             
|
| |  | the optimization of production costs; and                                               
|
| |  | our ability to enter into future business
    collaborations and marketing partnerships.

Forward-looking statements may include words such
as will, should, could,
anticipate, believe, plan,
estimate, expect, intend,
and other similar expressions. This list does not constitute all
factors which you should consider prior to making a decision to
invest in our securities. You should also not assume that the
information contained herein is complete or accurate in all
respects after the date of this filing. We disclaim any duty to
update the statements contained herein.



| |                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to successfully expand and
    scale up our production capacity or enter into favorable
    agreements with third parties to produce our oils or if our
    suppliers fail to produce and supply us with adequate amounts of
    oil, our customers may not be able to obtain a sufficient supply
    of DHA and ARA from us, and our future revenues from these
    products may be limited.

To meet our customers projected demand for
our nutritional oils that are used to supplement infant
formulas, we have developed a process for the large-scale
production of our oils at our Winchester, Kentucky and
Kingstree, South Carolina manufacturing plants. We estimate the
worldwide infant formula market to be approximately $8.5 to
$9.5 billion. If our licensees were to penetrate 100% of
this market with DHA and ARA supplemented formulas, we estimate
that we would receive greater than $400 million in revenues
annually from these sales. Our sales into the non-infant
nutritional supplement and food and animal feed markets to date
have been less than $10 million annually. Although we have
produced significantly more nutritional oils than our
customers initial projections, accelerated market demand
and a shortage of ARA from DSM that began in the first quarter
of fiscal 2004 have caused a production shortfall. Previously,
we requested from our customers that they provide us with longer
lead-times to fill their orders. Even with the longer lead-times
and an increase in production each quarter, we continue to limit
the orders we accept. To the extent that demand continues to
exceed our or DSMs current production capabilities, we may
be unable to provide the required quantities of oil
cost-effectively and may experience backlogs or our customers
may seek alternative sources of supply. Although some of our
licensees have a right to manufacture DHA and ARA, we are not
aware of any of our licensees doing so or preparing to do so. We
are in the process of expanding production capacity at our plant
in Kingstree, South Carolina and DSM is expanding its capacity
in Belvidere, New Jersey and Capua, Italy. We had production
capacity equaling between $270 and $280 million in
annualized sales of our nutritional oils at the end of fiscal
2004. Capacity is expected to increase each month throughout
fiscal 2005 and we expect to have production capacity equivalent
to approximately $500 million in annualized sales of our
nutritional oils during the second half of fiscal 2005 based on
current prices. Due to customer acceptance and qualification
requirements, there is a gap of approximately three months
between production capacity increases and potential sales
increases. Our ability to maintain commercial production at
these higher levels

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has not been successfully tested. As we increase
our production at our Kingstree plant, we may encounter many
risks associated with our commercial manufacturing such as:




| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the construction phase of our fermentation
    expansion at our Kingstree plant may not be completed in the
    timeframe that we have planned or at the projected cost;
|
| |  | 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;                                                                                                                                             
|
| |  | higher than anticipated product losses may result;                                                                                                                      
|
| |  | environmental and safety problems may result from
    our production process; and                                                                                       
|
| |  | additional regulatory issues relating to the
    scale-up of our production process may arise.                                                                          

If we were to experience any one or more of these
problems, there could be a material adverse effect on our
business, financial condition, and/ or results of operations.

Our future revenues from sales of DHA may be
limited if we are: (a) unable to cost effectively
manufacture our DHA-containing oil at our Winchester and
Kingstree plants; (b) unable to successfully expand our
production at our Kingstree facility; or (c) unable to
enter into other satisfactory third-party manufacturing
agreements; or if our licensees are able to find alternative
sources for DHA.

We have entered into an agreement with a
third-party manufacturer, DSM, to supply (except for limited
rights Martek retains) our ARA out of its plants in Capua, Italy
and Belvidere, New Jersey. If DSM fails to supply us with
required amounts of ARA under our agreement, we would not be
able to meet our customers demands unless we were able to
utilize alternative sources of supply. In this regard, we would
have to either manufacture the ARA at one or both of our plants,
which may be more costly and would also reduce our DHA oil
production capacity, or enter into other third-party
manufacturer supply agreements. If we are unable to find
alternative supply sources or are unable to cost effectively
manufacture the ARA in our Winchester or Kingstree plants, our
future revenues from sales of our oils may be limited.



| |                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A substantial portion of our nutritional
    oil products sales are made to four of our existing customers
    under agreements with no minimum purchase requirements. If
    demand by these customers for our nutritional oil products
    declines, our revenues may materially decline.

