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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,
    2004                                              
|  
|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

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|Delaware                                                           |  | 52-1399362                                 
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification Number)

6480 Dobbin Road, Columbia, Maryland
21045

(Address of principal executive
offices)


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:
|                     |  |                                           
|NONE                 |  | NONE                                      

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $.10 par value

(Title of Class)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
last
90 days.     þ Yes          o No

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act).     þ Yes          o No

The aggregate market value of Common Stock held
by non-affiliates of the registrant as of April 30, 2004
was $1,693,466,394.

The number of shares of Common Stock outstanding
as of January 7, 2005 was 29,507,058.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrants
Definitive Proxy Statement for its 2005 Annual Meeting of
Stockholders (which will be filed with the Commission within
120 days after the end of the Registrants 2004 fiscal
year) are incorporated by reference into Part III of this
Report.



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MARTEK BIOSCIENCES CORPORATION

FORM 10-K

For The Fiscal Year Ended October 31,
2004

INDEX

|           |  |                                                                                                                      |    |  |    | 
|---------- |  | -------------------------------------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I    
|Item 1.    |  | Business                                                                                                             |    |  | 1  | 
|Item 2.    |  | Properties                                                                                                           |    |  | 24 | 
|Item 3.    |  | Legal Proceedings                                                                                                    |    |  | 24 | 
|Item 4.    |  | Submission of Matters to a
    Vote of Security Holders                                                              |    |  | 26 | 
|PART II   
|Item 5.    |  | Market for Registrants
    Common Equity, Related Stockholder Matters and Issuer Purchases
    of Equity Securities |    |  | 26 | 
|Item 6.    |  | Selected Financial Data                                                                                              |    |  | 27 | 
|Item 7.    |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                            |    |  | 28 | 
|Item 7A.   |  | Quantitative and Qualitative
    Disclosures about Market Risk                                                       |    |  | 42 | 
|Item 8.    |  | Financial Statements and
    Supplementary Data                                                                      |    |  | 43 | 
|Item 9.    |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                             |    |  | 68 | 
|Item 9A.   |  | Controls and Procedures                                                                                              |    |  | 68 | 
|Item 9B.   |  | Other Information                                                                                                    |    |  | 68 | 
|PART III  
|Item 10.   |  | Directors and Executive
    Officers of the Registrant                                                               |    |  | 68 | 
|Item 11.   |  | Executive Compensation                                                                                               |    |  | 68 | 
|Item 12.   |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters               |    |  | 68 | 
|Item 13.   |  | Certain Relationships and
    Related Transactions                                                                   |    |  | 69 | 
|Item 14.   |  | Principal Accountant Fees
    and Services                                                                           |    |  | 69 | 
|PART IV   
|Item 15.   |  | Exhibits and Financial
    Statement Schedules                                                                       |    |  | 69 | 
|Signatures |  |                                                                                                                      | 71 | 



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PART I

The information in this Form 10-K contains
certain forward-looking statements, including statements related
to markets for the Companys products and trends in its
business that involve risks and uncertainties. The
Companys actual results may differ materially from the
results discussed in the forward-looking statements. Factors
that might cause such a difference include those discussed in
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business as well as those discussed elsewhere in
this Form  10-K, including in Exhibit 99.01
incorporated by reference into this Form  10-K..






|        |          
|------- | ---------
|ITEM 1. | BUSINESS.

OVERVIEW

Martek Biosciences Corporation
(Martek, we, or the Company)
was incorporated as a business corporation under the laws of the
State of Delaware in 1985. Martek develops and sells products
derived from microalgae and other microbes. We have pioneered
the commercial development of microalgae into high value
products and product candidates consisting of nutritional
products and fluorescent detection products.

NUTRITIONAL PRODUCTS

Over the past ten years, we have developed
production methods and intellectual property for two important
fatty acids. These fatty acids are docosahexaenoic acid,
commonly known as DHA, and arachidonic acid, commonly known as
ARA. We sell oils containing these fatty acids as DHASCO®
and ARASCO®. We derive DHA from microalgae and ARA from
fungi, using proprietary processes. Cell membranes throughout
the body, especially in the brain, central nervous system,
retina and heart, contain these fatty acids. DHA and ARA may
help develop the eyes and central nervous systems of newborns
and DHA may promote adult mental and cardiovascular health. An
adult may obtain DHA via foods such as fish or organ meats and
ARA via foods such as red meats, fish and eggs. A pregnant
mother passes DHA and ARA through the placenta to a fetus and a
lactating mother passes DHA and ARA to an infant through breast
milk. While there are currently no universally recognized
guidelines for daily consumption of DHA, a workshop sponsored by
various groups, including the National Institutes of Health,
recommended that adults consume at least 220 mg of DHA
daily. The World Health Organization has issued similar
guidelines for infant nutrition. The U.S. Department of
Agriculture and other organizations in Europe and Asia have
compiled data showing dietary intake in Western-developed
societies is less than one-half of this level. We believe that
this possible dietary deficiency will result in an increase in
demand for DHA-supplemented products. The importance of ARA in
the adult diet is not yet known.

Investigators at the National Institutes of
Health and other research centers have observed a relationship
between low levels of DHA and a variety of health risks,
including increased cardiovascular problems, Alzheimers
disease and dementia as well as neurological and visual
disorders. We have and continue to sponsor ongoing studies to
further investigate the potential benefit of DHA supplementation
on cardiovascular health, Alzheimers disease and dementia,
and pregnancy and nursing. Additionally, we, as well as others,
are conducting research regarding the impact of DHA
supplementation on certain visual and neurological disorders.
Additional research is needed to assess the impact, if any, that
DHA supplementation will have on these health risks. We are
targeting the infant formula market, the adult nutritional
market, and the food and beverage market for our nutritional
oils.

In May 2001, the Food and Drug Administration
(FDA) completed a favorable review of our generally
recognized as safe (GRAS) notification for the use
of our DHASCO® and ARASCO® oil blend in specified
ratios in infant formulas. Since the first product introduction
in February 2002, supplemented term infant formulas manufactured
by four of our licensees have been sold in the United States:
Mead Johnson Nutritionals, under the Enfamil®LIPIL®
brand of products including term, pre-term, lactose-free and
soy-based products; the Ross Products Division of Abbott
Laboratories under its Similac®, Isomil®, and
NeoSure® brands of products including term, pre-term,
lactose-free and soy-based products; Nestle under its Good
Start® Supreme DHA & ARA brand and PBM Products
Inc., using infant formula product manufactured by

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Wyeth, under the brand Bright
BeginningsTM and under the private label brand for
Wal-Mart, Parents ChoiceTM.


Sixteen infant formula manufacturers, including
Mead Johnson Nutritionals, Wyeth, Abbott Laboratories, Nestle,
Royal Numico N.V. (formerly Nutricia), Novartis, Maabarot,
Heinz-Watties, Laboratorios Ordesa, American St. George
Biological Corporation, International Nutrition Company, PT
Sanghiang Perkasa, Takaso Rubber and three companies whose
identities we have agreed not to disclose at this time, have
licensed from us the right to include our nutritional oils in
their products. Collectively, these companies represent
approximately 70% of the estimated $8.5 to $9.5 billion
worldwide wholesale market for infant formula and almost the
entire estimated $3.0 to $3.5 billion U.S. wholesale
market for infant formula, including the wholesale value of
Women, Infant & Children program (W.I.C.)
rebates. W.I.C. is a federal grant program that is
state-administered for the benefit of low-income, nutritionally
at-risk women, infants and children. Our licensees are now
selling term infant formula products containing our oils
collectively in over 30 countries and pre-term infant formula
products containing our oils collectively in over 60 countries
around the world. Adult supplements containing our nutritional
oils are being sold in the United States and to a lesser degree
in certain European markets. In addition, our licensees have
recently launched new products in the United States and abroad
that contain our nutritional oils and target the markets for
children ages nine months to two years as well as pregnant and
nursing women.

In April 2002, we purchased OmegaTech, Inc.
(OmegaTech or Martek Boulder), a
low-cost algal DHA producer located in Boulder, Colorado.
OmegaTech had been in the fermentable DHA business since 1987,
and had accumulated over 100 issued and pending patents
protecting its DHA technology, which we refer to as DHA-S, as
the DHA is derived from a different alga than our DHA authorized
for addition to infant formula. In June 2003, the Commission of
the European Communities authorized the use of our DHA-S oil and
declared that our DHA-S oil may be sold in the European
Community as a Novel Food ingredient. This Novel Food
designation authorizes the use of our DHA-S as an ingredient in
certain foods such as certain dairy products, including cheese
and yogurt (but not milk-based drinks), spreads and dressings,
breakfast cereals, food supplements and dietary foods for
special medical purposes in the European Community. In February
2004, the FDA completed a favorable review of our GRAS
notification for the use of DHA-S in food and beverage
applications. We are currently selling DHA-S products into the
nutritional supplements, food and beverage and animal feed
markets domestically and internationally.

FLUORESCENT DETECTION PRODUCTS

We have also developed new fluorescent detection
products from microalgae that connect fluorescent algal proteins
to antibodies. Since the compound itself cannot be seen, the
connected antibodies (with their algal fluors) then attach to a
compound of interest to tag or mark that compound. Compound
detection is then made or not made based on whether the fluor is
seen. These products have potential applications in automated
biological screening to find new compounds or reduce drug
discovery time. Our products bring greater speed, sensitivity
and simplicity to existing tests and applications.

CONTRACT MANUFACTURING

We provide certain contract manufacturing
services at our Kingstree, South Carolina facility. These
services are provided to customers that were assumed by us in
connection with our acquisition of FermPro Manufacturing, LP
(FermPro) in September 2003. FermPro formerly
operated as a contract manufacturer. We anticipate phasing out
most of the contract manufacturing business over the next few
years as the contracts associated with the existing customers
expire.

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PRODUCTS AND PRODUCT CANDIDATES

NUTRITIONAL OILS



| |                            
| | ---------------------------
| | Infant Formula Applications

Certain microalgae and fungi produce large
quantities of oils and fats containing long-chain
polyunsaturated fatty acids, known as PUFAs that are important
to human nutrition and health. We have identified two strains of
microalgae that produce oils rich in DHA and have developed the
means to grow them by fermentation. In addition, we have
isolated and cultured a strain of fungus that produces large
amounts of ARA.

DHA is the predominant omega-3 fatty acid in the
brain and retina of the eye and is a key component of heart
tissue in humans and other mammals. Children and adults obtain
DHA primarily through their diets, particularly from fish and
organ meats. The human body can make DHA from its precursor,
alpha-linolenic acid (ALA), which is more prevalent in the diet,
but the process is inefficient. ARA is the principal omega-6
fatty acid found in the brain and is a precursor to a group of
hormone-like substances important in several vital functions of
the body. Dietary sources of ARA include meat, eggs and milk.

Both DHA and ARA are important for infant brain
development which occurs primarily in the last trimester
in-utero and in the first 12 months of postnatal life. For
a fetus, DHA and ARA are provided through the mothers
bloodstream via the placenta. For a nursing infant, these
nutrients are provided via breast milk. DHA and ARA
supplementation may be particularly important for premature and
low birth weight infants who may not get their full in-utero
allotment. Our DHA and ARA oils provide the closest available
match, with regard to the molecular form of these fatty acids,
to the DHA and ARA in breast milk and are blended in ratios
similar to that found in breast milk. Although DHA and ARA are
naturally present in breast milk, they were only added to
U.S. infant formulas beginning in 2002.

We believe that our DHA oil is more desirable for
infant formula applications than fish oil or other sources,
because it is derived from a vegetarian source, contains no
undesirable fatty acids in significant quantities such as
eicosapentaenoic acid (EPA), and does not contain
contaminants such as methylmercury, polychlorinated biphenyls
(PCBs) and dioxins that may be found in fish oil.
Additionally, our DHA and ARA oils are in an easily digestible
triglyceride form similar to that found in breast milk and have
higher oxidative stability and longer shelf life than fish oil.

Independent studies have indicated that the
mental development and visual acuity of infants are positively
affected by breast feeding and that breast-fed infants have
higher levels of DHA in their brain tissue and enhanced mental
acuity later in life when compared to those fed infant formula
not containing DHA. Further, studies have shown that infants fed
DHA and ARA fortified formulas exhibited improved mental and
visual development. This evidence is from retrospective studies
comparing intelligence in breast-fed versus formula-fed infants
and from intervention studies in infants using DHA and ARA
supplemented infant formula. Other studies have failed to report
beneficial effects with DHA and ARA supplemented infant
formulas; however, in general, these studies tested levels of
DHA and ARA lower than levels recommended by authoritative
bodies.

Although not all experts agree on the importance
of DHA and ARA oils in the infant diet, the following are
examples of some of the studies that have found benefits from
DHA and ARA supplementation in the infant diet:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Researchers at Baylor College of Medicine in
    Houston, Texas, reported at the Pediatric Academic
    Societies Annual Meeting in San Francisco, California
    in April 2004 that children whose mothers received 200 mg
    of Marteks DHA while nursing their infants during the
    first four months of life had improved attention skills at five
    years of age compared to children whose mothers received placebo
    during that early nursing period. The maternal DHA supplement
    resulted in 76% higher DHA levels in the breast milk. These
    investigators had previously reported at the Pediatric Academic
    Societies meeting in 2001 that these same children whose
    mothers received the DHA supplement during early

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | nursing had improved psychomotor skills at
    30 months of age compared to children whose mothers had
    received placebo. This study was partially funded by Martek.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | A study 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | In November 2001, results were presented from a
    multi-center European study which showed sustained advantages
    for infants fed formula supplemented with DHA and ARA. At six
    years of age, children who had received a DHA and ARA
    supplemented formula for the first four months of life had
    significantly lower diastolic blood pressure, were significantly
    faster at making correct choices, and showed more efficient
    information processing than unsupplemented children. Some of the
    results of this study were published in BMJ (British Medical
    Journal)in May 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | A study published in 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Research published from a National Institutes of
    Health (NIH)-sponsored study in the March 2000 issue
    of Developmental Medicine and Child Neurologyshowed a
    significant improvement in mental development in term infants
    given a commercially available infant formula supplemented with
    our DHA and ARA compared to infants fed the same formula, but
    without DHA and ARA. In the double-blind study, infants fed the
    diet supplemented with our oils showed, at 18 months of
    age, a mean increase of 7 points on the Mental Development Index
    (MDI) of the Bayley Scales of Infant
    Development II. Researchers reported that these data
    support a long-term cognitive advantage of infant dietary DHA
    supply during the first 4 months of life. The significant
    correlations . . . support the hypothesis
    that early dietary supply of DHA was a significant determinant
    of improved performance on the MDI. Although there are
    different sources of DHA and ARA, these findings reaffirmed the
    beneficial effects of adding Marteks pure source of
    preformed DHA and ARA to infant formulas at the levels evaluated
    by the researchers.
|
| |  | A NIH-sponsored study published in the August
    1998 edition of Pediatric Researchconcluded that early
    dietary intake of preformed DHA and ARA appears necessary for
    optimal development of the brain and eye. The study reported
    that healthy, full-term infants fed formula supplemented with
    our oils had visual development results consistent with
    breast-fed infants, but those fed formula without DHA and ARA
    had a deficiency of about one line on an eye chart.
    The study also indicated that infant formula without preformed
    DHA and ARA may put infants at risk for DHA deficiency, and
    suggested that the availability of dietary DHA during the
    critical developmental period may lead to persistent changes in
    the underlying neural structure and/or function of infants.                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | The January 1998 issue of Pediatrics, in
    an article entitled Breastfeeding and Later Cognitive and
    Academic Outcomes by Horwood and Fergusson (New Zealand),
    reported that, in an 18-year longitudinal study of over 1,000
    children, those who were breast-fed as infants had both better
    intelligence and greater academic achievement than those who
    were fed infant formula without DHA and ARA. The authors cited
    the importance of DHA in the neurological development of
    children and recommended the need to develop improved
    infant formulas with properties more similar to those of human
    breast milk that may lead to improved developmental outcomes in
    children. The study indicated that breast-fed babies have
    a 38% greater likelihood of completing their high school
    matriculation than formula-fed babies even after allowances were
    made for confounding social, familial and perinatal factors.
    Although the study did not conclude that DHA provided to the
    breast-fed infants from their mothers milk was the sole
    cause of the improved achievement scores, the authors pointed                                              

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| |  |                                                                                                                                                
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | out recent controlled intervention studies
    demonstrating similar outcomes in infants with DHA-supplemented
    formulas and concluded that:



| |                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | . . . the weight of evidence
    clearly favors the view that exposure to breast-feeding is
    associated with small but detectable increases in childhood
    cognitive ability and educational achievement, with it being
    likely that these increases reflect the effects of long-chain
    polyunsaturated fatty acid levels and, particularly, DHA levels
    on early neurodevelopment.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In the November 12, 1994 edition of The
    Lancet, a scientific journal published in the United
    Kingdom, scientists concluded that some components of
    breast-milk may have a beneficial effect on brain
    development. . . . arachidonic acid [ARA] and
    docosahexaenoic acid [DHA] should be considered as essential
    nutrients for infants because they are present in structural
    lipids in brain and nervous tissue.

In addition, DHA and ARA have been recognized as
important in the infant diet and recommended for inclusion in
infant formula by an expert panel of the United Nations Food and
Agricultural Organization and The World Health Organization
(FAO/ WHO), a NIH and International Society for the
Study of Fats and Lipids sponsored workshop, an expert panel
sponsored by the Child Health Foundation, and the British
Nutrition Foundation (BNF).

Our infant formula licensees are now selling term
infant formula products containing our oils collectively in over
30 countries and pre-term infant formula products containing our
oils collectively in over 60 countries around the world.
Supplemented term infant formulas manufactured by four of our
licensees are currently being sold in the United States. Our
sales of nutritional oils for infant formula were approximately
$161.3 million, $107.1 million and $40.8 million
in fiscal 2004, 2003 and 2002, respectively. Mead Johnson
Nutritionals accounted for approximately 55%, 57% and 54% of our
total product sales in fiscal 2004, 2003 and 2002, respectively.
Abbott Laboratories accounted for approximately 16%, 16% and 5%
of our total product sales in fiscal 2004, 2003 and 2002,
respectively. Wyeth accounted for approximately 11%, 14% and 25%
of our total product sales in fiscal 2004, 2003 and 2002,
respectively. In addition, due to the success of fortified
infant formula, several of our licensees have launched products
known as follow-on formula, which contain our oils and are
targeted for children ages nine months to two years of age.



| |                                                  
| | -------------------------------------------------
| | Applications for Pregnant and Lactating
    Women

In addition to the May 2004 study results
reported by Baylor College of Medicine described above
supporting the benefits of DHA supplementation during
breastfeeding, the BNF and FAO/ WHO Committees, which also
recommended the inclusion of DHA and ARA in infant formula, have
recognized the importance of DHA and ARA in pregnancy and
lactation.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A study published in the March 2003 issue of
    Obstetrics and Gynecologyfound that expectant mothers at
    risk for pre-term 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.                                                                                                                                                     
|
| |  | A study published in the January 2003 edition of
    Pediatricsfound that mothers who supplemented their diet
    with fatty acids rich in DHA during pregnancy and lactation 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 lactation 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.

Additional research is needed to further evaluate
DHA supplementation during pregnancy and lactation. We are
currently providing DHA supplements to several researchers who
are evaluating potential benefits of

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maternal DHA supplementation during pregnancy and
lactation on pregnancy outcomes and infant development.


Mead Johnson Nutritionals has recently launched a
product in the United States and GlaxoSmithKline has launched a
product in India, both of which contain our DHA oil and target
the market for pregnant and nursing women.



| |                                                       
| | ------------------------------------------------------
| | Cardiovascular Health and Other Human
    Applications

Investigators at universities around the world
and at other research centers, such as NIH, have observed a
relationship between low levels of DHA and a variety of health
risks, including increased cardiovascular problems,
Alzheimers disease and dementia and various other
neurological and visual disorders. We are currently trying to
establish what contribution, if any, supplementation with our
oils will make in addressing these problems. We are supporting
studies to further investigate the potential benefit of DHA
supplementation on cardiovascular health, and we, as well as
others, are conducting research regarding the impact of DHA
supplementation on certain visual and neurological disorders.

DHA and improved cardiovascular
health Discussed below are
the findings of several recently published studies that
highlight the benefits of DHA on cardiovascular health while
cautioning people of the potential risks associated with the
intake of certain fish.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In the November 19, 2002 edition of
    Circulation: Journal of the American Heart Association,
    the American Heart Association (AHA) issued a
    Scientific Statement entitled Fish Consumption, Fish Oil,
    Omega-3 Fatty Acids, and Cardiovascular Disease. The
    Scientific Statement outlines the findings of a comprehensive
    report that examined the cardiovascular health benefit of
    omega-3 fatty acids, specifically DHA and EPA, from fish
    sources. The report concluded that consumption of such omega-3
    fatty acids, either through diet or supplements, reduces the
    incidence of cardiovascular disease. The statement refers to
    studies that have indicated the following to be associated with
    the intake of omega-3 fatty acids:



| |   |                                               
| | - | ----------------------------------------------
| |  | decreased risk of sudden death and arrhythmia;
|
| |  | decreased thrombosis (blood clot);            
|
| |  | decreased triglyceride levels;                
|
| |  | decreased growth of atherosclerotic plaque;   
|
| |  | improved arterial health; and                 
|
| |  | lower blood pressure.                         



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Scientific Statement concluded that omega-3
    fatty acids have been shown in epidemiological and clinical
    trials to reduce the incidence of heart disease and recommends
    that healthy individuals eat a variety of fish (preferably oily)
    at least twice a week. The statement cautioned, however, that
    fish intake must be balanced with concerns about
    environmental pollutants because some species of fish may
    contain significant levels of methylmercury, polychlorinated
    biphenyls (PCBs), dioxins, and other contaminants.
    Both the FDA and the Environmental Protection Agency have
    advised children, pregnant women, women who may become pregnant
    and nursing mothers to limit their intake of certain fish. In
    consideration of the health risks posed by such contaminants,
    the authors of the statement conclude by stating, The
    availability of high-quality omega-3 fatty acid supplements,
    free of contaminants, is an important prerequisite to their
    extensive use. Marteks DHA oil is derived from a
    vegetarian source and is free of contaminants that may be found
    in fish oil.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The November 28, 2002 edition of the New
    England Journal of Medicinepublished the results of a study
    directed by a team of researchers at The Johns Hopkins
    University. This study weighed the cardiovascular benefit of DHA
    derived from fish consumption, as compared to the cardiovascular
    health risk posed by the mercury content in certain fish.
    Researchers found that while high DHA levels were directly
    correlated with a lower risk for cardiovascular disease, high
    mercury levels were directly

6



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##### 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | correlated with the risk of heart attack. Based
    on these findings, researchers concluded that, High
    mercury content may diminish the cardioprotective effect of fish
    intake.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | In December 2004, the findings of a study were
    published in The International Journal of Clinical
    Pharmacology and Therapeutics relating to the effects of
    Marteks DHA oil on endothelial function in children with
    high cholesterol (hyperlipidemia). Hyperlipidemia in
    children is a risk factor for early coronary heart disease.
    Clinical data demonstrated that when patients received a
    specialized diet supplemented with DHA, they showed improved
    endothelial function as compared to the specialized diet alone.
    Researchers found that when patients received DHA, they
    experienced significant improvements in their arterial flow,
    indicating that their arteries had become more flexible. These
    investigators also reported at the American Heart Association
    Scientific Sessions 2003 that DHA supplementation in these same
    children resulted in a favorable shift from small, dense LDL
    particles, known to be highly correlated with coronary heart
    disease, to large LDL particles. DHA supplementation also
    resulted in a significant favorable increase in HDL particle
    size. We provided supplements for this study at no cost and
    performed the fatty acid analysis.
|
| |  | Further supporting the beneficial role of DHA on
    lipids, investigators from Carolinas Medical Center reported
    their clinical study results at the American Heart Association
    Scientific Sessions 2003. Thirty eight mildly overweight men and
    woman were randomized to receive 1,500 mg of DHA daily for
    12 weeks. Those receiving supplementation experienced a
    9 percent increase in beneficial HDL cholesterol, an
    11 percent decrease in triglyceride levels, and a marked
    decrease in the small LDL particles that are highly correlated
    with coronary heart disease. In addition, large LDL particles
    were favorably increased. We provided supplements for this study
    at no cost.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Researchers at the University of Guelph, Ontario,
    Canada reported in the May 2004 issue of The American Journal
    of Clinical Nutrition that DHA supplementation of 32
    postmenopausal women with 2.8 g DHA from Marteks DHA oil
    per day for 1 month resulted in a significant 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 September 2004, the FDA announced that it
would allow conventional foods and dietary supplements
containing DHA and EPA to make a qualified health claim for
reduced risk of coronary heart disease on their product
packaging. A qualified health claim must be supported by
credible scientific evidence. Upon review of this scientific
evidence, the FDA concluded that supportive but not conclusive
research shows that consumption of DHA and EPA may reduce the
risk of coronary heart disease. This qualified health claim
supports the benefit of Marteks DHA-S oil, as it contains
both DHA and small amounts of EPA.

A number of clinical studies, including several
listed above, as well as others conducted by Australian and
European researchers and published in Hypertension in
1999, The American Journal of Clinical Nutrition in 1997
and 2000, Diabetes Care in 2003, and The European
Journal of Clinical Nutrition in 1996, have shown that pure
DHA sources, including Marteks DHA oil, exhibit the main
cardioprotective benefits traditionally ascribed to fish
consumption or to the combination of DHA plus EPA. Researchers
have shown that DHA, in the absence of EPA, has the following
effects on cardiovascular risk factors:



| |   |                                                                    
| | - | -------------------------------------------------------------------
| |  | reduces triglycerides and raises the HDL or
    good cholesterol;
|
| |  | reduces blood pressure;                                            
|
| |  | reduces heart rate; and                                            
|
| |  | increases LDL and HDL cholesterol particle size.                   

Other cell culture and animal studies have
demonstrated that pure DHA possesses anti-arrhythmic properties,
which many researchers believe confer protection against sudden
cardiac death.

7



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| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | DHA and reduction of the risk of
    Alzheimers disease and age related
    dementia 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The September 2004 edition of the journal
    Neuronpublished the results of an animal study conducted
    by the UCLA School of Medicine of 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | In November 2003, results from a study on a
    subset of subjects from the Framingham Study suggested that
    increasing DHA levels in the blood by eating more than two
    servings of fish per week was associated with up to a
    48 percent reduction in the risk of dementia in elderly men
    and women. The reduction in the risk of dementia was not
    correlated with EPA consumption. The study conducted over a ten
    year period included 899 men and women with a mean age of 75.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | A study published in the July 2003 edition of
    Archives of Neurology indicated 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. Additional research is needed to evaluate the role,
    if any, of DHA in reducing the risk of developing these diseases.

We have agreements with two companies to
distribute our Neuromins® DHA supplements to mass market
retail outlets. We also work with leading supplement
manufacturers who privately label and sell the Neuromins®
DHA supplements to natural food markets nationwide. In addition,
we have entered into an agreement with a company to encapsulate
our DHA-S oil and sell under a private label. In Europe, we have
entered into agreements with two distributors of the DHA-S oil
for use in foods, beverages and/or supplements. In the United
States, PBM Products has recently announced the launch of a
beverage product containing Martek DHA formulated for diabetics.

We are continuing to explore additional markets
for our DHA and DHA-S oils including use in pharmaceuticals and
functional foods. We are in discussions with several companies
in the nutritional and food and beverage markets to sell
products containing our DHA and DHA-S oils for cardiovascular
and other applications. We, along with our customers, are
developing other DHA delivery methods, including powders and
emulsions, to address these potential new markets.

Our sales of nutritional oils for adult
supplements, food additives and other products were
$4.0 million, $3.1 million and $2.2 million in
fiscal 2004, 2003 and 2002, respectively.

ADVANCED DETECTION SYSTEMS

We have identified, isolated and now sell
powerful fluorescent dyes from various microalgae for use in
drug discovery and diagnostic life science applications. Our
fluorescence technology is a sensitive and direct method for
detection of a specific binding event. That event could be a
receptor mediated binding, cell based binding, antibody driven
binding or essentially any event where one entity recognizes
another. Because of environmental concerns with the use of
radioactivity as a sensitive method of detection, higher
sensitivity detection technologies are in demand. The main
advantages of fluorescence as a method of detection is that it
is direct, fast, and relatively simple in that it does not
require enzymatic steps for signal amplification or prolonged
development times for signal measurement.

Our fluorescent detection products include the
following:

Phycobiliproteins
Classical direct fluorescent detection dyes, which we have
produced for several years, fill an existing market in protein
detection and flow cytometry. In 1999, we introduced our own
brand of improved fluorescent dyes (SureLight-APC®) to be
used for time resolved fluorescence applications in the

8



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high throughput screening market. We have entered
into a non-exclusive supply agreement with PerkinElmer Life
Sciences who has an extensive line of reagents that are used in
this market.


SensiLightTMdyes  Our SensiLightTM dye
technology was developed to match the sensitivity of
chemiluminescent methods. SensiLightTM dyes are
large, intensely fluorescent combinations of phycobiliproteins
that provide extreme sensitivity with ease of use that is
unmatched by other common dyes or detection systems. A 100-fold
improvement in sensitivity has been demonstrated with the
SensiLightTM dyes over existing direct fluorescent
dyes, and multiple new applications are now accessible by
simple, direct fluorescence. Such increased sensitivity allows:



| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | detection of receptors or small molecules at
    100-fold lower concentrations;      
|
| |  | detection with the same level of sensitivity but
    in 100-fold smaller volumes; and
|
| |  | detection with the same level of sensitivity but
    using much lower cost equipment.

Our SensiLightTM dyes have
demonstrated an increased sensitivity compared to other direct
detection dyes in all applications evaluated thus far. They
provide sensitivity similar to enzymatically amplified or
radioactive detection systems but with fewer steps, generating
more rapid results at lower costs. Our dyes have been used in
immunodiagnostic detection, microarrays, flow cytometry, western
blotting and other applications.

Due to these advantages, we have entered into a
royalty agreement with minimum royalty payment requirements with
EMD Biosciences (Merck KgaA) for the use of our
SensiLightTM dye in their Easy Assay
protein microarray platform. We also provide one of our
SensiLightTM dyes to Beckman Coulter, Inc. for use in
their A2 protein microarray platform, which they expect to
launch in first quarter 2005.

Our sales of advanced detection system products
were less than $1 million in each of the last three years.

TECHNOLOGY

We apply our microalgal expertise and culturing
technology to our library of live and preserved microalgal
species and related database to achieve technical and commercial
advantages. Certain fundamental and unique attributes of
microalgae allow for the development and production of our
products:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | microalgae are a genetically diverse kingdom of
    organisms that have a range of physiological and biochemical
    characteristics; thus, they naturally produce many different and
    unusual fats, sugars, proteins and bioactive compounds that may
    have commercial applications, such as the fatty acids that are
    the principal ingredients in our oils, and highly sensitive
    fluorescent diagnostic products;
|
| |  | microalgae comprise a large, substantially
    unexplored group of organisms, and thus provide a virtually
    untapped genetic resource that can be screened for a variety of
    new products, including pharmaceuticals; and                                                                                                                                                                                                  
|
| |  | many microalgae can be successfully cultivated
    using conventional large-scale fermentation techniques and
    equipment, enabling economical production of commercial
    quantities of these valuable products.                                                                                                                                                                                                             

Our scientists have discovered microalgal strains
which selectively produce DHA in large amounts and are amenable
to large-scale, heterotrophic culture using common commercial
fermentation equipment used in the pharmaceutical, food and
biotechnology industries under Good Manufacturing Practices
(GMP) conditions. These microalgal strains and the
conditions applied to achieve economical production of DHA form
an important basis of our intellectual property. Our scientists
also have developed and patented novel microalgal culturing
systems which allow for the commercial production of other
high-value compounds, such as fluorescent pigments, and for the
rapid evaluation and scale-up of other microalgae of potential
interest. Proprietary closed-system, illuminated
photobioreactors and numerous techniques for maintaining
microalgal monocultures form the basis of this technology.

9



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Our product development process involves the
following primary steps:

Identification of Appropriate
Microalgae.We select specific
microalgae to produce potentially marketable compounds through a
comprehensive process, which involves developing a search and
screening strategy based upon our extensive knowledge of
microalgal physiology and the unique role played by the target
compound in the survival of selected microalgal species,
searching scientific literature and our proprietary microalgal
database, and performing biochemical analyses and product-yield
experiments on candidate strains. We currently maintain an
increasing in-house collection of over 3,500 strains of
microalgae, which includes representatives of virtually all of
the significant taxonomic microalgal groups. Equally important
is our proprietary microalgal database, which contains
biochemical and physiological data on the strains in the
collection. We believe that our microalgal collection and
associated database are among the largest such resources
available in the world. We also have access to potentially
useful microalgal strains outside of our collection through
agreements with several research organizations. Coupled with our
extensive microalgal expertise, these resources are used to
identify organisms for initial testing. Further testing
ultimately results in the selection of production strains.

Optimization of Microalgae and Growth
Conditions.We apply standard
industrial microbiological techniques to microalgae and
manipulate culturing conditions (growth medium composition,
temperature, pH and light intensity) to optimize product yield
and productivity. After selecting strains with the best yields
and growth characteristics, we enhance their production through
conventional and commonly employed strain improvement
methodologies. We have not used genetic engineering techniques
to develop any of our existing products, but we may use these
methods for certain products currently in development.

Scale-up and Commercial
Production.Successful exploitation of
the unique characteristics of microalgae is in large measure
dependent upon the availability of large-scale culturing
technology. We have successfully scaled-up several microalgae
capable of producing large amounts of DHA heterotrophically
using common organic nutrients and salts. Heterotrophic
culturing of these DHA-producing microalgae at commercially
viable levels enables significantly lower production costs to be
achieved, which were not possible prior to our achievements.
Aspects of our technology for the heterotrophic growth of
DHA-producing microalgae are the subject of several
U.S. patents. Similar patents have been issued in certain
countries and are pending in certain other countries around the
world.

For other product applications, we use our
proprietary light-driven, closed-culture system photobioreactors
for microalgal production. Photobioreactors are closed to the
atmosphere and designed to make the most efficient use of light
while keeping contaminating microbes out of the culture. Using
our photobioreactors, we are able to culture isolated microalgal
strains without contamination and to manipulate such strains to
influence growth and biochemical makeup, thus efficiently
generating products of interest, including the culturing of
various algae for the production of powerful fluorescent dyes
used in our advanced detection systems. We use a series of
photobioreactors of varying sizes, controls and methods of
operation to achieve culturing consistency. Certain aspects of
these photobioreactors are the subject of U.S. patents.

U.S. Government Research and Development
Contracts.Certain of our early stage
technologies were funded in part by Small Business Innovation
Research grants. The U.S. Government has certain rights in
the technology that we developed with the funding. The
U.S. Government may exercise such rights under certain
limited circumstances.

COLLABORATIVE AND LICENSING
AGREEMENTS

We have entered into licensing agreements with
sixteen infant formula manufacturers, including Mead Johnson
Nutritionals, Wyeth, Abbott Laboratories, Nestle, Royal Numico
N.V. (formerly Nutricia), Novartis, Maabarot,
Heinz-Watties, Laboratorios Ordesa, American St. George
Biological Corporation, International Nutrition Company, PT
Sanghiang Perkasa, Takaso Rubber and three companies whose
identities we have agreed not to disclose at this time.
Collectively, these companies represent approximately 70% of the
worldwide wholesale market for infant formula. Under all of
these agreements, we received up-front license fees and will
receive either a) a flat rate price per kilogram upon the
sale of our oils to our

10



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licensees, or b) a transfer price on sales
of our oils to our licensees plus ongoing royalties based on our
licensees sales of infant formula products containing our
oils. The most significant license agreements have remaining
terms ranging from approximately 16 to 25 years, contain no
future funding commitments on our part or that of our licensees,
and may be terminated by our licensees upon proper notification
pursuant to the terms of each contract. Licensees have the right
to buy other sources of DHA and ARA oils provided they still
make royalty payments to us upon the sale of the final infant
formula product containing the oils that are covered by our
patents.


Under the terms of these licensing agreements,
our licensees are responsible for obtaining FDA and all other
necessary regulatory approvals with respect to these nutritional
oils. Under each of our current license agreements, our
licensees generally are obligated to indemnify us against
product liability claims relating to our nutritional oils unless
our nutritional oils do not meet agreed-upon specifications.