We rely on a substantial portion of our sales of
nutritional products to four of our existing customers.
Approximately 90% of our product sales revenue during fiscal
2004 was generated by sales of DHA and ARA to four customers.
Approximately 55% of these sales were to Mead Johnson and the
remaining sales were to Wyeth, Abbott Laboratories and Nestle
combined. We cannot guarantee that these customers will continue
to demand our nutritional products at current levels. None of
our license agreements requires our licensees to purchase any
minimum amount of products from us now or in the future, and
certain of our license agreements allow our licensees to
manufacture our products themselves or purchase nutritional oils
from other sources. If demand by any of these customers for our
nutritional products declines, we may experience a material
decline in our revenues.



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

In response to current and projected levels of
demand for our nutritional oils, we have been actively working
to accelerate our production build-out plans. To manage our
growth successfully we must implement, constantly improve and
effectively utilize our operational and financial systems while
expanding our production capacity and workforce. We must also
maintain and strengthen the breadth and depth of our current
strategic relationships while developing new relationships. Our
existing or planned operational and

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financial systems may not be sufficient to
support our growth; we may not successfully control production
costs and maintain current and anticipated gross profit levels;
and our management may not be able to effectively identify,
manage and exploit existing and emerging market opportunities.
If we do not adequately manage our growth, our business and
future revenues will suffer.




| |                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our oils are very sensitive to oxidation
    and are not very compatible with most 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.

Although we believe that the food and beverage
market could be a large market for DHA fortification with our
DHA-S oil, the potential in this market could be limited if
methods are not developed that allow good compatibility of our
DHA-S oil with various foods and beverages. The flavor, texture
and stability of finished products, such as cereals, milk and
nutritional bars enriched with our oils, have not yet been
successfully established. Even if we can successfully
incorporate our oils into foods and beverages, manufacturers of
these products will have to develop methods to demonstrate
feasibility in their production processes. The timing and extent
of our sales into the food and beverage market, therefore, are
dependent not only on market demand, but also on manufacturing
issues over which we have no control.



| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Since infant formula pricing is very
    competitive, the premium that our oils adds to the cost of the
    formula may never allow it to be priced at levels that will
    allow worldwide acceptance by consumers.

Infant formula pricing is very competitive and
the market is very sensitive to product price changes. Because
the inclusion of our oils into infant formula may add 10% to 20%
to the retail cost of standard infant formula, there is the risk
that our licensees may not be able to sell supplemented products
at prices that will allow them to gain worldwide market
acceptance while, at the same time, remaining profitable. This
may lead to price pressure on us. If we have to reduce our
prices, we may not be able to sell products at a price that
would enable us to be profitable. We are prohibited from
granting a license to any party for the inclusion of our
nutritional oils in infant formula with payment terms or royalty
rates that are more favorable than those provided to the
licensees under the terms of several of our current license
agreements without either the written consent of those current
licensees or prospectively offering such new more favorable
terms to those current licensees.



| |                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If market demand for our products continues
    to grow, we will need significant additional capital to expand
    our production capability. We may also 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.

Our nutritional oil sales are increasing, and
meeting projected demand will require expanding our production
capability for our nutritional oils. We are now in the process
of expanding or improving our Kingstree and Winchester
facilities. As of October 31, 2004, we had approximately
$42.7 million in cash, cash equivalents and short-term
investments as well as the $15.0 million unused portion of
our revolving credit facility available to meet future capital
requirements. As of October 31, 2004, we believe that
approximately $55 to $60 million may be needed over the
ensuing 12 months to complete the expansions and production
improvements as well as for other company-wide capital needs. We
also may require additional capital to fund our research and
development, product testing, and marketing activities. The
timing and extent of our additional cash needs will primarily
depend on: (a) the timing and extent of future launches of
infant formula products containing our oils by our licensees;
(b) the timing and extent of introductions of DHA into
foods and/or nutritional supplements for children and adults;
(c) whether or not we enter into collaborations with third
parties to produce our nutritional oils; and (d) our
ability to generate profits from the sales of our nutritional
products.