Under the terms of several of our current license
agreements, 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 to such licensee than those provided in our agreements
with our current licensees without either the prior written
consent of the current licensees or prospectively offering such
new favorable terms to these licensees. This restriction does
not apply to any lump sum payments to us pursuant to a
territorially restricted license under which the reduced payment
is reasonably related to the reduced marketing opportunities
available under such a restricted license.

In April 2004, we provided an exclusive license
to Advance Bionutrition (ABN), a start-up company
founded by a former officer of Martek, to sell certain ARA
byproducts as aquaculture feed. This license and supply
agreement has a term of three years and requires ABN to purchase
all such ARA byproducts produced by us, up to a certain maximum.
In addition, in August 2004, we granted ABN an exclusive license
in the aquaculture field and non-exclusive license in the animal
nutrition field for the sale of DHA. This agreement also has a
term of three years and provides for certain minimum inventory
purchases from Martek. We recognized revenues of approximately
$600,000 and $800,000 in fiscal 2004 and 2003, respectively,
from sales of products to ABN.

In November 2001, we sold the assets consisting
primarily of inventory and technology surrounding our former
stable isotope product line to Spectra Gases, Inc., a privately
held New Jersey company. As part of the agreement, we received
approximately $800,000 for the assets of the group. We also
retained an ongoing royalty from future reagent sales for five
years up to a maximum of $500,000 and also received a 9% equity
position and royalty interest in a new company that was formed
to pursue the nuclear magnetic resonance protein structures in
cell membranes. As of October 31, 2004, the value of the
investment in the new company was fully reserved. We recognized
approximately $100,000 in royalty revenue during both fiscal
2004 and 2003 in connection with this arrangement.

In April 2004, we entered into a new 15-year
agreement with DSM Food Specialties (DSM) under
which they continue to be our contract supplier for nutritional
oils containing ARA. Under the agreement, DSM will provide us
with 100% of our crude ARA oil needs on a cost plus margin
basis. The agreement also provides for the sale to us by DSM of
a license related to certain technologies associated with the
manufacture of ARA and provides us with the ability to produce
and sell ARA, to the extent allowed by the overall supply
agreement. This sale involved a license fee totaling
$10 million. Through this license and the overall supply
arrangement, we have the ability to produce, either directly or
through another third party, an unlimited amount of ARA. The
sale of such self-produced ARA is limited annually, however, to
the greater of (i) 100 tons of ARA oil or (ii) any
amounts ordered by us that DSM is unable to fulfill. We
anticipate being capable of producing ARA and having it
available for sale by the end of the second quarter of fiscal
2005. In addition, the agreement with DSM provides for the
granting to DSM by us of an exclusive license under certain of
our patents and intellectual property rights for the production
by DSM of products containing ARA that are not for human
consumption, including animal feed products. We and DSM have
also agreed to contribute our complementary resources to
cooperative marketing and joint research and development efforts
to expand the applications and fields of use for ARA, with both
parties sharing in the economic benefits of such efforts.

11



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In December 2003, we executed a collaboration
agreement with SemBioSys Genetics, Inc. (SemBioSys),
a Canadian biotechnology company, to co-develop DHA products
from plants. We anticipate spending approximately $700,000 to
$800,000 in fiscal 2005 related to this agreement, excluding
payments we may be required to make for milestones which may be
realized.

We have also entered into various additional
collaborative research and license agreements. Under these
agreements, we are required to fund research or to collaborate
on the development of potential products. As of October 31,
2004, we were not committed to fund any future development
activities under these arrangements. Certain of these agreements
also commit us to make payments upon the occurrence of certain
milestones and pay royalties upon the sale of certain products
resulting from such collaborations.

MANUFACTURING

We manufacture oils rich in DHA at our
fermentation and oil processing facilities located in
Winchester, Kentucky, and Kingstree, South Carolina by
conventional fermentation processes. We acquired the Winchester
facility in 1995 and the Kingstree facility in 2003 through the
acquisition of FermPro Manufacturing, LP. The oils that we
produce in these facilities are certified kosher by the Orthodox
Union and are certified Halal by the Islamic Food and Nutrition
Council of America. We completed an expansion of our Winchester
facility in 2003. During fiscal 2004, we commenced and are now
nearing completion of an extensive expansion at our Kingstree,
South Carolina location for the fermentation and processing of
our nutritional oils. The overall expansion is expected to cost
approximately $180 million when complete. Certain
components of the initial phase of the expansion, including the
first addition to the fermentation area, commenced commercial
operation during the last six months of fiscal 2004. The second
expansion phase is expected to commence commercial operation in
the second quarter of fiscal 2005.

Our ARA oils have historically been purchased
from DSM as manufactured at its Capua, Italy plant. During
fiscal 2004, DSM added production capacity in the U.S. by
converting existing facilities in Belvidere, New Jersey to the
production of ARA. In June 2004, DSM restarted the production
line at the Belvidere facility after a shutdown relating to a
fire incident in May 2004. Since that time, Belvidere has
continued to increase its monthly output of ARA. DSM is
currently expanding its ARA production capabilities at both
facilities. We are now receiving approximately 40% of our ARA
from DSMs Belvidere facility with that percentage expected
to grow to approximately 70% as DSM completes its current
expansion at Belvidere, in phases, over the next 12 to
16 months. As part of the April 2004 agreement with DSM, we
are required to guarantee the recovery to DSM of certain
expansion costs incurred by them. This guarantee, which
currently relates to DSMs recent Belvidere expansion, will
decline in value as we purchase ARA from DSM in the future. As
of October 31, 2004, the value of our current guarantee to
DSM is approximately $3.1 million. In addition, we are in
the process of negotiating an amendment to the April 2004
agreement with DSM. This amendment is expected to establish the
overall economics associated with DSMs current expansions
at both facilities, including our guarantee of such expansion
costs. Because DSM is a third-party manufacturer, we do not have
full control over the timing and extent of its Capua and
Belvidere production volumes.

We have attempted to reduce the risk inherent in
having a single supplier, such as DSM, through certain elements
of a new supply agreement entered into with DSM in April 2004.
In connection with the new agreement, we have licensed the DSM
technology associated with ARA production. Through this license
and the overall supply arrangement, we have the ability to
produce, either directly or through another third party, an
unlimited amount of ARA. The sale of such self-produced ARA is
limited annually, however, to the greater of (i) 100 tons
of ARA oil or (ii) any amounts ordered by us that DSM is
unable to fulfill. We anticipate being capable of producing ARA
and having it available for sale by the end of the second
quarter of fiscal 2005. To further reduce our ARA production
risk, we have directly engaged and recently added a new
U.S.-based provider of certain post-fermentation ARA
manufacturing services. Historically, these services had been
provided by two European vendors through DSM. Along with
existing ARA extraction capabilities at Winchester and our
pending ARA extraction capabilities at Kingstree, which we
anticipate being available by the second quarter of fiscal 2005,
the addition of a new third-party facility will give us multiple
U.S. sites for the downstream processing of ARA.

12



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When combining our current and projected DHA
production capabilities in Winchester and Kingstree with
DSMs current and projected ARA production capabilities in
Italy and the U.S., we had total production capacity equivalent
to 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. A portion of
this capacity is reserved for future production of DHA-S. We
also believe that production optimization efforts will continue
at our plants for the next several years as new technologies and
additional algal strains are tested to further increase output
and reduce costs.

If, however, the production expansion in
Kingstree does not proceed as planned or if DSM is not able to
further expand its ARA production capacity in the U.S., our
ability to produce at these forecasted levels may be negatively
impacted. To meet demand in excess of these levels, we will need
to do one or more of the following:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | further expand our production facilities in
    Winchester and Kingstree;               
|
| |  | build another production facility to manufacture
    our oils; or                       
|
| |  | enter into additional agreements with third-party
    manufacturers to produce our oils.

We also have several other contractual agreements
with third-party manufacturers to assist in the production of
our nutritional oils. Most significantly, we have a production
agreement with C.P. Kelco U.S. Inc. (C.P.
Kelco) that we assumed with the purchase of OmegaTech for
the production of DHA-S biomass that we sell to animal feed
companies or process further for use in the adult supplement and
food and beverage markets. We currently have a minimum purchase
commitment with C.P. Kelco that expires on June 30, 2006
with possible annual renewals. As of October 31, 2004, our
remaining obligation was approximately $4.1 million.

The commercial success of our nutritional oils
will depend, in part, on our ability to manufacture these oils
or have them manufactured at large scale and at a commercially
acceptable cost. If the production expansion in Kingstree does
not proceed as planned, if DSM is not able to complete the
production expansion in Belvidere, or if market demand subsides
due to our inability to meet demand for our products, our
results could be negatively impacted. There can also be no
assurance that we will be able to successfully optimize
production of our nutritional oils, or continue to comply with
applicable regulatory requirements, including GMP requirements.
Under the terms of several of our infant formula licenses, our
licensees may elect to manufacture these oils themselves. We are
currently unaware of any of our licensees producing our oils or
preparing to produce our oils, and estimate that it would take a
licensee at least one year or more to implement our process of
making our oils.

SOURCES OF SUPPLY

Our raw material suppliers for production of DHA
oil include major chemical companies and food ingredient
suppliers. We have identified and validated several sources for
each of our major ingredients and have not had problems
obtaining adequate quantities of any of these materials.

Since fiscal 2003, the demand for our nutritional
oils for use in infant formula products significantly exceeded
our ability to supply them. These shortfalls have resulted from
an acceleration of such demand over what our customers had
projected coupled with a shortage of ARA production capacity
from DSM that began in the first quarter of fiscal 2004. To
date, crude ARA oil has been provided to us by third-party
processors. DSM, through a fermentation process, produces a
fungal biomass rich in ARA oil, which is then sent to a separate
vendor for extraction of the oil. After extraction, the crude
ARA oil is sent to our production facilities for final
processing. We do not currently have an alternate outside source
for the purchase of ARA crude oil. As noted above under
Manufacturing, we recently obtained a license from
DSM to begin producing ARA at our facilities and we anticipate
being able to commence production of a limited amount of ARA and
having it

13



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available for sale by the end of the second
quarter of fiscal 2005. Our production capabilities with respect
to ARA, however, are untested. As such, we believe that after
completing its expansion, DSM will be able to fill our ARA needs
for at least the next several years. If DSM fails to supply us
with the required amounts or we are not able to produce
sufficient quantities of ARA to make up the shortfall, we may
not be able to fulfill customer orders and the result would be
some disruption to our customers.


RESEARCH AND DEVELOPMENT

The primary focus of our research and development
activities has been the development and optimization of
manufacturing processes for our nutritional oils. We perform
research and development at three facilities: Columbia,
Maryland, Winchester, Kentucky and Boulder, Colorado.
Approximately 60% of our research and development expenditures
in fiscal 2004 were associated with development activity at the
Columbia, Maryland lab directed toward improving the quality,
sensory properties and stability of our nutritional oils,
optimizing production characteristics of microalgal strains,
investigating the clinical health benefits of DHA and ARA fatty
acids, and exploring the biochemical pathways utilized by
microalgae to produce DHA. Additional research and development
expenses incurred at our Winchester, Kentucky laboratory and
manufacturing facility were directed towards increasing our
production yields, reducing waste and continuing to improve the
quality of our oils. Research conducted at our lab in Boulder,
Colorado is focused on developing feasible approaches to the
expression of nutritional fatty acids, especially DHA, in plant
oilseeds, investigating the feasibility of utilizing our
proprietary genes to produce other bioactive compounds with
application in the healthcare fields and developing new
ingredient forms and applications technology for DHA-enriched
food products. In addition, during fiscal 2004, SemBioSys
commenced research pursuant to the collaborative agreement with
us, which focuses on the development of plant-based DHA. We
incurred total research and development expense of approximately
$18.6 million, $13.2 million and $12.2 million in
fiscal 2004, 2003 and 2002, respectively.

SALES AND MARKETING

Our nutritional oils are marketed and sold
primarily to the infant formula, nutritional supplement and
functional foods industries. Infant formula manufacturers are
required to purchase a license from us in order to use our DHA
and ARA oils in infant formula. To date, we have entered into
license agreements with sixteen infant formula manufacturers who
represent approximately 70% of the worlds wholesale infant
formula market. Due to the success of the fortified infant
formula products, several of our licensees have also launched
products known as follow-on formula, which contain our oils and
are targeted to children ages nine months to two years of age.
In addition, Mead Johnson Nutritionals has recently launched a
product in the United States and GlaxoSmithKline has launched a
product in India, both of which contain our DHA oil and target
pregnant and nursing women.

Neuromins® DHA, our line of dietary
supplements, is sold through many leading supplement
manufacturers and is available in nutritional and health
products stores nationwide. We also sell our supplement line
directly to consumers and healthcare professionals through a
toll-free customer service center. We are currently marketing
food and beverage and animal feed applications to both U.S. and
international companies. Several egg producers, including Gold
Circle Farm®, are producing eggs and liquid eggs using our
DHA. These eggs are sold in several grocery store chains in the
U.S. and Europe.

Consumer marketing efforts are performed
primarily by our customers although we play a supportive role.
Our infant formula licensees market their DHA and ARA
supplemented formulas directly to the consumer and healthcare
professionals. Our nutritional supplement and functional foods
customers also create and implement their own advertising
campaigns. We support these efforts through trade show
participation and targeted direct mail campaigns as well as
limited national advertising.

Our line of advanced detection products is
designed for use in a wide range of drug discovery and research
applications. These products are marketed to large
pharmaceutical research institutions through distributors, such
as PerkinElmer Life Sciences Products, Beckman Coulter and
Kirkegaard & Perry Laboratories, who

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have entered into distribution agreements with
us. Our distributors perform most of the marketing surrounding
this product line. We support their efforts by attending
industry trade shows.


COMPETITION

The health care and biological sciences
industries are characterized by rapidly evolving technology and
intense competition. Our competitors include major
pharmaceutical, chemical, specialized biotechnology and food
companies, many of whom have financial, technical and marketing
resources significantly greater than ours. In addition, many
specialized biotechnology companies have formed collaborations
with large, established companies to support research,
development and commercialization of products and technologies
that may be competitive with our products and technologies.
Academic institutions, governmental agencies and other public
and private research organizations are also conducting research
and development activities that may be competitive with our
products. These organizations are seeking patent protection, and
may commercialize products and technologies on their own or
through joint ventures that are competitive with our products
and technologies. The existence of products and technologies of
which we are not aware, or those that may be developed in the
future, may adversely affect the marketability of the products
and technologies that we have developed.

The development of a DHA-containing fish oil for
infant formula applications provides an alternative to our DHA
nutritional oil. Fish oil is significantly less costly than our
DHA oil, and therefore presents a substantial competitive threat
to our DHA product line. Although fish oil is a lower cost
product relative to our DHA, it has odor, stability and taste
characteristics that may limit its usefulness in food products.
Several large companies, including BASF and F. Hoffman-LaRoche
Ltd., have developed microencapsulated fish oil products that
claim to have resolved much of the odor, stability and taste
issues associated with fish oil, but that have considerably
increased the cost of the product.

Published reports, however, have cited a number
of fish oils as containing chemical toxins not present in our
oils. In addition, we believe the combination of either fish oil
or microencapsulated fish oil with a microbial source of ARA for
use in infant formula would likely infringe upon our patent
position in several countries. Several large companies are
promoting ARA oil, but can only produce limited quantities and
we are unable to determine if these companies will present a
competitive threat to our ARA sales in the future.

The Ross Products Division of Abbott Laboratories
submitted a GRAS notification on January 2, 2002 seeking
FDA concurrence that its fish oil source of DHA and its fungal
source of ARA are GRAS when used as ingredients in infant
formula. At this time, the notification continues to be under
consideration by the FDA.

In November 2004, the Ross Products Division of
Abbott Laboratories received FDA approval for the restricted use
of Omacoronly for the treatment of hypertriglyceridemia
in adults. Omacoris a lipid-regulating agent which
includes both EPA and DHA from fish oil.

Small amounts of DHA and ARA can be derived from
egg yolk lipids, but DHA and ARA of this type are not in the
same molecular form as that predominantly found in breast milk
(i.e., phospholipid vs. triglyceride). DHA and ARA derived from
egg yolks are currently being added to some brands of infant
formula marketed by Royal Numico and DHA from egg yolks is also
being added to baby food by Beechnut. We believe that the
processes to produce DHA and ARA from egg lipids are more costly
than the processes that we use for producing DHA and ARA from
microbial sources. Furthermore, the addition of DHA and ARA from
egg yolks at levels equivalent to those found in human breast
milk will result in dietary levels of lecithin and cholesterol
far in excess of those found in human breast milk.

We believe that our nutritional oils have the
following advantages over fish oil and other currently available
sources of DHA and ARA for use in infant formula, as food
ingredients, or as nutritional supplements:



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our oils do not have the odor, stability, taste
    characteristics, or impurities that may limit the usefulness of
    DHA derived from fish oil;

15



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| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 contains no undesirable
    fatty acids in significant quantities such as EPA, which is
    found in fish oil;  
|
| |  | 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, amenable to
    the spray drying process required for powdered formula;                      
|
| |  | 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.                                                                             

At this time, our oils are the only DHA and ARA
oils cleared by the FDA for inclusion in infant formula in the
U.S.

Nutrinova, one of the operating units of Celanese
Ventures, is actively marketing a DHA-rich microalgal oil to the
food and beverage and dietary supplement markets in the U.S. and
overseas. We have filed patent infringement lawsuits against
Nutrinova and Celanese related to this matter. These lawsuits
are further described in Item 3 of Part I of this
Form 10-K, Legal Proceedings.

There may be other competitive sources of DHA and
ARA of which we are not aware. The fact that many of the
companies mentioned above are larger, more experienced and
better capitalized than us raises the significant risk that
these companies may be able to use their resources to develop
less costly sources of DHA and ARA than our current technology
permits.

In the area of advanced detection, our major
competitors consist of life science reagent suppliers such as
Amersham Pharmacia, Molecular Probes, Prozyme and Cyanotech. Our
diagnostic products compete primarily on the basis of product
efficacy, safety, patient convenience, reliability, price and
proprietary position.

Our competitive position will also depend on our
ability to attract and retain qualified scientific and other
personnel, develop effective proprietary products, implement
production and marketing plans, obtain patent protection and
secure adequate capital resources.

PATENTS, LICENSES AND PROPRIETARY
TECHNOLOGY

We have received numerous patents protecting our
nutritional products technology, including the fermentation
methods of producing our DHA and ARA oils, as well as the
blending of DHA and ARA oils for use in infant formula. In 1994,
we received a U.S. patent covering certain blends of a
microbial oil enriched with DHA and a microbial oil enriched
with ARA, as well as the use of such blends in infant formulas.
In 1995, we received a U.S. patent covering a process for
making an edible oil containing DHA and the edible oil made by
such process as well as a U.S. patent covering an infant
formula comprising a specified edible oil containing DHA. In
1996, we received two additional U.S. patents covering our
nutritional oils technology. The first patent protects
pharmaceutical compositions and dietary supplements comprising a
single cell oil in concentrations of at least 20% DHA in a
triglyceride form made using our method of producing DHA oil.
The second patent clarifies that our patent coverage includes
the blending, in infant formula and nutritional supplements, of
microbially derived ARA oil with low EPA fish oils. Fish oil is
a potential competitive source of DHA to Marteks
algal-derived DHA oil. This patent will make it more difficult
for low EPA fish oils to be combined with microbial sources of
ARA oils without violating our patents. A U.S. patent was
granted in 1997, which protects the production, use and sale of
oils rich in ARA (30% or greater concentration). In 1998, a
U.S. patent was issued protecting our DHA-rich algal
biomass. DHA-rich algal biomass is the raw product of the DHA
fermentation process and represents an inexpensive source of DHA
that may potentially be a low

16



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cost product itself. We also have been awarded a
number of foreign patents covering various aspects of our
nutritional oils, including European patents covering our DHA
and ARA-rich oils, as well as the blending of these oils for use
in infant formula.


We also own patents and applications that cover
algae fermentation processes, lipid extraction/purification,
genomic-based approaches to lipid production, arachidonic acid
production and use, animal feeding protocols, and food
applications for PUFAs, as a result of the OmegaTech purchase in
2002. From 1992 to 2001, six U.S. patents were issued
covering the use of algae in the production of omega-3 PUFAs
(e.g. DHA), and the use of such PUFAs in such products as human
food, animal feed, aquaculture and the resulting fortified meat,
seafood, milk and eggs. Additional patent applications directed
to this technology are still pending. From 1994 to 2003, eight
U.S. patents were issued covering the fermentation of
microorganisms in low chloride fermentation medium. Small
microorganisms, the use of such microorganisms in aquaculture,
and the resulting products are also claimed. Additional patent
applications covering this technology are still pending. From
1996 to 2003, five U.S. patents were issued covering the
use and production of ARA using a variety of fungi. Additional
patent applications covering this technology are still pending.
Other U.S. patents have been issued and a number of patents
are pending worldwide.

We are the exclusive licensee of two
U.S. patents and numerous foreign patent applications
covering production, sale and use of our SensiLightTM
dyes. We have U.S. and European patents and are the licensee of
two Patent Cooperation Treaty applications covering the
fractionation of lipids.

Our success is dependent in part on our ability
to obtain and maintain patent protection for our products,
maintain trade secret protection and operate without infringing
the proprietary rights of others. Our policy is to aggressively
protect our proprietary technology through patents, where
appropriate, and in other cases, through trade secrets.
Additionally, in certain cases, we rely on the licenses of
patents and technology of third parties. We hold approximately
66 U.S. patents, covering various aspects of our
technology, which will expire on various dates between 2007 and
2021. We have filed, and intend to file, applications for
additional patents covering both our products and processes as
appropriate. Currently, we have approximately 581 issued patents
and pending applications worldwide. There can be no assurance
that:



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

Furthermore, patent law relating to the scope of
claims in the fields of health care and biosciences is still
evolving, and our patent rights are subject to this uncertainty.
Our patent rights on our products therefore might conflict with
the patent rights of others, whether existing now or in the
future. Alternatively, the products of others could infringe our
patent rights. The defense and prosecution of patent claims are
both costly and time consuming, even if the outcome is
ultimately in our favor. An adverse outcome could subject us to
significant liabilities to third parties, require disputed
rights to be licensed from third parties or require us to cease
selling the affected products.

It is our corporate policy to vigorously protect
our substantial investment in the research and development of
our products and to continue to enforce our patent and other
intellectual property rights against third parties who engage in
the unauthorized manufacture, sale or use of our technology.

We currently have several challenges to our
European patents covering our DHA oils, ARA oils and DHA and ARA
blended oils and these challenges are described in Item 3
of Part I of this Form 10-K, Legal Proceedings.
Patent defense costs were approximately $1.4 million in
fiscal 2004.

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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 additional challenges to our
suite of U.S. patents may arise in the future. We will
likely incur substantial costs in the future protecting and
defending our patent and other intellectual rights.

If we fail to maintain patent protection for our
nutritional oils, it would have a material adverse effect on our
ability to gain a competitive advantage for these oils and may
have a material adverse effect on our results of operations,
particularly future sales of our nutritional oils and future
license fees related to sales of infant formula containing these
oils. In particular, if we fail to maintain patent protection,
it would permit our competitors to produce products that would
be directly competitive with our nutritional oils using similar
or identical processes, and it is possible that our current
infant formula manufacturers under license or those which may be
under license in the future may choose formula ingredients from
these competitors if they choose to include the ingredients in
their formulas at all.

We also rely on trade secrets and proprietary
know-how, which we seek to protect in part by confidentiality
agreements with our collaborators, employees and consultants.
There can be no assurance that these agreements will not be
breached, that we will have adequate remedies for any such
breach or that our trade secrets will not otherwise become known
or be independently developed by competitors.

GOVERNMENT REGULATION AND PRODUCT
TESTING

Our products and our manufacturing and research
activities are subject to varying degrees of regulation by a
number of state and federal regulatory authorities in the United
States, including the FDA pursuant to the Federal Food, Drug and
Cosmetic Act (the FDC Act). The products developed
by us are subject to potential regulation by FDA as food
ingredients, dietary supplements, drugs and/or medical devices.
The regulatory status of any product is largely determined by
its intended use.

Drugs and medical devices generally may not be
marketed without first obtaining FDA authorization to do so. New
infant formulas also are subject to premarket notification
requirements. Although there are no premarket authorization
requirements for whole foods per se, there are premarket
approval requirements for food additives. Specifically exempt
from the food additive definition and, therefore, the premarket
approval requirements, are generally recognized as safe
(GRAS) food ingredients. Dietary supplements for the
most part are not subject to premarket authorization
requirements, although there is a premarket notification
requirement for certain new dietary ingredients that were not
marketed as dietary supplements prior to October 1994. The FDA
has established detailed GMP, labeling and other requirements
for drugs, medical devices, infant formulas, foods and dietary
supplements. The requirements for drugs, medical devices and
infant formulas generally are much more stringent than the
requirements for foods and dietary supplements.

Our infant formula licensees are responsible for
obtaining the requisite regulatory clearances to market their
products containing our oils. Sales of our products outside the
United States are subject to foreign regulatory requirements
that may vary widely from country to country.

In May 2001, the Food and Drug Administration
completed a favorable review of our generally recognized as safe
notification for the use of our DHASCO® and ARASCO®
oil blend in specified ratios in infant formulas. The first DHA
and ARA supplemented infant formula introduced was Mead
Johnsons Enfamil® LIPIL® in February 2002. It is
now supported by other DHA and ARA supplemented Mead Johnson
products within their pre-term, lactose-free and soy-based
product lines. The Ross Products Division of Abbott Laboratories
has launched its DHA and ARA supplemented line, Similac®
Advance®, which includes term, pre-term, lactose-free and
soy-based products. Nestle has launched a supplemented formula
under the Good Start® Supreme DHA & ARA brand.
Finally, Bright BeginningsTM and private label
brands, such as Wal-Marts Parents
ChoiceTM, are produced by Wyeth Nutritionals and
distributed by PBM Products, Inc.

The federal Dietary Supplement Health and
Education Act of 1994 (DSHEA) regulates the use and
marketing of dietary supplements. We are currently selling
several lines of DHA dietary supplements. In addition, we are
researching and developing new applications for our DHA and ARA
oils. We believe that our

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DHA and ARA are not subject to premarket
notification requirements when marketed for use as dietary
supplements. There can be no assurance that the FDA would agree
that a premarket notification is not required or that we will be
able to comply with the requirements of DSHEA or any regulations
that the FDA may promulgate thereunder.


In June 2002, the Australia New Zealand Food
Standards Council authorized the use of DHA-S oil for use as a
Novel Food ingredient in Australia and New Zealand. In June
2003, the Commission of the European Communities authorized the
use of our DHA-S oil and declared that our DHA-S oil may be sold
in the European Community as a Novel Food ingredient. This Novel
Food designation authorizes the use of our DHA-S as an
ingredient in certain foods such as certain dairy products,
including cheese and yogurt (but not milk-based drinks), spreads
and dressings, breakfast cereals, food supplements and dietary
foods for special medical purposes in the European Community. In
February 2004, the FDA completed a favorable review of our GRAS
notification for the use of DHA-S in food and beverage
applications.

Our fluorescent detection and other products
derived from microalgae are subject to potential regulation by
FDA as either medical devices or as a combination medical
device/drug product to the extent that they are used in the
diagnosis, mitigation, treatment, cure or prevention of
diseases. Such classification would subject the products to
premarket clearances and/or regulatory approvals. There can be
no assurances that we or our licensees or collaborators would be
able to develop the extensive safety and efficacy data needed to
support such FDA premarket authorizations or that FDA ultimately
would authorize the marketing of such products on a timely
basis, if at all.

For potential pharmaceutical uses of products
derived from microalgae, there can be no assurance that required
clinical testing will be completed successfully within any
specified time period, if at all, with respect to our products.
Additionally, there is no assurance that we or our licensees or
collaborators will be able to develop the extensive data needed
to establish the safety and efficacy of these products for
approval for drug uses, or that such drug products will not be
subject to regulation as biological products or as controlled
substances, which would affect marketing and other requirements.

Many of our products are in research or
development phases. We cannot predict all of the regulatory
requirements or issues that may apply to or arise in connection
with our products. Changes in existing laws, regulations or
policies and the adoption of new laws, regulations or policies
could prevent us or our licensees or collaborators from
complying with such requirements.

Due to the cost and time commitment associated
with the FDA regulatory process, we will decide on a
product-by-product basis whether to handle relevant clearance
and other requirements independently or to assign such
responsibilities to our licensees or future collaborative
partners. There can be no assurance that we or our licensees or
collaborators will be able to obtain such regulatory clearances,
if required, on a timely basis or at all. Delays in receipt of,
or failure to receive, such clearances, the loss of previously
received approvals or clearances, or failure to comply with
existing or future regulatory requirements would have a material
adverse effect on our business, financial condition and results
of operations.

In connection with the manufacture of certain of
our products, we are required to adhere to applicable current
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. The GMP requirements for foods, infant formulas, drugs
and medical devices vary widely. 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, we are
subject to GMP and various other requirements applicable to
infant formulas and dietary supplements. There can be no
assurance that we will be able to continue to manufacture our
nutritional oils in accordance with relevant infant formula and
dietary supplement 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 the imposition of civil
penalties, including fines, product recalls or product seizures,
and, in the most egregious cases, criminal sanctions.

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As large scale manufacturing facilities, our
plants in Winchester, Kentucky and Kingstree, South Carolina are
required to abide by applicable federal and state environmental
and safety laws, including regulations established by the
Environmental Protection Agency (U.S. EPA) and
the Occupational Safety and Health Administration
(OSHA). In addition to the normal standards for
heavy industrial manufacturing facilities, our solvent
extraction process includes the use of hexane, which is
extremely flammable and subject to emission requirements.
Ongoing compliance with environmental and safety laws is
monitored by periodic inspections by the U.S. EPA and OSHA.
If we fail to abide by these laws we could receive fines, or if
the violations were serious enough, our operations could be shut
down until the problems are fixed. Such penalties could have a
material adverse effect on our ability to manufacture our
nutritional oils, and our financial results could be negatively
impacted. While the costs of our compliance with environmental
laws and regulations cannot be predicted with certainty, such
costs are not expected to have a material adverse effect on our
earnings or competitive position. Current estimates indicate
that total company-wide capital expenditures for environmental
compliance are not expected to be material in fiscal 2005. See
Item 3 of Part I of this Form 10-K, Legal
Proceedings, for further discussion.

The Federal Trade Commission (FTC)
regulates certain aspects of the advertising and marketing of
our products. Under the Federal Trade Commission Act, a company
must be able to substantiate both the express and implied claims
that are conveyed by an advertisement. It is not uncommon for
the FTC to conduct an investigation of the claims that are made
about products in new and emerging areas of science that involve
a potentially vulnerable population such as infants.

EMPLOYEES

As of October 31, 2004, we had
541 full-time employees, one of whom is an M.D. and 29 of
whom have Ph.D.s. Approximately 100 employees are engaged in
research and development and contract related research and
development activities, 343 are engaged in production or
production development related activities and 98 are in
administrative, business development, and sales and marketing
positions. We consider relations with our employees to be good.
None of our employees is covered by a collective bargaining
agreement.

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DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT

Our directors and executive officers are as
follows:

|                                |  |     |    |  |          |                                                         
|------------------------------- |  | --- | -- |  | -------- | --------------------------------------------------------
|Name                            |  | Age |    |  | Position
|                                |  |     |    |  |         
|James R. Beery(2)               |  |     | 63 |  |          | Director                                                
|Jules Blake, Ph.D.(1)           |  |     | 80 |  |          | Director                                                
|Robert J. Flanagan(3)           |  |     | 48 |  |          | Director                                                
|Ann L. Johnson, M.D.(1)         |  |     | 68 |  |          | Director                                                
|Henry Linsert, Jr.              |  |     | 63 |  |          | Chairman, Chief Executive Officer and Director          
|Gordon S. Macklin               |  |     | 76 |  |          | Director                                                
|Douglas J. MacMaster, Jr.(1)(3) |  |     | 74 |  |          | Director                                                
|John H. Mahar(1)                |  |     | 70 |  |          | Director                                                
|Sandra Panem, Ph.D.(2)          |  |     | 58 |  |          | Director                                                
|Richard J. Radmer, Ph.D.        |  |     | 62 |  |          | Director                                                
|Eugene H. Rotberg(2)(3)         |  |     | 74 |  |          | Director                                                
|David M. Abramson               |  |     | 51 |  |          | Senior Vice President, Business Development             
|George P. Barker                |  |     | 65 |  |          | Senior Vice President, General Counsel and
    Secretary
|Peter L. Buzy                   |  |     | 45 |  |          | Chief Financial Officer and Treasurer                   
|Steve Dubin                     |  |     | 51 |  |          | President                                               
|Barney B. Easterling            |  |     | 59 |  |          | Senior Vice President, Manufacturing                    
|James H. Flatt, Ph.D.           |  |     | 45 |  |          | Senior Vice President, Research and Development         
|Jerome C. Keller                |  |     | 62 |  |          | Senior Vice President, Sales and Marketing              



---



|    |                                                            
|--- | -----------------------------------------------------------
|(1) | Member of Compensation Committee                           
|   
|(2) | Member of Audit Committee                                  
|   
|(3) | Member of Nominating and Corporate Governance
    Committee



| |           
| | ----------
| | Directors:

Mr. Beeryserved as Senior Vice President and General Counsel for
SmithKline Beecham and subsequently GlaxoSmithKline from 1993
until his retirement in 2001. Prior to that, Mr. Beery
practiced law with international law firms in New York, Tokyo
and London, including serving as Managing Partner of the London
office of Morrison & Foerster, specializing in
strategic transactions and general corporate matters for a
variety of industries. Following his retirement from
GlaxoSmithKline, Mr. Beery is Senior Of Counsel to the
London office of Covington & Burling. Mr. Beery
also serves as a director for deCODE genetics, Inc. and Orchid
BioSciences, Inc. (biotechnology). Mr. Beery has been a
director of the Company since March 2004. His term expires in
2006.

Dr. Blakeserved as Vice President of Research and Development, and later
Vice President, Corporate Scientific Affairs, for
Colgate-Palmolive from 1973 until 1989. Following his retirement
in 1989, Dr. Blake accepted an appointment as Industrial
Research Institute Fellow at the Office of Science and
Technology Policy, Executive Office of the President, where he
served until 1991. Dr. Blake also serves as a director for
Gene Logic, Inc. (biotechnology). Dr. Blake has been a
director of the Company since 1990. His term expires in 2005.

Mr. Flanaganis
Executive Vice President of Clark Enterprises, Inc.
(Clark), one of the largest privately-held
construction companies in the United States. Prior to joining
Clark, Mr. Flanagan was the Treasurer, Secretary and member
of the Board of Directors of the Baltimore Orioles, Inc. and was
also employed as a member of Arthur Andersens audit
division in the Washington, D. C. office. Certified as a public
accountant in Washington, D.C., Mr. Flanagan has been
a director of the Company since April 2002. His term expires in
2006.

21



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##### 



Dr. Johnsonserved as a physician on the psychiatry staff of Mills Peninsula
Hospital and the neonatology staff of Childrens Hospital
Stanford from 1992 to 2001. Dr. Johnson has a private
practice in psychiatry and psychopharmacology. Dr. Johnson
has been a director of the Company since March 1995. Her term
expires in 2005.

Mr. Linsertjoined Martek as Chairman of the Board in 1988 and became Chief
Executive Officer in 1989. From 1987 to 1988 he was primarily
engaged as President of American Technology Investments Corp., a
consulting company specializing in the development and financing
of early stage companies in the Mid-Atlantic area. He was
President and Chief Executive Officer of Suburban Capital
Corporation, a venture capital subsidiary of Sovran Financial
Corporation (now Bank of America), from 1983 to 1987. Prior to
1983, Mr. Linsert was Vice President of Inverness Capital
Corporation, a small business investment company, and Vice
President of First Virginia Bank. He also served as a Captain in
the U.S. Marine Corps and as an artillery officer in
Vietnam. His term expires in 2005.

Mr. Macklinserves as a director of MedImmune, Inc. (biotechnology) and
Overstock.com (internet sales), and is a director, trustee, or
managing general partner, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds.
Mr. Macklin was formerly the Deputy Chairman of White
Mountains Insurance Group, Inc. from 2001 to 2004, Chairman of
White River Corporation (financial services) from 1993 to 1998,
President of the National Association of Securities Dealers,
Inc. (1970-1987) and Chairman of Hambrecht and Quist Group
(1987-1992). From 1998-2002, Mr. Macklin was also a member
of the Board of Directors of WorldCom, Inc. (now called MCI,
Inc). Mr. Macklin has been a director of Martek since 1998.
His term expires in 2006.