To continue to fund our growth, we will pursue
various sources of funding, which may include debt financing,
equity issuances, asset-based borrowing, lease financing, and
collaborative arrangements with partners. In January 2004, we
established a three-year secured revolving credit facility of
$85 million. In May

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2004, we amended and expanded this credit
facility to $100 million. This debt financing arrangement
will require us to comply with financial covenants, which we may
not be able to meet if demand for our products was to drop, if
there was a significant change in our financial position or if
our cash needs are greater than we currently anticipate.
Additionally, funding from other sources may not be available,
or may not be available on terms that would be commercially
acceptable or permit us to continue the planned
commercialization of our products or expansion of our production
capacity. In August 2004, our shelf registration statement was
declared effective by the SEC. The shelf registration enables us
to issue debt securities, preferred stock, common stock and
warrants in the aggregate amount of $200 million. Future
equity issuances may be dilutive to our existing shareholders.
If we obtain funds through collaborative or strategic partners,
these partners may require us to give them technology or product
rights, including patent rights that could ultimately diminish
our value. If we cannot secure adequate funding, we may need to
scale back our research, development, manufacturing, and
commercialization programs, which may have a material adverse
effect on our future business.




| |                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 effect of short-term events like product launches and
    license announcements.

We are a public growth company in the biosciences
sector. As frequently occurs among these companies, the market
price for our common stock may experience a high level of
volatility. During the fifty-two week period ending
October 31, 2004, our common stock closed between $44.67
and $70.99 per share. During the fifty-two week period
ending October 31, 2003, our common stock closed between
$15.40 and $58.55 per share. The following are examples of
items that may significantly impact the market price for our
common stock:



| |   |                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | announcements of technical innovations, new
    commercial products and product launches by us or our
    competitors;                                                                                  
|
| |  | arrangements or strategic partnerships by us or
    our competitors;                                                                                                                                    
|
| |  | announcements of license agreements, acquisitions
    or strategic alliances;                                                                                                                           
|
| |  | patent or other intellectual property
    achievements or adverse developments;                                                                                                                         
|
| |  | quarterly fluctuations in our results of
    operations;                                                                                                                                                
|
| |  | failure or delay in expansion and scale-up of our
    commercial manufacturing or failure or delay of our third-party
    manufacturers in expansion and scale-up of their commercial
    manufacturing;
|
| |  | failure to enter into favorable third-party
    manufacturing agreements;                                                                                                                               
|
| |  | regulatory decisions (approvals or disapprovals)
    or changes concerning our products and our competitors
    products;                                                                              
|
| |  | announcements related to threatened, new or
    existing litigation;                                                                                                                                    
|
| |  | changes in estimates of our financial performance
    or changes in recommendations by securities analysts; and                                                                                         
|
| |  | general market conditions for growth companies
    and bioscience companies.                                                                                                                            

Because we may experience a high level of
volatility in our common stock, you should not invest in our
stock unless you are prepared to handle a significant loss of
your capital. At any given time, you may not be able to sell
your shares at a price that you think is acceptable.

The market liquidity for our stock is relatively
low. As of October 31, 2004, we had 29,491,127 shares
of common stock outstanding. The average daily trading volume in
our common stock during the fifty-two week period ending
October 31, 2004 was approximately 660,000 shares.
Although a more active trading market may develop in the future,
the limited market liquidity for our stock may affect your
ability to sell at a price that is satisfactory to you.