Mr. MacMasterserved in various management positions at Merck & Co.,
Inc. (Merck) from 1961 to 1988, at which time he was
appointed Senior Vice President responsible for ten divisions,
including Manufacturing and Technology, and Pharmaceutical
Manufacturing. Mr. MacMaster retired from Merck in 1991 and
currently serves as a director for Neose Technologies, Inc.
(biotechnology) and Stratton Mutual Funds.
Mr. MacMaster has been a director of the Company since
1993. His term expires in 2007.

Mr. Maharhas
served as President of Hillside Management, a consulting firm,
since 1992. From 1991 to 1992, Mr. Mahar was a Vice
President at Salomon Brothers Inc., serving as a principal for
the Venture Capital Fund. From 1985 to 1991, Mr. Mahar was
Executive Vice President and Chief Operating Officer of Elf
Technologies, Inc., a venture capital firm. Mr. Mahar was
reelected as a director of the Company in February 1993. Prior
to that time, he served as a director of the Company from 1988
until 1991. His term expires in 2007.

Dr. Panemis a
partner in Cross Atlantic Partners, an investment company
specializing in biotechnology and healthcare. Prior to 1999,
Dr. Panem was President of Vector Fund Management,
L.P. (VFM), which focused on later-stage companies.
Prior to joining VFM, she served as Vice President and Portfolio
Manager for the Oppenheimer Global BioTech Fund, a mutual fund
that invested in public and private biotechnology companies.
Prior to joining Oppenheimer, Dr. Panem was a Vice
President at Salomon Brothers Venture Capital, a fund focused on
early and later-stage life sciences and technology investments.
Dr. Panem has been a director of the Company since May
1995. Prior to that time, she served as a director from June
1990 until February 1993. Dr. Panem also serves as a
director for Bioject, Inc. (healthcare equipment manufacturer).
Her term expires in 2005.

Dr. Radmer,a
founder of Martek, has served since 1985 as a director. He
served as our President and Chief Scientific Officer through
March 2003. Prior to 1985, he worked for 17 years at Martin
Marietta Corp. where he headed the Biosciences Department which
performed research to develop new products from microalgae,
among other activities. He has served as an Adjunct Associate
Professor and Associate Member of the Graduate Faculty at the
University of Maryland. His term expires in 2006.

Mr. Rotberghas
been an independent advisor to international development and
financial institutions since 1990. From 1987 to 1990,
Mr. Rotberg was Executive Vice President and a member of
the Executive Committee at Merrill Lynch & Co., Inc.
From 1969 to 1987, Mr. Rotberg was Vice President and
Treasurer of the World Bank. Mr. Rotberg has been a
director of the Company since 1992. His term expires in 2007.

22



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##### 





| |                                                     
| | ----------------------------------------------------
| | Executive Officers (in addition to
    Mr. Linsert):

Mr. Abramsonjoined Martek in 2003 as head of Business Development. Prior to
joining Martek, he was the Executive Vice President and General
Counsel for U.S. Foodservice from 1996 to 2003. In this
position, Mr. Abramson oversaw the legal and regulatory
affairs of U.S. Foodservice, a large foodservice
distributor in the United States, and advised on business
development opportunities for this company.
U.S. Foodservice became a subsidiary of Royal Ahold in
2002. In addition, Mr. Abramson was also the Executive Vice
President for Legal Affairs at Ahold, U.S.A. from 2000 to 2003.
Mr. Abramson also served on the Board of Directors of
U.S. Foodservice from 1994 to 2003. Prior to joining
U.S. Foodservice, from 1983 until 1996, Mr. Abramson
was a partner at Levan, Schimel, Belman & Abramson,
P.A., now a part of Miles & Stockbridge.
Mr. Abramson graduated from George Washington University in
1975, where he obtained a Bachelors of Business Administration
in accounting. He received his Juris Doctor degree, with honors,
from the University of Maryland School of Law in 1978.
Mr. Abramson is a member of the Maryland Bar.

Mr. Barkerjoined Martek in 2000 as Senior Vice President, General Counsel
and Secretary. Prior to joining Martek, Mr. Barker was
Senior Vice President of Howard County General Hospital, Inc: A
Member of Johns Hopkins Medicine and its affiliate Howard County
Health Services, Inc. From 1982 to 1991, Mr. Barker was
Senior Vice President for Development, General Counsel and
Secretary of The Enterprise Development Company, a real estate
development company located in Columbia, Maryland. Prior to
1982, Mr. Barker held positions as a partner of a
Baltimore, Maryland, law firm and Associate General Counsel and
Assistant Secretary of The Rouse Company, a real estate
development company also located in Columbia, Maryland.
Mr. Barker has an A.B. degree from Princeton University and
a LL.B. degree from Columbia University.

Mr. Buzyjoined
Martek in 1998 as Chief Financial Officer. Prior to joining
Martek, Mr. Buzy spent 13 years with the accounting
firm of Ernst & Young LLP, most recently as an audit
partner in the Northern Virginia High Technology/ Life Sciences
Practice. Mr. Buzy is a Certified Public Accountant and a
member of the American Institute of Certified Public
Accountants. He received his B.S. in accounting from Salisbury
University.

Mr. Dubinjoined Martek in 1992, where he served in various management
positions, including CFO, Treasurer, Secretary, General Counsel
and Senior Vice President of Business Development. In 2000, he
moved to a part-time position of Senior Advisor 
Business Development, a role he filled until his election to
President of the Company in September 2003. He also spent time
during 2000 through 2003 co-founding and co-managing a
Maryland-based, angel-investing club that funds early-stage,
high-potential businesses. He was also Of Counsel to
the law firm Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C. during part of 2001 and 2002. Prior to 1992,
Mr. Dubin worked in the financing and management of
early-stage businesses and, over a period of 12 years,
served in various positions at Suburban Bank, now part of Bank
of America, including Vice President and Treasurer of their
venture capital subsidiary, Suburban Capital Corporation.
Mr. Dubin received a B.S in accounting from the University
of Maryland and a Juris Doctor degree from the George Washington
University. Mr. Dubin is a Certified Public Accountant and
a member of the Maryland Bar.

Mr. Easterlingjoined Martek in 2003 in connection with Marteks
acquisition of FermPro Manufacturing, LP (FermPro).
With the acquisition, he was named Vice President of
Manufacturing of Martek, and in March 2004, he was elected to
the position of Senior Vice President of Manufacturing. From
1994 to 2003, Mr. Easterling served as President and CEO of
FermPro, a provider of contract fermentation services with a
workforce of over 100 personnel. From 1980 to 1994,
Mr. Easterling served in various management capacities for
Gist-Brocades. He received a B.S. in premedicine from Clemson
University.

Dr. Flattjoined Martek in 2002 as Senior Vice President, Research and
Development. Prior to joining Martek, Dr. Flatt was the
Vice President of Research and Development for OmegaTech, Inc.,
a DHA producer in Boulder, Colorado that was acquired by Martek
in April 2002. In his position with OmegaTech, Dr. Flatt
managed all corporate research and development, including
discovery, ingredient technology, food and analytical sciences
and process development. Prior to joining OmegaTech,
Dr. Flatt held a position at Procter & Gamble and
was Vice President of Fermentation and Process Research for the
Kelco division of

23



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##### 



Merck, where he led the development and
commercialization of several major new products and processing
technologies. Dr. Flatt is the author of six patents and
numerous professional papers. He received his B.S. in chemical
engineering from the Massachusetts Institute of Technology, his
M.S. in chemical engineering from the University of
California  Berkeley, and his Ph.D. in chemical and
biochemical engineering from the University of
Wisconsin  Madison.


Mr. Kellerjoined Martek in 1997 as Senior Vice President of Sales and
Marketing. Prior to joining Martek, Mr. Keller had been
consulting after spending a 25-year career at Merck, most
recently as Vice President of Sales from 1986 to 1993. In this
position, he was responsible for all U.S. sales operations,
including the direction of a support staff of 4,500 personnel
and a sales volume of $4.2 billion. Mr. Keller has a
M.S. degree from the University of Pittsburgh and a B.S. degree
from Duquesne University.

COMPANY

Martek was incorporated in Delaware in 1985.
Marteks principal executive offices are located at 6480
Dobbin Road, Columbia, Maryland 21045. Our telephone number is
(410) 740-0081 and our website address is
http://www.martekbio.com. We make our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to these reports
available on our website free of charge as soon as practicable
after we file with the SEC.






|        |            
|------- | -----------
|ITEM 2. | PROPERTIES.

We lease an aggregate of approximately
53,000 square feet of laboratory, technical and
administrative space in Columbia, Maryland. Our lease expires in
January 2011.

We also lease an aggregate of approximately
14,000 square feet of laboratory, technical and
administrative space in Boulder, Colorado. The lease expires in
May 2008.

We own a fermentation and oil processing facility
in Winchester, Kentucky where we produce oils rich in DHA and
ARA using our proprietary technology. The facility is located on
eight acres and occupies approximately 91,000 square feet
holding multiple fermentation vessels totaling 1.2 million
liters of capacity. These fermentation vessels are used
primarily for DHA production.

We also own a fermentation and oil processing
facility in Kingstree, South Carolina where we produce oils rich
in DHA using our proprietary technology. The facility is located
on more than five hundred acres and occupies approximately
414,000 square feet currently holding multiple fermentation
vessels totaling 1.7 million liters of capacity. These
fermentation vessels are used primarily for DHA production and
also for contract manufacturing, which utilizes less than 20% of
this capacity. As part of our expansion at this facility, which
is described in Item 1-Business, we are nearing
completion of multiple fermentation vessels with additional
capacity of 1.1 million liters.






|        |                   
|------- | ------------------
|ITEM 3. | LEGAL PROCEEDINGS.

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.

24



---



##### 



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 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. Martek believes it has
substantive grounds for the appeal and intends to vigorously
pursue the matter.

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 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 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. 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.

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.

On October 18, 2004, we filed a Declaratory
Judgment Complaint in the United States District Court for the
District of Maryland against Robert Zuccaro, as
stockholders representative of the former security holders
of OmegaTech, Inc. The complaint was brought to seek to resolve
Mr. Zuccaros claim that the former OmegaTech security
holders are owed 666,119 additional Martek shares under the
Agreement and Plan of Merger by which we acquired OmegaTech
because a milestone under that agreement was allegedly met. That
milestone was to be triggered if a report issued by the
Institute of Medicine of the National Academy of Science
regarding the nutritional properties of DHA met criteria
specified in the merger agreement. We have asked the Court to
declare that the report does not fulfill the requirements of the
milestone and that we are not

25



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##### 



required to distribute the shares to the former
security holders of OmegaTech. While we believe that our
position is meritorious and that the milestone was not met, no
assurance can be given as to the outcome of the litigation. On
October 25, 2004, Mr. Zuccaro submitted a demand to
the Judicial Arbitration and Mediation Service, seeking to
arbitrate this dispute. We filed a motion to stay the
arbitration, which the District Court granted in
December 2004. We expect Mr. Zuccaro to file an answer
and a counterclaim in this matter shortly.


In addition, from time to time, Martek is a party
to litigation or administrative proceedings relating to claims
arising from its operations in the normal course of business.
Management believes that the ultimate resolution of any such
litigation or administrative proceedings currently pending
against Martek is unlikely, either individually or in the
aggregate, to have a material adverse effect on Marteks
results of operations or financial condition.






|        |                                                         
|------- | --------------------------------------------------------
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS.

No matters were voted upon during the fourth
quarter of fiscal 2004.



PART II





|        |                                                                                                                      
|------- | ---------------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY,
    RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES.

The Companys common stock is traded on the
NASDAQ National Market System under the symbol MATK. As of
January 7, 2005, there were approximately 387 holders of
record of the Companys common stock. The price of the
Companys common stock was $49.33 on January 7, 2005.
No cash dividends have been paid on the common stock and the
Company does not anticipate paying any cash dividend in the
foreseeable future. Dividend payments are restricted under the
Companys Loan and Security Agreement dated
January 26, 2004. The following table sets forth, for the
calendar periods indicated, the range of high and low sales
prices for the Companys common stock as reported by NASDAQ:

Sales Price Range of Common Stock

|                                        |  |      |       |  |     |   |       | 
|--------------------------------------- |  | ---- | ----- |  | --- | - | ----- | 
|Fiscal 2003                             |  | High |       |  | Low |  
|                                        |  |      |       |  |     |  
|November 1, 2002 
    January 31, 2003 |  | $    | 27.38 |  |     | $ | 15.40 | 
|February 1, 2003  April 30,
    2003   |  | $    | 34.38 |  |     | $ | 21.11 | 
|May 1, 2003  July 31, 2003             |  | $    | 53.25 |  |     | $ | 31.30 | 
|August 1, 2003  October 31,
    2003   |  | $    | 58.55 |  |     | $ | 43.19 | 

|                                        |  |      |       |  |     |   |       | 
|--------------------------------------- |  | ---- | ----- |  | --- | - | ----- | 
|Fiscal 2004                             |  | High |       |  | Low |  
|                                        |  |      |       |  |     |  
|November 1, 2003 
    January 31, 2004 |  | $    | 69.10 |  |     | $ | 46.46 | 
|February 1, 2004  April 30,
    2004   |  | $    | 73.36 |  |     | $ | 55.80 | 
|May 1, 2004  July 31, 2004             |  | $    | 72.69 |  |     | $ | 44.51 | 
|August 1, 2004  October 31,
    2004   |  | $    | 58.95 |  |     | $ | 43.89 | 

No repurchases of common stock took place during
the fourth quarter of fiscal 2004.

26



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##### 








|        |                         
|------- | ------------------------
|ITEM 6. | SELECTED FINANCIAL DATA.

The selected financial data set forth below with
respect to the Companys consolidated statements of
operations for each of the years in the three-year period ended
October 31, 2004 and with respect to the consolidated
balance sheets as of October 31, 2004 and 2003 are derived
from, and are qualified by reference to, the consolidated
financial statements that have been audited by Ernst &
Young LLP, independent registered public accounting firm, and
are included elsewhere in this Form 10-K. The statement of
operations data for each of the years in the two-year period
ended October 31, 2001 and the balance sheet data at
October 31, 2002, 2001 and 2000 are derived from audited
financial statements not included in this Form 10-K.

The following selected financial data should be
read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the consolidated financial statements and notes contained in
this Form 10-K.

|                                                        |                                              |                        |         |         |      |   |         |         |   |   |         |        |  |      |         |        |  |   |         |        | 
|------------------------------------------------------- | -------------------------------------------- | ---------------------- | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------ |  | ---- | ------- | ------ |  | - | ------- | ------ | 
|                                                        |                                              |                       
|                                                        |                                              | Year Ended October 31, |        
|                                                        |                                              |                        |        
|                                                        |                                              | 2004                   |         |         | 2003 |   |         | 2002    |   |   | 2001    |        |  | 2000 |        
|                                                        |                                              |                        |         |         |      |   |         |         |   |   |         |        |  |      |        
|                                                        |                                              |                        |         |         |      |   |         |         |   |   |         |        |  |      |        
|                                                        |                                              |                       
|In thousands, except per share data                     |                                              |                        |        
|Consolidated Statements of Operations
    Data          |                                              |                        |         |         |      |   |         |         |   |   |         |        |  |      |         |        |  |   |         |       
|Revenues                                                |                                              |                        |         |         |      |   |         |         |   |   |         |        |  |      |         |        |  |   |         |       
|                                                        | Product sales                                |                        | $       | 170,565 |      |   | $       | 112,298 |   |   | $       | 46,055 |  |      | $       | 18,824 |  |   | $       | 9,677  | 
|                                                        | Contract manufacturing sales                 |                        |         | 13,928  |      |   |         | 2,439   |   |   |         |       |  |      |         |       |  |   |         |       | 
|                                                        |                                              |                        |         |         |      |   |         |         |   |   |         |        |  |      |        
|Total revenues                                          |                                              |                        | 184,493 |         |      |   | 114,737 |         |   |   | 46,055  |        |  |      | 18,824  |        |  |   | 9,677   |       
|                                                        |                                              |                        |         |         |      |   |         |         |   |   |         |        |  |      |        
|Costs and expenses                                      |                                              |                        |         |         |      |   |         |         |   |   |         |        |  |      |         |        |  |   |         |       
|                                                        | Cost of product sales                        |                        |         | 103,423 |      |   |         | 66,347  |   |   |         | 29,794 |  |      |         | 12,554 |  |   |         | 7,092  | 
|                                                        | Cost of contract manufacturing sales         |                        |         | 11,570  |      |   |         | 2,192   |   |   |         |       |  |      |         |       |  |   |         |       | 
|                                                        | Research and development                     |                        |         | 18,596  |      |   |         | 13,154  |   |   |         | 12,188 |  |      |         | 12,705 |  |   |         | 12,517 | 
|                                                        | Selling, general and administrative          |                        |         | 25,774  |      |   |         | 16,275  |   |   |         | 11,804 |  |      |         | 7,969  |  |   |         | 6,942  | 
|                                                        | Other operating expenses                     |                        |         | 4,000   |      |   |         | 1,943   |   |   |         | 406    |  |      |         | 565    |  |   |         |       | 
|                                                        | Restructuring charge                         |                        |         |        |      |   |         | (250    | ) |   |         | 1,266  |  |      |         |       |  |   |         |       | 
|                                                        | Acquired in-process research and development |                        |         |        |      |   |         |        |   |   |         | 15,788 |  |      |         |       |  |   |         |       | 
|                                                        |                                              |                        |         |         |      |   |         |         |   |   |         |        |  |      |        
|Total costs and expenses                                |                                              |                        | 163,363 |         |      |   | 99,661  |         |   |   | 71,246  |        |  |      | 33,793  |        |  |   | 26,551  |       
|                                                        |                                              |                        |         |         |      |   |         |         |   |   |         |        |  |      |        
|Income (loss) from operations                           |                                              |                        | 21,130  |         |      |   | 15,076  |         |   |   | (25,191 | )      |  |      | (14,969 | )      |  |   | (16,874 | )     
|Other income, net                                       |                                              |                        | 772     |         |      |   | 916     |         |   |   | 958     |        |  |      | 1,267   |        |  |   | 1,147   |       
|                                                        |                                              |                        |         |         |      |   |         |         |   |   |         |        |  |      |        
|Income (loss) before income tax benefit                 |                                              |                        | 21,902  |         |      |   | 15,992  |         |   |   | (24,233 | )      |  |      | (13,702 | )      |  |   | (15,727 | )     
|Income tax benefit                                      |                                              |                        | 25,146  |         |      |   |        |         |   |   |        |        |  |      |        |        |  |   |        |       
|                                                        |                                              |                        |         |         |      |   |         |         |   |   |         |        |  |      |        
|Net income (loss)                                       |                                              | $                      | 47,048  |         |      | $ | 15,992  |         |   | $ | (24,233 | )      |  | $    | (13,702 | )      |  | $ | (15,727 | )     
|                                                        |                                              |                        |         |         |      |   |         |         |   |   |         |        |  |      |        
|Net income (loss) per share, basic                      |                                              | $                      | 1.62    |         |      | $ | 0.63    |         |   | $ | (1.10   | )      |  | $    | (0.73   | )      |  | $ | (0.91   | )     
|Net income (loss) per share, diluted                    |                                              | $                      | 1.55    |         |      | $ | 0.58    |         |   | $ | (1.10   | )      |  | $    | (0.73   | )      |  | $ | (0.91   | )     
|                                                        |                                              |                        |         |         |      |   |         |         |   |   |         |        |  |      |        
|Shares used in computing basic earnings per share       |                                              |                        | 29,033  |         |      |   | 25,510  |         |   |   | 21,982  |        |  |      | 18,864  |        |  |   | 17,335  |       
|Shares used in computing diluted earnings per
    share |                                              |                        | 30,386  |         |      |   | 27,417  |         |   |   | 21,982  |        |  |      | 18,864  |        |  |   | 17,335  |       
|                                                        |                                              |                        |         |         |      |   |         |         |   |   |         |        |  |      |        

|                                                                             |  |             |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |         |  
|---------------------------------------------------------------------------- |  | ----------- | ------- | - | ---- | - | -------- | ---- |  | - | -------- | - |  | ---- | -------- | - |  | - | ------- | -
|                                                                             |  |            
|                                                                             |  | October 31, |        
|                                                                             |  |             |        
|                                                                             |  | 2004        |         |   | 2003 |   |          | 2002 |  |   | 2001     |   |  | 2000 |         
|                                                                             |  |             |         |   |      |   |          |      |  |   |          |   |  |      |         
|Consolidated Balance Sheets and Other
    Data                               |  |             |         |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |         |  
|Cash, cash equivalents, short-term investments
    and marketable securities |  | $           | 42,650  |   |      | $ | 96,971   |      |  | $ | 22,419   |   |  | $    | 26,682   |   |  | $ | 19,264  |  
|Working capital                                                              |  |             | 68,195  |   |      |   | 106,218  |      |  |   | 30,457   |   |  |      | 31,501   |   |  |   | 21,266  |  
|Total assets                                                                 |  |             | 501,398 |   |      |   | 295,523  |      |  |   | 124,312  |   |  |      | 56,603   |   |  |   | 45,442  |  
|Long-term debt, notes payable and other long-term
    obligations            |  |             | 97,175  |   |      |   | 10,441   |      |  |   |         |   |  |      |         |   |  |   |        |  
|Long-term portion of unearned revenue                                        |  |             | 9,140   |   |      |   | 8,992    |      |  |   | 2,246    |   |  |      | 2,353    |   |  |   | 2,460   |  
|Accumulated deficit                                                          |  |             | (64,520 | ) |      |   | (111,568 | )    |  |   | (127,560 | ) |  |      | (103,327 | ) |  |   | (89,625 | )
|Total stockholders equity                                                   |  |             | 346,164 |   |      |   | 243,964  |      |  |   | 105,977  |   |  |      | 46,701   |   |  |   | 35,455  |  
|Cash dividends declared  common stock                                       |  |             |        |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |        |  

27



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|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS
    OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Managements Discussion and Analysis
of Financial Condition and Results of Operations contains
forward-looking statements concerning our business and
operations, including, among other things, statements concerning
the following:



| |   |                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | expectations regarding future revenue growth,
    product introductions, growth in nutritional product sales,
    margin and productivity improvements and potential
    collaborations and acquisitions;
|
| |  | expectations regarding sales to and by our
    infant formula licensees;                                                                                                                                 
|
| |  | expectations regarding marketing of our oils
    by our infant formula licensees;                                                                                                                        
|
| |  | expectations regarding future efficiencies in
    manufacturing processes and the cost of production of our
    nutritional oils;                                                                        
|
| |  | expectations regarding future purchases of
    third-party manufactured oils and expansion of third-party
    manufacturing facilities;                                                                  
|
| |  | expectations regarding the timing and amount
    of production capacity and our ability to meet future demands
    for our nutritional oils;                                                             
|
| |  | expectations regarding future research and
    development costs;                                                                                                                                        
|
| |  | expectations regarding our expansion at our
    Kingstree, South Carolina facility;                                                                                                                      
|
| |  | expectations regarding the impact of the
    incident at the Winchester Wastewater Treatment Plant;                                                                                                      
|
| |  | expectations regarding additional capital
    expenditures needed in relation to our fermentation and oil
    processing activities; 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 are all made pursuant to
the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. We wish to caution you that our actual
results may differ significantly from the results we discuss in
our forward-looking statements. We discuss the risks that could
cause such differences in Exhibit 99.01 to this report
incorporated by reference into this 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.

28



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GENERAL

Martek was founded in 1985. We are a leader in
the development and commercialization of products derived from
microalgae and other microbes. Our leading products are
nutritional oils used as ingredients in infant formula and foods
and as ingredients in, and encapsulated for use as, dietary
supplements. Our nutritional oils are comprised of fatty acid
components, primarily docosahexaenoic acid, commonly known as
DHA, and arachidonic acid, commonly known as ARA. Many
researchers believe that these fatty acids may enhance mental
and visual development in infants, may play a pivotal role in
brain function throughout life and may reduce risks associated
with coronary heart disease. Low levels of DHA in adults have
also been linked with a variety of health risks. Research is
underway to assess what impact, if any, supplementation with our
DHA will have on these health risks. Additional applications of
our patented technology based upon microalgae include our
currently marketed fluorescent detection products that can be
used by researchers as an aid in drug discovery and diagnostics.

In 1992, we realized our first revenues from
license fees related to our nutritional oils containing DHA and
ARA and sales of sample quantities of these oils. In 1995, we
recognized our first product and royalty revenues from sales of
infant formula containing these oils, and in 1996 we began to
realize revenues from the sale of Neuromins®, a DHA dietary
supplement. In 1998, we first realized revenues from the sale of
our fluorescent detection products. We currently have license
agreements with sixteen infant formula manufacturers, including
Mead Johnson Nutritionals, Wyeth, Abbott Laboratories, Nestle,
Royal Numico N.V. (formerly Nutricia), Novartis, Maabarot,
Heinz-Watties, Laboratorios Ordesa, American St. George
Biological Corporation, International Nutrition Company, PT
Sanghiang Perkasa, Takaso Rubber and three companies whose
identities we have agreed not to disclose at this time.
Collectively, these companies represent approximately 70% of the
estimated $8.5 to $9.5 billion worldwide wholesale market
for infant formula and nearly 100% of the estimated $3.0 to
$3.5 billion U.S. wholesale market for infant formula,
including the wholesale value of Women, Infant &
Children program (W.I.C.) rebates. W.I.C. is a
federal grant program administered by the states for the benefit
of low-income, nutritionally at-risk women, infants and
children. Our licensees are now selling term infant formula
products containing our oils collectively in over 30 countries
and pre-term infant formula products containing our oils
collectively in over 60 countries around the world. Supplemented
term infant formulas manufactured by Mead Johnson Nutritionals,
Abbott Laboratories, Wyeth and Nestle are currently being sold
in the United States.

In April 2002, we acquired OmegaTech, Inc.
(OmegaTech or Martek Boulder), a
low-cost algal DHA producer located in Boulder, Colorado.
OmegaTech had been in the fermentable DHA business since 1987,
and had accumulated over 100 issued and pending patents
protecting its DHA technology. Its revenues mainly consisted of
sales of DHA into the dietary supplement, food, beverage, and
animal feed markets. We acquired OmegaTech to obtain its
low-cost DHA oil and related intellectual property for use in
the adult supplements market and future use in the food and
beverage markets.

In June 2002, the Australia New Zealand Food
Standards Council authorized the use of DHA-S oil for use as a
Novel Food ingredient in Australia and New Zealand. In June
2003, the Commission of the European Communities authorized the
use of our DHA-S oil and declared that our DHA-S oil may be sold
in the European Community as a Novel Food ingredient. This Novel
Food designation authorizes the use of our DHA-S as an
ingredient in certain foods such as certain dairy products,
including cheese and yogurt (but not milk-based drinks), spreads
and dressings, breakfast cereals, food supplements and dietary
foods for special medical purposes in the European Community. In
February 2004, the FDA completed a favorable review of our GRAS
notification for the use of DHA-S in food and beverage
applications. We are currently selling DHA-S products into the
nutritional supplements, food and beverage and animal feed
markets domestically and internationally.

In September 2003, we purchased certain assets
and assumed certain liabilities of FermPro Manufacturing, LP,
which operated a fermentation facility located in Kingstree,
South Carolina. FermPro provided contract fermentation services
and had an experienced workforce of over 100 personnel on a site
of over 500 acres with extensive fermentation, recovery,
laboratory and warehousing capabilities. The addition of the
FermPro facility and workforce has enabled us to expand our
production capabilities using the existing facility,

29



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##### 



coupled with the extensive construction build-out
and employee build-up that are currently nearing completion.


During the fourth quarter of fiscal 2004, several
new products were launched which contained Martek DHA.
Specifically, Mead Johnson launched a DHA supplement for
pregnant and nursing women containing Martek DHA. This product,
ExpectaTM LIPIL®, extends Mead Johnsons
use of Martek DHA beyond infant formula and responds to the
growing body of evidence suggesting both mothers and their
babies benefit from an adequate maternal intake of DHA. In
addition, PBM Products announced the launch of the first
beverage containing Martek DHA that is formulated for diabetics
and people with abnormal glucose tolerance. Finally,
GlaxoSmithKline launched a second powdered drink mix containing
Martek DHA in India. The product, Junior Horlicks, is specially
formulated for a childs developing brain and nervous
system and is available in selected outlets in south and east
India. All of these products are expected to generate additional
revenue for us during fiscal 2005.

Prior to fiscal 2003, we incurred losses in each
year since our inception. For the year ended October 31,
2004, we recognized approximately $47.0 million in net
income and as of October 31, 2004, our accumulated deficit
was approximately $64.5 million. Although we anticipate
significant continued growth in sales of our nutritional oils,
and we achieved an operating profit in fiscal 2003 and 2004, we
may continue to experience quarter-to-quarter and year-to-year
fluctuations in our future operating results, some of which may
be significant. The timing and extent of such fluctuations will
depend, in part, on the timing and receipt of oils-related
revenues. The extent and timing of future oils-related revenues
are largely dependent upon the following factors:



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | the ability by us and our third-party
    manufacturers to produce adequate levels of our nutritional oils;                             
|
| |  | the timing of the completion of construction at
    our Kingstree facility and related expanded production
    capabilities;            
|
| |  | the timing and extent of production and
    production expansion by DSM at its facilities;                                              
|
| |  | the timing of infant formula market introductions
    by our licensees;                                                                 
|
| |  | the timing and extent of introductions of DHA
    into various child and/or adult applications;                                         
|
| |  | the timing and extent of acceptance of products
    containing our oils under state-administered reimbursement
    programs in the U.S.;
|
| |  | the acceptance of these products by consumers;                                                                                          
|
| |  | our ability to protect against competitive
    products through our patents;                                                            
|
| |  | competition from alternative sources of DHA and
    ARA; and                                                                            
|
| |  | agreements with other future third-party
    collaborators to market our products or develop new products.                              

As such, the likelihood, timing and extent of
future profitability are largely dependent on factors such as
those mentioned above, as well as others, over which we have
limited or no control.

CRITICAL ACCOUNTING POLICIES AND

THE USE OF ESTIMATES


The preparation of our consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in
our consolidated financial statements and accompanying notes. On
an ongoing basis, we evaluate our estimates and judgments, which
are based on historical and anticipated results and trends and
on various other assumptions that we believe are reasonable
under the circumstances, including assumptions as to future
events. By their nature, estimates are subject to an inherent
degree of uncertainty and, as such, actual results may differ
from our estimates. We believe that the following significant
accounting policies and assumptions involve a higher degree of
judgment and complexity than others.

30



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##### 



Assets and Liabilities Acquired in Business
CombinationsOur
business acquisitions of FermPro and OmegaTech were accounted
for using the purchase method. The purchase method requires us
to allocate the cost of an acquired business to the assets
acquired and liabilities assumed based on their estimated fair
values at the date of acquisition. The excess of the cost of an
acquired business over the fair value of the assets acquired and
liabilities assumed is recognized as goodwill. In performing the
purchase price allocations, we utilized both internal discounted
cash flow analyses and third-party appraisals to determine the
value of acquired assets and liabilities. Such valuations
require significant estimates and assumptions, including, but
not limited to, estimating future cash flows from contracts and
products and developing appropriate discount rates. The
valuation of the acquired assets and liabilities will impact the
future operating results of the Company.

Valuation of Long-lived Assets and
GoodwillLong-lived
assets, including fixed assets, goodwill and other intangibles,
are reviewed for impairment as events or changes in
circumstances occur indicating that the carrying amount of the
asset may not be recoverable. For goodwill, an assessment is
made at least annually. Discounted cash flow or fair value
analyses are used to assess goodwill impairment, while
undiscounted cash flow analyses are used to assess other
long-lived asset impairment. The estimates of future cash flows
involve considerable management judgment and are based upon
assumptions about expected future operating performance. While
management believes that its projections are reasonable and that
no impairment of these assets exists, different assumptions
could affect these evaluations and result in impairment charges
against the carrying value of these assets.

Revenue
RecognitionWe
derive revenue principally from two sources: product sales and
contract manufacturing. We recognize revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the
fee is fixed or determinable and collectibility is probable.
Typical infant formula license contracts include an upfront
license fee, a prepayment of product sales and established
pricing on future product sales. In accordance with Emerging
Issues Task Force No. 00-21 (EITF
No. 00-21), Revenue Arrangements with Multiple
Deliverables, the consideration from these contracts is
allocated based on the relative fair values of the separate
elements. Revenue is recognized on product sales when goods are
shipped. Cash received as a prepayment on future product
purchases is deferred and recognized as revenue when product is
shipped. Revenue from product licenses is deferred and
recognized on a straight-line basis over the term of the
agreement. Royalty income is recorded when earned, based on
information provided by our licensees.

Contract manufacturing revenue is recognized when
goods are shipped to customers and all other conditions for
revenue recognition are met. Cash received that is related to
future performance under such contracts is deferred and
recognized as revenue when earned.

Deferred Income
TaxesWe
recognize deferred tax assets and liabilities based on temporary
differences between the financial reporting bases and the tax
bases of assets and liabilities. We also recognize deferred tax
assets for certain tax net operating loss carryforwards. These
deferred tax assets and liabilities are measured using the
enacted tax rates and laws that will be in effect when such
amounts are expected to reverse or be utilized. The realization
of deferred tax assets is contingent upon the generation of
future taxable income. When appropriate, we recognize a
valuation allowance to reduce such deferred tax assets to
amounts that are more likely than not to be ultimately realized.
The calculation of deferred tax assets (including valuation
allowances) and liabilities requires management to apply
significant judgment related to such factors as the application
of complex tax laws, changes in tax laws and the future
operations of the Company. We review our deferred tax assets on
a quarterly basis to determine if a valuation allowance is
required based upon these factors. Changes in our assessment of
the need for a valuation allowance could give rise to a change
in such allowance, potentially resulting in additional expense
or benefit in the period of change.

Stock-Based
CompensationWe
account for employee stock-based compensation in accordance with
the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees (APB 25) and related
interpretations, which require us to recognize compensation cost
for the excess of the fair value of the stock at the grant date
over the exercise price, if any. An alternative method of
accounting would apply the principles of SFAS No. 123,
Accounting for Stock-Based Compensation
(SFAS 123),

31



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which require the fair value of the stock option
to be recognized at the date of grant and amortized to
compensation expense over the stock options vesting
period. No stock-based employee compensation cost for stock
options is reflected in net income, as all options granted under
the plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. Stock-based
compensation for non-employees is accounted for using the fair
value-based method in accordance with SFAS 123. See
Recently Issued Accounting Pronouncements.


MANAGEMENT OUTLOOK

We believe that the outlook for future revenue
growth remains positive, although quarterly results may show
fluctuations, particularly if we experience unforeseen variances
in production. Specifically, we believe that for fiscal 2005,
current term infant formula products containing our oils will
continue to gain market share in existing markets, new products
will be added in those markets, and term infant formulas
containing our oils will also be introduced in additional
countries. As we have discussed, to date, twelve of our infant
formula licensees are selling term infant formula products
containing our oils collectively in over 30 countries and
pre-term infant formula products containing our oils
collectively in over 60 countries around the world. Supplemented
term infant formulas manufactured by four of our licensees are
currently being sold in the United States and we expect these
sales to increase in fiscal 2005.

In fiscal 2004, over 90% of our product sales
revenues related to the sales of our oils for use in infant
formula and recently introduced toddler products. We anticipate
increased future sales of our oils for other products such as
products developed for pregnant and nursing mothers,
cardiovascular health, and the food and beverage market. We
expect that the majority of these sales will come through
partnering relationships with larger companies in the
nutritional and food and beverage markets. We anticipate that
over the next few years these sales will expand and represent a
much larger potential market than infant formula.

We have an aggressive growth plan that includes
substantial additional investments in our manufacturing
facilities. To accommodate our growth plan, we will need to
continue to improve our operational and financial information
systems and controls, expand our management team, continue to
attract and retain new employees, accurately anticipate demand
for our products and effectively bring on line and integrate new
production capacity. In addition, we will rely on third-party
manufacturers to effectively bring on line and integrate new
production capacity. All of these factors present numerous
challenges and could result in unanticipated costs and delays in
product manufacture.

PRODUCTION

Since fiscal 2003, the demand for our nutritional
oils for use in infant formula products has significantly
exceeded production capacity. These shortfalls have resulted
from an acceleration of such demand over what our customers had
projected coupled with a shortage of ARA production capacity
from DSM that began in the first quarter of fiscal 2004. As
customer demand has increased, we have requested that our
customers provide us with longer lead-times in order to fill
their orders. Even with the longer lead-times and increased
production each quarter, we continue to limit the orders we
accept for our nutritional oils.