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| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

As of October 31, 2004, we had
29,491,127 shares of common stock outstanding, stock
options outstanding to purchase an aggregate of approximately
4.0 million shares of common stock and warrants outstanding
to purchase up to approximately 31,000 shares of common
stock at an exercise price of $19.05 per share. Of these
options and warrants, approximately 3.2 million were
exercisable at January 13, 2005. Furthermore, we have filed
a universal shelf registration statement with the SEC, which was
declared effective in August 2004, pursuant to which we may
issue debt securities, preferred stock, common stock and
warrants to purchase debt securities, preferred stock or common
stock in an aggregate amount of up to $200 million. To the
extent that these options and warrants for our common stock are
exercised or we issue additional shares to raise capital to
increase production capacity or if our financial requirements
otherwise warrant, the increase in the number of our outstanding
shares of common stock may adversely affect the price for our
common stock. This could hurt our ability to raise capital
through the sale of equity securities. If we continue to require
additional outside sources of capital to finance, among other
things, our research and development, product testing and the
manufacturing and marketing of our products, we may need to
raise additional capital through the sale of equity securities.

We have agreed to issue and register for resale
up to 1,931,853 additional shares, to former OmegaTech
stockholders and option holders pursuant to our Agreement and
Plan of Merger with OmegaTech, if certain regulatory and
financial milestones are achieved by October 31, 2004. The
representative for these interest holders has asserted that
shares related to two of these milestones should be issued, an
assertion with which we do not agree. While we have not resolved
this matter, a substantial number of these additional shares
would be issued and become eligible for resale if it were
determined that these two milestones were achieved. See
Item 3 of Part I of this Form 10-K, Legal
Proceedings, for further discussion. The market price of
our common stock could decline as a result of sales of a large
number of shares of our common stock in the market or the
perception that these sales could occur, which could limit your
ability to sell at a price satisfactory to you.



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our current patents may not be able to
    provide protection against competitive products and we may be
    unable to protect our intellectual property portfolio in the
    future.

European and United States patent authorities
have not adopted a consistent policy regarding the breadth of
claims allowed for health and bioscience patents. Our issued
patents, or patents that we may obtain in the future, may not
afford adequate protection against competing technology because
governmental agencies may revoke our patents or may limit the
scope of our patents. If this happens, companies may be able to
produce products using our previously patented technology. A
number of our competitors have challenged our patents,
particularly in Europe:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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. Consistent with our request, the patent has
    been returned to the Opposition Division for a determination as
    to whether it has met the legal requirement of inventive
    step. A hearing is scheduled for November 2005 and the
    process is expected to take an additional 24 to 30 months
    to complete. Our opponents are seeking to accelerate the date
    for the scheduled hearing.
|
| |  | With respect to our ARA patent issued by the EPO,
    BASF AG, Friesland Brands B.V., and Suntory Limited have filed
    their grounds for opposing this patent with the Opposition
    Division of the EPO. The validity of the patent is unaffected by
    these filings. An initial hearing at the Opposition Division is
    scheduled for April 2005. The opposition process is not expected
    to be completed until some time in late 2006 or 2007.                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | 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
    have filed their grounds for                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | opposing this patent with the Opposition Division
    of the EPO. In November 2004, the Opposition Division of the EPO
    revoked Marteks European DHA/ ARA oil blends patent as a
    result of these challenges. The Company immediately filed an
    appeal of this decision; as a consequence, the blends patent has
    been reinstated and will remain in force during the appeal. The
    appeal process is anticipated to take 18 to 24 months to
    complete.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | 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. During the appeal process, the patent
    will remain in full force and effect. The appeal process is not
    expected to be completed until some time in 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | On September 23, 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 alleging infringement of two of our
    U.S. patents. The lawsuit alleges that Nutrinova and
    Celanese have been making, using, offering to sell, selling
    and/or importing into the United States DHA marketed under the
    brand name DHActiveTM that is made by a process and
    employs compositions that infringe the patents. On
    October 24, 2003, Nutrinova and Celanese filed
    counterclaims alleging inequitable conduct and invalidity,
    unenforceability and/or noninfringement of all our
    U.S. patents and rights. We also filed a patent
    infringement suit involving Nutrinova in Germany on
    January 16, 2004. Named as defendants were Nutrinova
    Nutrition Specialties & Food Ingredients GmbH and
    Celanese Ventures GmbH. The complaint alleges infringement of
    our European patent relating to DHA-containing oils. A hearing
    in the German case is now scheduled to be held in April 2005 and
    a scheduling hearing in the U.S. case is scheduled for
    January 2005.
|
| |  | Suntory has opposed our blended oil patent in
    Japan, where we believe there currently are no sales of infant
    formula containing our blended oils. The patent has been revoked
    by the Japanese Patent Office and the revocation upheld by the
    Tokyo High Court in September 2004. We have appealed this
    decision to the Japanese High Court. We believe that it is
    unlikely that the court will exercise its discretion and hear
    the matter. A similar situation exists with respect to our
    Japanese ARA patent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | With respect to our ARA patent in Korea, where we
    believe there are limited sales of infant formula containing our
    ARA oil, Suntory has also filed an opposition. A hearing on the
    matter has not been scheduled. Suntory has also initiated an
    invalidation case against our blended oil patent in Korea. Our
    response is due February 11, 2005. No hearing date has been
    set. At this point, it is not possible to indicate what the
    likely outcome of these two Korean matters will be.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

If any of the challenges described above or any
other challenges to our patents which may arise in the future
are successful, our competitors may be able to produce similar
products and, as a result, we may experience decreases in the
future sales of our nutritional oils, decreases in the royalty
revenues on sales of infant formula containing our oils and
decreases in license fees related to our oils. If our products
are found to infringe on the intellectual property rights of
others, we may have to pay substantial damages. The revocation
of our European DHA patent, ARA patent or blended-oils patent
could result in a decrease in revenues under our license
agreements.

We expect that in the future, as our nutritional
oils continue to be commercialized, opposition to our
intellectual property by our competitors will continue and most
likely increase. We believe that challenges to our suite of
U.S. patents may arise in the future. We may incur
substantial costs in the future protecting and defending our
patents and cannot be sure that we will be able to successfully
defend our patents or that our competitors will not be able to
design around our intellectual property.

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| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are aware of several products that are
    currently available, and products under development, that may
    present a serious competitive threat to our
    products.

Our success depends upon achieving and
maintaining a superior competitive position in the infant
formula and adult nutritional product markets. Many potential
competitors, which include companies such as BASF AG, Cargill,
Suntory Limited, Celanese Ventures and Nagase & Co.
Ltd., have substantially greater research and development
capabilities, marketing, financial and managerial resources and
experience in the industry. If a competitor develops a better
product or technology, our products or technologies may be
rendered obsolete.

We believe that, to date, we have developed the
purest forms of DHA and ARA oils commercially available in
significant quantities; however, we are aware that other sources
of DHA and ARA are or may be available. Specifically:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Ross Products Division of Abbott Laboratories
    filed a Generally Recognized as Safe notification on
    January 2, 2002 seeking FDA concurrence that its fish oil
    source of DHA and its fungal source of ARA are Generally
    Recognized as Safe when used as ingredients in infant formula.
    At this time, the notification continues to be under
    consideration by the FDA;                                                                                       
|
| |  | Suntory Limited and Cargill Inc, through a joint
    venture with a company in China, and a second, independent
    Chinese manufacturer have announced the intent to begin
    producing and distributing a fungal source of ARA;                                                                                                                                                                                                                                                    
|
| |  | some infant formulas now on the market outside
    the United States use DHA derived from other sources, such as
    fish or eggs;                                                                                                                                                                                                                                                                                                                                                    
|
| |  | some baby food products now on the market in the
    United States use DHA derived from eggs;                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | fish oil-based products currently dominate the
    adult DHA supplement market;                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | we are aware that Nutrinova is actively marketing
    a DHA-rich microalgal oil to the food and beverage and dietary
    supplement markets in the United States, China and Europe. We
    have filed a patent infringement suit against Nutrinova in both
    the United States and Germany;                                                                                                                                                                                         
|
| |  | we are aware that other companies, several with
    greater financial resources than ours, are developing
    plant-based DHA and other companies are developing chemically
    synthesized DHA; and                                                                                                                                                                                                                                                                                  
|
| |  | we are aware of the development of
    microencapsulated fish oil products by several large companies,
    including BASF and DSM. Although microencapsulation of the oil
    resolves many of the odor, stability and taste issues found with
    fish oil, a microencapsulated product currently is significantly
    more costly than regular fish oil. Because fish oil is
    significantly less costly than our DHA oil, fish oil presents a
    substantial competitive threat.