We manufacture oils rich in DHA at our
fermentation and oil processing facilities located in
Winchester, Kentucky and Kingstree, South Carolina. We are
nearing completion of an extensive expansion at our Kingstree
facility. Certain components of the initial phase of the
expansion, including the first fermentation area, commenced
commercial operation during the last six months of fiscal 2004.
The second expansion phase is expected to commence commercial
operation in the second quarter of fiscal 2005.

Our ARA oils have historically been purchased
from DSM as manufactured at its Capua, Italy plant. During
fiscal 2004, DSM added production capacity in the U.S. by
converting existing facilities in Belvidere, New Jersey to the
production of ARA. In June 2004, DSM restarted the production
line at the Belvidere facility after a shutdown relating to a
fire incident in May 2004. Since that time, Belvidere has
continued to increase its monthly output of ARA. DSM is
currently expanding its ARA production capabilities at both
facilities. We are now receiving approximately 40% of our ARA
from DSMs Belvidere facility with that

32



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##### 



percentage expected to grow to approximately 70%
as DSM completes its current expansion at Belvidere, in phases,
over the next 12 to 16 months. As part of the April 2004
agreement with DSM, we are required to guarantee the recovery to
DSM of certain expansion costs incurred by them. This guarantee,
which currently relates to DSMs recent Belvidere
expansion, will decline in value as we purchase ARA from DSM in
the future. As of October 31, 2004, the value of our
current guarantee to DSM is approximately $3.1 million. In
addition, we are in the process of negotiating an amendment to
the April 2004 agreement with DSM. This amendment is expected to
establish the overall economics associated with DSMs
current expansions at both facilities, including our guarantee
of such expansion costs. Because DSM is a third-party
manufacturer, we do not have full control over the timing and
extent of its Capua and Belvidere production volumes.


We have attempted to reduce the risk inherent in
having a single supplier, such as DSM, through certain elements
of a new supply agreement entered into with DSM in April 2004.
In connection with the new agreement, we have licensed the DSM
technology associated with ARA production. Through this license
and the overall supply arrangement, we have the ability to
produce, either directly or through another third party, an
unlimited amount of ARA. The sale of such self-produced ARA is
limited annually, however, to the greater of (i) 100 tons
of ARA oil or (ii) any amounts ordered by us that DSM is
unable to fulfill. We anticipate being capable of producing ARA
and having it available for future sale by the end of the second
quarter of fiscal 2005. To further reduce our ARA production
risk, we have directly engaged and recently added a new
U.S.-based provider of certain post-fermentation ARA
manufacturing services. Historically, these services had been
provided by two European vendors through DSM. Along with
existing ARA extraction capabilities at Winchester and our
pending ARA extraction capabilities at Kingstree, which we
anticipate being available by the second quarter of fiscal 2005,
the addition of a new third-party facility will give us multiple
U.S. sites for the downstream processing of ARA.

When combining our current and projected DHA
production capabilities in Winchester and Kingstree with
DSMs current and projected ARA production capabilities in
Italy and the U.S., we had total production capacity equivalent
to 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. A portion of
this capacity is reserved for future production of DHA-S. We
also believe that production optimization efforts will continue
at our plants for the next several years as new technologies and
additional algal strains are tested to further increase output
and reduce costs.

If, however, the production expansion in
Kingstree does not proceed as planned or if DSM is not able to
further expand its ARA production capacity in the U.S., our
ability to produce at these levels may be negatively impacted.
To meet demand in excess of these levels, we will need to do one
or more of the following:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | further expand our production facilities in
    Winchester and Kingstree;               
|
| |  | build another production facility to manufacture
    our oils; or                       
|
| |  | enter into additional agreements with third-party
    manufacturers to produce our oils.

We also have several other contractual agreements
with third-party manufacturers to assist in the production of
our nutritional oils. Most significantly, we have a production
agreement with C.P. Kelco U.S. Inc. (C.P.
Kelco) that we assumed with the purchase of OmegaTech for
the production of DHA-S biomass that we sell to animal feed
companies or process further for use in the adult supplement and
food and beverage markets. We currently have a minimum purchase
commitment with C.P. Kelco that expires on June 30, 2006
with possible annual renewals. As of October 31, 2004, our
remaining obligation was approximately $4.1 million.

The commercial success of our nutritional oils
will depend, in part, on our ability to manufacture these oils
or have them manufactured at large scale and at a commercially
acceptable cost. If the production expansion plans of Martek or
DSM do not proceed as anticipated or if market demand subsides
due to our

33



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##### 



inability to meet demand for our products, our
results could be negatively impacted. There can also be no
assurance that we will be able to successfully optimize
production of our nutritional oils, or continue to comply with
applicable regulatory requirements, including GMP requirements.
Under the terms of several of our infant formula licenses, our
licensees may elect to manufacture these oils themselves. We are
currently unaware of any of our licensees producing our oils or
preparing to produce our oils, and estimate that it would take a
licensee at least one year or more to implement our process of
making our oils.


ACQUISITIONS AND DISPOSITIONS

In September 2003, we purchased, through a
wholly-owned subsidiary, certain assets and assumed certain
liabilities of FermPro, which operated a fermentation facility
located in Kingstree, South Carolina. The addition of the
FermPro facility added to our production capabilities and has
allowed us to establish a second manufacturing facility with
redundant capabilities. The purchase price of the assets
acquired and liabilities assumed included a payment of
approximately $12.2 million, comprised of $5.4 million
in cash, 124,788 shares of our common stock valued at
approximately $5.6 million, and approximately
$1.2 million in acquisition-related fees and expenses. In
addition, a $10 million note was assumed as part of the
transaction.

The results of operations of FermPro have been
included in the accompanying consolidated statements of
operations from the date of the acquisition. The purchase price
has been allocated to the assumed assets and liabilities of
FermPro based on their relative fair values.

In April 2002, we completed our acquisition of
OmegaTech for approximately $54.1 million. Approximately
$49.3 million of the purchase price was related to the
value of 1,765,728 shares of our common stock
($1.5 million of which related to OmegaTech transaction
costs paid by us), approximately $2.1 million was for our
acquisition-related fees and expenses, and approximately
$2.7 million was related to the fair value of 154,589
vested OmegaTech stock options that were assumed as part of the
transaction. The merger agreement also provides for additional
stock consideration of up to $40 million, subject to
certain pricing adjustments, if certain milestones are met. Two
of these milestones relate to operating results (sales and gross
profit margin objectives by October 2003 and October 2004) and
two relate to regulatory approvals in the U.S. and Europe. One
of the regulatory approval milestones related to the granting of
Novel Foods approval in Europe for the OmegaTech DHA-S oil. In
June 2003, the Commission of the European Community granted
approval of the use of this oil in certain foods in Europe,
meeting the conditions of this regulatory milestone.
Accordingly, approximately 358,566 shares of Martek common
stock, with a fair market value of approximately
$14.2 million, were issued during the third quarter of
fiscal 2003. The payment of this additional consideration was
recorded as goodwill.

As of October 31, 2004, we do not believe
the second regulatory milestone has been achieved. In addition,
we do not believe that either financial milestone related to
sales and gross profit margin for the periods ended
October 31, 2004 and 2003 has been achieved. The
representative of the former OmegaTech stockholders has advised
us that he believes that the common stock issuable with respect
to the second regulatory milestone as well as the financial
milestone related to the period ended October 31, 2003
should be issued. Martek disagrees with that conclusion. As
discussed in Item 3 of Part I of this
Form  10-K, Legal Proceedings, we are
currently involved in litigation to resolve this dispute with
respect to the second regulatory milestone. The total Martek
common stock that may be issued relating to the three remaining
milestones is subject to a formula that is based on the average
market price of our stock on the dates that the individual
milestones are determined to have been achieved, up to a maximum
of 1.9 million shares. Any contingent consideration paid
related to these milestones would be recorded as goodwill.

The results of operations of OmegaTech have been
included in the accompanying consolidated statements of
operations from the date of the acquisition. The purchase price
has been allocated to the assets and liabilities of OmegaTech
based on their relative fair values.

As part of the OmegaTech purchase price
allocation, we allocated approximately $15.8 million of the
purchase price to in-process research and development projects.
This allocation represented the estimated fair value based on
risk-adjusted cash flows pertaining to the incomplete research
and development related

34



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##### 



primarily to two projects. At the date of
acquisition, the development of these projects had not yet
reached technological feasibility and the research and
development in progress had no alternative future uses.
Accordingly, the acquired in-process research and development
was charged to expense as of the date of the merger.


RESULTS OF OPERATIONS



| |         
| | --------
| | Revenues

The following table presents revenues by category
(in thousands):

|                             |                |                        |         |         |      |   |         |         |  |   |        |        | 
|---------------------------- | -------------- | ---------------------- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------ | ------ | 
|                             |                |                       
|                             |                | Year Ended October 31, |        
|                             |                |                        |        
|                             |                | 2004                   |         |         | 2003 |   |         | 2002    | 
|                             |                |                        |         |         |      |   |         |         | 
|Product sales                |                | $                      | 170,565 |         |      | $ | 112,298 |         |  | $ | 46,055 |       
|Contract manufacturing sales |                |                        | 13,928  |         |      |   | 2,439   |         |  |   |       |       
|                             |                |                        |         |         |      |   |         |         | 
|                             | Total revenues |                        | $       | 184,493 |      |   | $       | 114,737 |  |   | $      | 46,055 | 
|                             |                |                        |         |         |      |   |         |         | 

Product sales increased by $58.3 million or
52% in fiscal 2004 as compared to fiscal 2003, primarily due to
a continued increased in sales of our oils to both existing and
new infant formula licensees. Substantially all of our product
sales in fiscal 2004 relate to the sale of our oils for use in
infant formulas. Approximately 55% of our fiscal 2004 product
sales revenue was generated by sales to Mead Johnson
Nutritionals, 16% was generated by sales to Abbott Laboratories
and 11% was generated by sales to Wyeth. Collectively, these
three companies and Nestle are currently manufacturing term
infant formulas supplemented with our oils for sale in the U.S.,
and in over 30 countries around the world. Although we are not
given precise information by our customers as to the countries
in which infant formula containing our oils is ultimately sold,
we estimate that approximately two-thirds of our sales to infant
formula licensees for the year ended October 31, 2004
relates to sales in the U.S. The first infant formulas
containing our oils were introduced in the U.S. in February
2002 and, as of October 31, 2004, formula supplemented with
our oils had gained more than a 70% penetration in the
U.S. infant formula market.

Product sales increased by $66.2 million or
144% in fiscal 2003 as compared to fiscal 2002, primarily due to
increased sales of our oils to infant formula licensees.
Approximately 57% of our fiscal 2003 revenue was generated by
sales to Mead Johnson and 34% was generated by sales of DHA and
ARA to Wyeth, Abbott and Nestle combined.

We anticipate product sales will continue to grow
as infant formulas containing our oils are introduced by new
licensees and by current licensees in additional countries. We
also anticipate that sales of our products will continue to grow
in countries where our products are currently sold. Our future
sales growth, however, is dependent upon our ability to expand
our production capabilities at our Kingstree facility and the
ability of DSM to continue to expand production of ARA at their
Belvidere, New Jersey and Capua, Italy facilities.

Contract manufacturing sales revenues, totaling
approximately $13.9 million and $2.4 million in fiscal
2004 and 2003, respectively, relate to fermentation work
performed for various third parties at the Kingstree, South
Carolina facility, which we acquired in the fourth quarter of
fiscal 2003. Contract manufacturing sales are expected to
decrease in the future as this business is mostly phased out
over the next few years to allow for increased fermentation
capacity for our DHA and ARA production.

As a result of the above, total revenues
increased by $69.8 million or 61% in fiscal 2004 as
compared to fiscal 2003 and increased $68.7 million or 149%
in fiscal 2003 as compared to fiscal 2002.

35



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| |                  
| | -----------------
| | Cost and Expenses

The following table presents our operating costs
and expenses (in thousands):

|                    |                                              |                          |   |         |         |  |   |        |        |  |   |        |        | 
|------------------- | -------------------------------------------- | ------------------------ | - | ------- | ------- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                    |                                              |                         
|                    |                                              | Year Ended October 31,   |  
|                    |                                              |                          |  
|                    |                                              | 2004                     |   |         | 2003    |  |   | 2002   |       
|                    |                                              |                          |   |         |         |  |   |        |       
|Cost of revenue:    |                                              |                          |   |         |         |  |   |        |        |  |   |       
|                    | Cost of product sales                        |                          | $ | 103,423 |         |  | $ | 66,347 |        |  | $ | 29,794 |       
|                    | Cost of contract manufacturing sales         |                          |   | 11,570  |         |  |   | 2,192  |        |  |   |       |       
|Operating expenses: |                                              |                          |   |         |         |  |   |        |        |  |   |       
|                    | Research and development                     |                          |   | 18,596  |         |  |   | 13,154 |        |  |   | 12,188 |       
|                    | Selling, general and administrative          |                          |   | 25,774  |         |  |   | 16,275 |        |  |   | 11,804 |       
|                    | Other operating expenses                     |                          |   | 4,000   |         |  |   | 1,943  |        |  |   | 406    |       
|                    | Restructuring charge                         |                          |   |        |         |  |   | (250   | )      |  |   | 1,266  |       
|                    | Acquired in-process research and development |                          |   |        |         |  |   |       |        |  |   | 15,788 |       
|                    |                                              |                          |   |         |         |  |   |        |       
|                    |                                              | Total costs and expenses |   | $       | 163,363 |  |   | $      | 99,661 |  |   | $      | 71,246 | 
|                    |                                              |                          |   |         |         |  |   |        |       

Cost of Product SalesDuring
fiscal 2004, we continued to satisfy as much customer demand as
possible, while, at times, sacrificing cost efficiencies. As
such, our cost of product sales increased as a percentage of
product sales to 61% in the year ended October 31, 2004
from 59% in the year ended October 31, 2003. The increases
resulted from our continued use of air freight in connection
with ARA shipments from Europe (an increase of approximately 2%
in cost of product sales as a percentage of product sales) and
internal production inefficiencies in connection with the
commencement of DHA manufacturing at the Kingstree plant (an
increase of approximately 1% in cost of product sales as a
percentage of product sales). The gross profit margins were also
impacted by an increase in our overall cost of ARA due to the
decline of the U.S. dollar against the euro, the currency
in which we are required to pay DSM for their supply of ARA from
Italy (an increase of approximately 3% in cost of product sales
as a percentage of product sales). Such increases, however, were
partially offset by the benefits of certain DHA production
improvements recently developed (a decrease of approximately 2%
in cost of product sales as a percentage of product sales),
savings from the introduction of lower cost ARA from DSMs
Belvidere facility (a decrease of approximately 1% in cost of
product sales as a percentage of product sales) and insurance
receipts by us associated with incidents at DSM production
plants which served to offset some increased cost related to
those incidents and decrease cost of product sales as a
percentage of product sales by approximately 1% for the fiscal
year. We expect our gross profit margins to continue to reflect
the benefits of the newly implemented DHA production
improvements and expect the impact of certain negative factors
noted above to be mitigated in fiscal 2005 as we continue to
source more DHA domestically and complete the Kingstree
expansion.

Our cost of product sales as a percentage of
product sales improved during fiscal 2003 compared to fiscal
2002, decreasing to 59% from 65%. This was due primarily to
lower ARA costs from DSM, our third-party supplier of ARA, due
to efficiencies realized from increased sales volume, partially
offset by unfavorable exchange rate fluctuations between the
euro and the U.S. dollar.

Cost of Contract Manufacturing SalesCosts of
contract manufacturing sales, totaling $11.6 million and
$2.2 million for the years ended October 31, 2004 and
2003, respectively, are the costs related to the fermentation
work performed for various third parties at our Kingstree, South
Carolina facility, which we acquired in the fourth quarter of
fiscal 2003. Our contract manufacturing sales achieve
significantly lower gross margins than our product sales.
Contract manufacturing sales are to be mostly phased out over
the next few years as the associated contracts expire. This will
allow for increased fermentation capacity for our DHA and ARA
production.

Research and DevelopmentOur
research and development costs increased by $5.4 million or
41% in fiscal 2004 as compared to fiscal 2003. The increases are
primarily the result of additional resources directed toward
improving the quality and stability of our products, lowering
our DHA production cost by increasing

36



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##### 



our fermentation production yields and developing
new downstream processing techniques. The increases are also due
to the commencement of new development projects, including
development of ARA fermentation methods, development of DHA
products for the food and beverage industry, exploration of new
DHA applications and long-term development of plant-based DHA
under the collaboration agreement with SemBioSys.


Approximately 60% of the $18.6 million in
research and development expenditures incurred in fiscal 2004
related to research conducted in our Columbia, Maryland
laboratory directed toward improving the quality, sensory
properties and stability of our nutritional oils, optimizing
production characteristics of microalgal strains, investigating
the clinical health benefits of DHA and ARA fatty acids, and
exploring the biochemical pathways utilized by microalgae to
produce DHA. Additional research and development expenses
incurred at our Winchester, Kentucky facility were directed
toward increasing our DHA production yields, reducing waste,
continuing to improve the quality of our oils and developing ARA
fermentation methods. Research conducted at our laboratory in
Boulder, Colorado is focused on developing feasible approaches
to the expression of nutritional fatty acids, especially DHA, in
plant oilseeds, investigating the feasibility of utilizing our
proprietary genes to produce other bioactive compounds with
application in the healthcare fields and developing new
ingredient forms and applications technology for DHA-enriched
food products.

Our research and development costs increased by
$1.0 million or 8% in fiscal 2003 as compared to fiscal
2002. The increase was primarily the result of new development
projects, including research directed toward improving the
quality and stability of our products and research related to
increasing our production yields and reducing waste at our
manufacturing facilities.

Selling, General and AdministrativeOur
selling, general and administrative costs increased by
$9.5 million or 58% in fiscal 2004 as compared to fiscal
2003. Of the increase, approximately $2.9 million relates
to the addition of the Kingstree, South Carolina plant acquired
in September 2003, for which the administrative infrastructure
was assumed and supports the new facility and its expansion. The
remaining increase is primarily due to additional personnel
($4.2 million) and increased insurance costs
($1.7 million) required to manage our overall growth.
Specifically, we have increased staffing in our business
development, food and beverage sales and marketing and finance
departments.

Our selling, general and administrative costs
increased by $4.5 million or 38% in fiscal 2003 as compared
to fiscal 2002. The increase is primarily due to additional
personnel ($3.0 million) and increased legal fees and
insurance costs ($1.7 million) required to manage our
overall growth.