As of December 31, 2004, no other sources of
DHA and ARA have received clearance from the FDA for inclusion
in U.S. infant formulas.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Experts differ in their opinions on the
    importance of DHA and ARA in infant formula. Some experts feel
    that they are not necessary ingredients for infant development
    and that supplemented formulas will remain a premium product and
    never gain widespread acceptance. If this occurs, or if clinical
    trials that are now ongoing do not yield positive results on the
    benefits of DHA on cardiovascular or other health problems, our
    future revenues may be limited in the infant formula market,
    foods market and the nutritional supplement
    market.

Ultimately our success in the infant formula
industry depends on growing acceptance of our nutritional oils
as necessary or beneficial additives to infant formulas.
Notwithstanding existing clinical results that have demonstrated
the beneficial effects of adding our nutritional oils to infant
formula, some experts in the field of infant nutrition do not
believe that our nutritional oils are necessary or that they
provide any long-term beneficial effects. There have also been
clinical studies where no beneficial effects have been found,
possibly due to dose, duration or other factors. Experts
generally recommend that mothers breastfeed rather than use

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infant formulas whether or not they contain our
nutritional oils. Some experts also believe that infant formula
without our oils contains sufficient precursor fats that infants
can convert into DHA and ARA as needed. In addition, some
physicians are unimpressed by studies showing that infant
formulas fortified with our oils improve infants cognitive
ability at early ages, suggesting that these results may not
carry over to improved results later in life. Due to these
differences in opinion, we are subject to the risk that the use
of DHA and ARA in infant formula may never gain widespread
acceptance worldwide. As of October 31, 2004, our products
have been in the U.S. infant formula market for
approximately 32 months and we believe that these products
have penetrated more than 70% of the U.S. infant formula
market. Internationally, our products have been included in term
infant formula in over 30 countries. Many of these introductions
have occurred in the last three to four years.


In addition to sales into the infant formula
market, approximately 1% of product sales revenues in fiscal
2004 and fiscal 2003 came from sales of our nutritional oils to
the adult supplement market. Investigators at universities and
at other research centers, such as the National Institutes of
Health, have observed a relationship between low levels of DHA
and a variety of health risks. We are currently trying to
establish what contribution, if any, supplementation with our
oils will make in addressing these problems. Although clinical
data are not required to market food ingredients or nutritional
supplements outside of the infant formula market, we believe
that further clinical studies are needed to validate the
benefits of DHA supplementation. Accordingly, we are sponsoring
studies to further investigate the potential benefit of DHA
supplementation on cardiovascular health and we are aware of
research being conducted regarding the impact of DHA
supplementation on certain visual and neurological disorders.
Unless these studies, which are more extensive than earlier
pilot studies, establish and quantify the positive impact of DHA
supplementation, we may only have a limited adult market
opportunity.



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

In connection with the manufacture of certain of
our products, we are required to adhere to applicable current
good manufacturing practice (GMP)
requirements as required by the FDA. GMP regulations specify
component and product testing standards, control quality
assurance requirements and records and other documentation
controls. As the manufacturer of DHA and ARA that are marketed
as dietary supplements and used as ingredients in infant
formulas sold in the United States, and may be used in food and
beverages, we are subject to GMP and various other requirements
applicable to such products. There can be no assurance that we
will be able to continue to manufacture our nutritional oils in
accordance with relevant dietary supplement and infant formula
requirements for commercial use. Ongoing compliance with GMP and
other applicable regulatory requirements is monitored through
periodic inspections by state and federal agencies, including
the FDA and comparable agencies in other countries. A
determination that we are in violation of such GMP and other
regulations could lead to an interruption of our production
output and the imposition of civil penalties, including fines,
product recalls or product seizures, and, in the most egregious
cases, criminal sanctions.



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | Our corporate compliance program cannot
    guarantee that we are in compliance with all potentially
    applicable federal and state regulations.

Our business is subject to extensive federal and
state regulation. Current products and products in development
cannot be sold if we or our customers do not obtain or maintain
regulatory approvals. While we have developed and instituted a
corporate compliance program, we cannot assure you that we or
our employees are or will be in compliance with all potentially
applicable federal and state regulations. If we fail to comply
with any of these regulations a range of actions could result,
including, but not limited to, the failure to approve a product
candidate, restrictions on our products or manufacturing
processes, including withdrawal of our products from the market,
significant fines, or other sanctions.

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| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | Our business exposes us to potential
    product liability claims and recalls, and our insurance may not
    provide adequate coverage.

Our development, manufacture and marketing of
products involve an inherent risk of exposure to product
liability claims, product recalls, product seizures and related
adverse publicity. In addition, as only a small amount of our
oils resides in our customers end product, a recall of our
oils could impact a much larger recall of our customers
end products. Insurance coverage is expensive and difficult to
obtain, and we may be unable to obtain coverage in the future on
acceptable terms, if at all. Although we currently maintain
product liability and recall insurance for our products in the
amounts we believe to be commercially reasonable, we cannot be
certain that the coverage limits of our insurance policies or
those of our strategic partners will be adequate. If we are
unable to obtain sufficient insurance at an acceptable cost, if
a successful product liability claim is made against us, or if
there is a product recall, whether fully covered by insurance or
not, our business and future sales could be adversely impacted.



| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our opportunity in the U.S. infant
    formula market may be limited by the adoption or renewal rate of
    supplemented formulas into the Women, Infants and Children
    program.

We estimate that of our total current annual
U.S. market opportunity for sales of supplemented infant
formula, approximately half, or $70 million, will come from
Women, Infant and Children (WIC)-funded sales. Most
WIC state agencies provide only one brand of infant formula to
its participants, depending on which company has the rebate
contract in a particular state. Since early 2002, approximately
45 state WIC programs have adopted a brand of infant
formula supplemented with our oils. WIC is a federal grant
program that is state administered for the benefit of low-income
nutritionally at-risk women, infants and children. If our
licensees do not attempt to gain adoption of a supplemented
brand of infant formula in other states, other state WIC
agencies do not agree to adopt a supplemented infant formula
into their WIC program, supplemented formulas are removed from
WIC programs that previously adopted them, or if any of our
licensees fail to renew, in a timely fashion, their contract
awards from WIC agencies for the adoption of a supplemented
infant formula, then our future revenues from supplemented
infant formula sales in the U.S. would be limited.



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our manufacturing process involves the
    handling of hazardous materials and the mishandling of these
    hazardous materials could result in substantial costs and harm
    to our business.

In connection with our research and manufacturing
activities, we utilize some hazardous materials. We are subject
to federal, state and local laws and regulations governing the
use, storage, handling and management of hazardous materials and
specified waste products. The cost of compliance with these laws
and regulations could be significant. Moreover, we could be
subject to loss of our permits, government fines or penalties
and/or other adverse governmental or private party action if
such hazardous materials are used, stored, handled or otherwise
managed in violation of law or any permit. In addition, we could
be subject to liability if hazardous materials are released into
the environment. A substantial fine, penalty or judgment, the
payment of significant environmental remediation costs or
property or personal injury damages, or the loss of a permit or
other authorization to operate or engage in our ordinary course
of business could result in material, unanticipated expenses and
the possible inability to satisfy customer demand for our
nutritional oils.

On March 12, 2003, an explosion occurred at
a public wastewater treatment works in Winchester, Kentucky,
resulting in property damage. On April 8, 2003, we received
a report from the state fire marshal that concluded that the
incident resulted from the introduction of n-hexane into the
local sewer system. We use n-hexane in the production process
for our DHA oil. The state fire marshal report did not rule out
other possible contributors to the incident. Although n-hexane
was found at the site of the incident, there are other factors
which we believe may be relevant, including the presence of
other flammable substances that were not discharged from our
plant and existing conditions at the water treatment facility.
We have entered into active discussions relating to the cause of
and determination of responsibility for the property damage with
the Winchester Municipal Utilities Commission (WMU)
and its insurer. We have received and are analyzing information
from the utility and its insurer concerning the details of the
incident. We have entered into an agreement with the city of
Winchester, WMU, and WMUs insurer to extend any applicable
statute of limitations and allow the parties to continue
discussing this matter. We learned in March 2004 that the federal

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Environmental Protection Agency
(EPA), utilizing personnel from its Criminal
Investigation Division, had asked questions of current and
former employees relating to the explosion at the wastewater
treatment plant and n-hexane. Current and former employees have
testified before a federal grand jury that is investigating the
matter. As of October 31, 2004, we have recorded a
liability totaling approximately $1,000,000 as an estimate of
certain future costs that we might incur as a result of this
incident, including $500,000 recorded during the three months
ended October 31, 2004. Through October 31, 2004, we
have incurred and paid approximately $440,000 in legal fees
related to the incident. In addition to any potential
liabilities for property damage, this incident resulted in the
delay of the issuance of certain permits required for the
expansion of our existing Winchester plant and was a
consideration in our decision to begin immediate expansion at
our Kingstree, South Carolina plant. While we cannot be certain
of the ultimate outcome of our discussions with WMU and its
insurer or the EPA and grand jury activity, we believe that they
will not have a material adverse impact on our production,
financial condition or results of operations.




| |                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our adoption of the Financial Accounting
    Standards Boards SFAS No. 123 (revised 2004),
    Share-Based Payment, or alternative incentive
    compensation plans that we could adopt could result in our
    recognition of significant additional compensation
    expense.

In October 2004, the Financial Accounting
Standards Board concluded that SFAS No. 123 (revised
2004), Share-Based Payment
(SFAS 123R), would be effective for interim or
annual periods beginning after June 15, 2005. We currently
expect to adopt SFAS 123R in the quarter ended
October 31, 2005, and currently plan to apply
SFAS 123Rs modified prospective method, whereby a
company recognizes share-based employee costs from the beginning
of the fiscal period in which the recognition provisions are
first applied as if the fair-value-based accounting method had
been used to account for all employee awards granted, modified,
or settled after the effective date and to any awards that were
not fully vested as of the effective date. SFAS 123R and
the related accounting is described in more detail in
Note 2 to our audited consolidated financial statements
under the heading Recently Issued Accounting
Pronouncements. In December 2004 and January 2005, we
accelerated the vesting of certain unvested stock options
previously issued by us. The acceleration will enable us to
avoid recording approximately $28 million of future
compensation expense that would have been required to be
recognized under SFAS 123R. After giving effect to this
acceleration of vesting and based upon our projection of
unvested stock options at the implementation date of stock
options granted and outstanding as of November 30, 2004, we
expect the adoption to result in the recognition of additional
compensation expense of approximately $1.3 million in the
fourth quarter of fiscal 2005 and approximately
$3.3 million during fiscal 2006. In light of our
anticipated adoption of SFAS 123R, we and our compensation
committee are reevaluating our current incentive compensation
plans and may adopt new plans that involve equity, cash or other
forms of incentive compensation that may increase the absolute
amount or volatility of our future compensation expense.



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Changes in foreign currency exchange rates
    or interest rates could result in losses.

Beginning in January of 2004, our purchases of
ARA from DSMs Capua, Italy plant were denominated in
euros. Fluctuations in the euro-U.S. dollar exchange rate
can adversely impact our cost of ARA oil and our gross margins.
In the fiscal year ended October 31, 2004, we were somewhat
adversely affected by these fluctuations. To reduce the risk of
unpredictable changes in these costs, we may, from time to time,
enter into forward foreign exchange contracts. However, due to
the variability of timing and amount of payments under these
contracts, the forward foreign exchange contracts may not
mitigate the potential adverse impact on our financial results.



| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | We have significantly increased our
    manufacturing capacity, and have incurred substantial costs in
    doing so.

To achieve sufficient revenue from our
nutritional oils, we must be able to produce sufficient
quantities of our nutritional oils at approved facilities. In
connection with our efforts to alleviate supply constraints with
our infant formula licensees, we have completed an extensive
build-out in our Winchester, Kentucky facility and

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are in the process of completing an extensive
expansion of our Kingstree, South Carolina facility. The
build-out at these two facilities is expensive, and our ability
to recover the costs we incurred in the build-outs will depend
on increased revenue from, and greater manufacturing efficiency
achieved in the production of, our nutritional oils produced at
these facilities. There are no assurances that we will be able
to achieve these goals.


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