Other Operating ExpensesWe
incurred other operating expenses of $4.0 million,
$1.9 million and $400,000 in fiscal 2004, 2003 and 2002,
respectively. These expenditures related primarily to production
start-up costs associated with the expansion at our Kingstree
facility in fiscal 2004 and our Winchester facility in fiscal
2003, which include training expenses and costs related to
unsuccessful fermentation runs in connection with the scale-up
and validation of new equipment into the production process.
These also include qualification of certain third-party
manufacturers as well as expenses related to the Winchester
wastewater treatment matter. In addition, in fiscal 2003 we
incurred expenditures related to start-up costs of additional
ARA capacity at DSMs Capua, Italy facility under the terms
of our prior contract with DSM. Other operating expenses in
fiscal 2002 were associated with evaluating and obtaining
additional capacity for the production of our DHA and ARA oils,
including costs associated with testing and validating the
fermentation technology at FermPro.

RestructuringIn July
2002, we announced a restructuring of our food and beverage
sales and marketing efforts. As part of this restructuring,
eight employees and five consultants associated with food and
beverage sales were terminated. A one-time operating charge of
approximately $1.3 million was recorded in the third
quarter of fiscal 2002 to account for severance and other costs
associated with this restructuring. Employee separation benefits
of approximately $766,000 under the restructuring plan include
severance, medical and other benefits. Other costs of the
restructuring, totaling approximately $500,000, include
consultant termination costs, idle office space and professional
fees. During the first quarter of fiscal 2003, we reduced the
liability for employee separation benefits related to severance
costs due to changes in previous estimates. Additionally, we
increased the restructuring liability related to other charges
such as consultant termination fees and costs

37



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##### 



related to idle space. The net result of the
related adjustments to the restructuring liability was a
reversal of $250,000 in the fiscal quarter ended
January 31, 2003. As of October 31, 2004,
approximately $500,000 has been paid in employee separation
benefits and approximately $400,000 has been paid in other
costs. The remaining liability of approximately $100,000 at
October 31, 2004 relates primarily to certain contractual
liabilities as of the restructuring date.




| |                  
| | -----------------
| | Other Income, Net

Our other income, net, decreased by $144,000 in
fiscal 2004 as compared to fiscal 2003 and decreased by $42,000
in fiscal 2003 as compared to fiscal 2002, due primarily to
changes in interest income resulting from varying levels of cash
on-hand and changes in interest rates. See Liquidity and
Capital Resources for further discussion of cash on-hand.



| |                   
| | ------------------
| | Income Tax Benefit

As of October 31, 2004, we, for the first
time in our history, generated three years of cumulative
operating profits. As a result of this positive earnings trend
and projected operating results over the next five years, we
reversed approximately $51 million of our deferred tax
asset valuation allowance, having now determined that it is more
likely than not that this portion of the deferred tax asset will
be realized. This reversal resulted in the recognition of an
income tax benefit totaling $25.2 million, a direct
increase to stockholders equity of approximately
$22.8 million and a decrease to goodwill of approximately
$2.6 million. Although we will continue to have significant
net operating loss carryforwards which are expected to mitigate
some of our cash tax expenditures over the next several years,
we will begin recording, in fiscal 2005, a provision for income
taxes based on the appropriate effective tax rate.

Deferred tax assets and liabilities are
recognized based on temporary differences between the financial
reporting bases and the tax bases of assets and liabilities.
Deferred tax assets are also recognized for certain tax net
operating loss carryforwards. These deferred tax assets and
liabilities are measured using the enacted tax rates and laws
that will be in effect when such amounts are expected to reverse
or be utilized. The realization of deferred tax assets is
contingent upon the generation of future taxable income.
Valuation allowances are provided to reduce such deferred tax
assets to amounts more likely than not to be ultimately realized.

As of October 31, 2004, we had net operating
loss carryforwards for Federal income tax purposes of
approximately $200 million. Approximately $3 million
of this amount will expire, if unused, by the end of fiscal 2007
with the remainder expiring through fiscal 2023. Of the total
net operating loss carryforwards, approximately $56 million
continues to be fully reserved through a valuation allowance as
realizability of these assets is uncertain at this time. Should
realization of these and other deferred tax assets become more
likely than not, approximately $9.4 million of the
resulting benefit will be reflected as an income tax benefit
upon reversal of the allowance, approximately $8.8 million
will be reflected as a reduction to goodwill and approximately
$3.9 million will be reflected as an increase to
stockholders equity.



| |                  
| | -----------------
| | Net Income (Loss)

As a result of the foregoing, net income was
$47.0 million in fiscal 2004 as compared to net income of
$16.0 million in fiscal 2003 and a net loss of
$24.2 million in fiscal 2002. In fiscal 2002,
$20.3 million of the net loss was related to Martek
Boulder, including the $15.8 million charge for in-process
research and development and restructuring charges.

RECENTLY ISSUED

ACCOUNTING PRONOUNCEMENTS


In May 2003, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity
(SFAS 150). This statement establishes
standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities
and equity in its balance sheets. It requires that an issuer
classify a financial instrument that is within its scope as a
liability (or

38



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##### 



an asset in some circumstances) because that
financial instrument embodies an obligation of the issuer. This
statement is effective for financial instruments entered into or
modified after May 31, 2003, and is otherwise effective at
the beginning of the first interim period beginning after
June 15, 2003, except for mandatory redeemable financial
instruments of nonpublic entities. The FASB has deferred
implementation of SFAS 150 indefinitely for certain
noncontrolling interests, the provisions of which are currently
not applicable to us. The adoption of SFAS 150 had no
material impact on our consolidated financial statements.


In March 2004, the Emerging Issues Task Force
(EITF) reached a consensus on Issue No. 03-01,
The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments
(EITF 03-1). EITF 03-1 provides guidance
on other-than-temporary impairment models for marketable debt
and equity securities accounted for under
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities (SFAS 115),
and non-marketable equity securities accounted for under the
cost method. The EITF developed a basic three-step model to
evaluate whether an investment is other-than-temporarily
impaired. On September 30, 2004, the FASB issued FSP
03-1-1, Effective Date of Paragraphs 10-20 of EITF
Issue 03-1, The Meaning of Other-Than-Temporary
Impairment and its Application to Certain
Investments, delaying the effective date for the
recognition and measurement guidance of EITF 03-1, as
contained in paragraphs 10-20, until certain implementation
issues are addressed and a final FSP providing implementation
guidance is issued. The disclosure requirements of the consensus
remain in effect. We do not expect the adoption of
EITF 03-1s three-step model to have a material effect
on our results of operations and financial condition.
Quantitative and qualitative disclosures for investments
accounted for under SFAS 115 are effective for our fiscal
year ended October 31, 2004.

In October 2004, the FASB concluded that
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123R), which would require
all companies to measure compensation cost for all share-based
payments (including employee stock options) at fair value, would
be effective for interim or annual periods beginning after
June 15, 2005. SFAS 123R provides two tentative
adoption methods. The first method is a modified prospective
transition method whereby a company would recognize 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. Measurement and attribution of
compensation cost for awards that are unvested as of the
effective date of SFAS 123R would be based on the same
estimate of the grant-date fair value and the same attribution
method used previously under SFAS No. 123,
Accounting for Stock-Based Compensation
(SFAS 123). The second adoption method is a
modified retrospective transition method whereby a company would
recognize employee compensation cost for periods presented prior
to the adoption of SFAS 123R in accordance with the
original provisions of SFAS 123; that is, an entity would
recognize employee compensation costs in the amounts reported in
the pro forma disclosures provided in accordance with
SFAS 123. A company would not be permitted to make any
changes to those amounts upon adoption of SFAS 123R unless
those changes represent a correction of an error. For periods
after the date of adoption of SFAS 123R, the modified
prospective transition method described above would be applied.
We currently expect to adopt SFAS 123R in the quarter ended
October 31, 2005, using the modified prospective method,
although we continue to review our options for adoption under
this new pronouncement. After giving effect to the accelerated
vesting of certain stock options in December 2004 and January
2005, described in Note 16 to the audited consolidated
financial statements, and based upon our projection of unvested
stock options at the implementation date from 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 December 2004, the FASB issued
SFAS No. 151, Inventory Costs
(SFAS 151). SFAS 151 requires abnormal
amounts of inventory costs related to idle facility, freight
handling and wasted material expenses to be recognized as
current period charges. Additionally, SFAS 151 requires
that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production
facilities. The standard is effective for fiscal years beginning
after June 15, 2005. We believe the adoption of
SFAS 151 will not have a material impact on our
consolidated financial statements.

39



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LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations primarily from
the following sources:



| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | cash generated from operations;                                       
|
| |  | proceeds from the sale of equity securities;                          
|
| |  | cash received from the exercise of stock options
    and warrants; and
|
| |  | debt financing.                                                       

At October 31, 2004, our primary source of
liquidity was our cash, cash equivalents and short-term
investments totaling $42.7 million as well as the unused
portion of our revolving credit facility of $15.0 million.
Cash, cash equivalents and short-term investments decreased
$54.3 million from October 31, 2003. This decrease was
primarily attributable to $180.4 million in capital
expenditures, the majority of which were related to the
expansion of the Kingstree facility to increase output of our
nutritional oils. These expenditures were offset by cash flow
from operations of $10.1 million, which was primarily the
result of our profitability, partially offset by an increase of
DHA inventory which could not be blended with ARA for sales to
infant formula manufacturers because of a shortage of ARA. In
addition, we generated cash flows from financing activities of
$114.5 million, primarily proceeds from the exercise of
stock options and warrants and the issuance of common stock
($32.2 million) and borrowings under our revolving credit
facility ($85.0 million).

The expansion of our production facility in
Kingstree, South Carolina and, to a lesser degree, production
improvements at our facility in Winchester, Kentucky, have and
will continue to have a material effect upon our liquidity and
capital resources in fiscal 2005. We expect to invest
approximately $55 to $60 million in fiscal 2005 in plant
and equipment expenditures to complete the expansion and
production improvements as well as for other company-wide
capital needs. Throughout the construction period, all interest
incurred on borrowings will be capitalized to the extent that
the borrowings are used to cover the balance of projects under
construction. In fiscal 2004, we incurred interest on borrowings
of approximately $2.1 million and recorded amortization of
related debt fees of approximately $200,000. All of the interest
incurred and debt fee amortization recorded in fiscal 2004 was
capitalized as part of the cost of our construction.

Since our inception, we have raised approximately
$315 million from public and private sales of our equity
securities, as well as from option and warrant exercises. In
fiscal 2003, we achieved our first fiscal year of positive net
income of approximately $16.0 million. Including net income
of $47.0 million in fiscal 2004, our accumulated deficit at
October 31, 2004 is $64.5 million.

The following table sets forth our future minimum
payments under contractual obligations at October 31, 2004:

|                                             |  |       |         |           |        |   |       |       |  |     |        |  |           |         |        |  |  |   |       | 
|-------------------------------------------- |  | ----- | ------- | --------- | ------ | - | ----- | ----- |  | --- | ------ |  | --------- | ------- | ------ |  |  | - | ----- | 
|                                             |  |       |         | Less than |        |   | 1-3   |       |  | 3-5 |        |  | More than |        
|                                             |  | Total |         |           | 1 Year |   |       | Years |  |     | Years  |  |           | 5 Years |       
|In thousands                                 |  |       |         |           |        |   |       |       |  |     |        |  |           |         |       
|Notes payable                                |  | $     | 10,077  |           |        | $ | 609   |       |  | $   | 1,025  |  |           | $       | 8,111  |  |  | $ | 332   | 
|Borrowings under revolving credit facility   |  |       | 85,000  |           |        |   |      |       |  |     | 85,000 |  |           |         |       |  |  |   |      | 
|Operating and capital lease obligations(1)   |  |       | 14,345  |           |        |   | 2,746 |       |  |     | 5,428  |  |           |         | 5,287  |  |  |   | 884   | 
|DSM license fee and other obligations        |  |       | 7,000   |           |        |   | 4,333 |       |  |     | 2,667  |  |           |         |       |  |  |   |      | 
|Unconditional inventory purchase obligations |  |       | 4,133   |           |        |   | 2,296 |       |  |     | 1,837  |  |           |         |       |  |  |   |      | 
|                                             |  |       |         |           |        |   |       |       |  |     |        |  |           |         |       
|Total contractual cash obligations           |  | $     | 120,555 |           |        | $ | 9,984 |       |  | $   | 95,957 |  |           | $       | 13,398 |  |  | $ | 1,216 | 
|                                             |  |       |         |           |        |   |       |       |  |     |        |  |           |         |       



---



|    |                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Does not include the minimum payments due under
    an operating lease for equipment at our Kingstree facility
    entered in December 2004 as part of a sale/leaseback
    transaction. Minimum payments under the lease are approximately
    $60,000 per month and the lease expires in October 2009.

As part of the acquisition of FermPro, we assumed
a $10 million note with a stated interest rate of 5%. The
note was amended in January 2004 and is now an unsecured
obligation of the Company with a maturity date of
December 31, 2008. Principal is amortized over a 20-year
period, with the balance due at maturity.

40



---



##### 



Also as part of the FermPro acquisition, we
assumed a long-term note of approximately $400,000, due in 2023
with a 7% stated interest rate.


In April 2004, we entered into a new agreement
with DSM extending the existing relationship between the two
companies involving the production and supply of ARA, one of our
nutritional oils that we sell to our infant formula licensees.
Among other things, this agreement provides for the sale to us
by DSM of a license related to certain technologies associated
with the manufacture of ARA. This sale involved a license fee
totaling $10 million, $4 million of which was paid
upon execution of the agreement, $4 million of which was
paid on November  2, 2004, and the remaining
$2 million of which will be paid on November 2, 2005.
This agreement also provides for the guarantee by us of
DSMs recovery of certain expansion costs incurred by them.
This guarantee, which currently relates to DSMs recent
Belvidere expansion, will decline in value as we purchase ARA
from DSM in the future. As of October 31, 2004, the value
of our current guarantee to DSM is approximately
$3.1 million.

In May 2004, we entered into a $100 million
secured revolving credit facility which amended and expanded the
$85 million credit facility established in January 2004.
The revolving credit facility is collateralized by accounts
receivable and inventory and expires in February 2007. The
weighted average interest rate on the credit facility was
approximately 3.7% for the year ended October 31, 2004 and
is based on LIBOR and our current leverage ratio. Among other
things, the credit facility agreement contains restrictions on
future debt, the payment of dividends and the further
encumbrance of assets. In addition, the credit facility requires
that we comply with specified financial ratios and tests,
including minimum liquidity, minimum coverage ratios and maximum
leverage ratios. We do not believe that these covenants restrict
our ability to carry out our current business plan. As of
October 31, 2004, we are in compliance with all of these
debt covenants and have borrowed $85 million under the
revolving credit facility.

In February 2004, we completed an underwritten
public offering of 176,885 shares of our common stock at a
price of $65.59 per share pursuant to a shelf registration.
Net proceeds to us, after deducting underwriters fees and
expenses, amounted to approximately $11.3 million. The
proceeds from this offering, together with funds on-hand and
borrowings under our bank credit facility, have been used to
finance the expansion of our manufacturing capacity to meet
increased demand for our DHA and ARA oils and for various
general corporate purposes.

In August 2004, our shelf registration statement
was declared effective by the Securities and Exchange
Commission. The shelf registration statement enables us to raise
funds through the offering of debt securities, preferred stock,
common stock and warrants, as well as any combination thereof,
from time to time and through one or more methods of
distribution, in an aggregate amount of up to $200 million.

In October 2004, we entered an operating lease
for equipment at our Kingstree facility as part of a
sale/leaseback transaction. The equipment subject to lease was
sold at its cost basis and fair value of $10.8 million and
simultaneously leased back to us. The lease expires in October
2009 and contains the same restrictions as our revolving credit
facility. In December 2004, we entered an operating lease for
equipment at our Kingstree facility subject to the same terms
and expiration as part of a second sale/leaseback transaction.
This equipment was sold at its cost basis and fair value of
$4.1 million.

We believe that the revolving credit facility,
when combined with our cash and short-term investments of
$42.7 million on-hand at October 31, 2004, and
anticipated operating cash flows, will provide us with adequate
capital to meet our obligations for at least the next 12 to
18 months. However, in order to address the possibility
that additional production capacity may be needed to meet
anticipated demand, or if we believe that our financial
requirements otherwise warrant it, we expect to seek to raise
more equity capital in the first quarter of 2005.

The ultimate amount of additional funding that we
may require will depend, among other things, on one or more of
the following factors:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | the cost of capital expenditures at our
    manufacturing facilities;                   
|
| |  | growth in our infant formula, food and beverage
    and other nutritional product sales;

41



---



##### 





| |   |                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 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); and
|
| |  | the costs of marketing and commercializing our
    products.                                                                                                                                                                                                       

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

OFF-BALANCE SHEET ARRANGEMENTS

We have entered into lease agreements for certain
laboratory and administrative space as well as manufacturing
equipment with rental payments aggregating to $14.3 million
over the lease terms, which expire through 2011. Included in
these aggregate rentals are amounts related to certain equipment
leases, for which we are contingently liable for a residual
value guarantee of approximately $1.7 million. Subsequent
to October 31, 2004, we entered into an additional
equipment lease which included aggregate rentals of
$3.7 million over the lease term and increased our residual
value guarantee to a total of $2.3 million.

As part of our agreement with DSM, we agreed to
guarantee DSMs recovery of certain expansion costs
incurred by them. This guarantee, which currently relates to
DSMs recent Belvidere expansion, will decline in value as
we purchase ARA from DSM in the future. As of October 31,
2004, the value of our current guarantee to DSM is approximately
$3.1 million

We do not engage in any other off-balance sheet
financing arrangements. In particular, we do not have any
interest in entities referred to as variable interest entities,
which include special purpose entities and structured finance
entities.






|         |                                                                
|-------- | ---------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES
    ABOUT MARKET RISK.

Beginning in January 2004, purchases of ARA from
DSMs plant in Capua, Italy were denominated in euros,
which exposes us to risks related to changes in exchange rates
between the U.S. dollar and the euro. Fluctuations between
the U.S. dollar and the euro will impact our cost of ARA
oil and gross margins. We estimate that a 5% change in the
exchange rate would impact gross margins of our infant formula
products by approximately 1.5%. Our exposure to these currency
fluctuations has begun to slightly decrease as DSM has now
commenced ARA production in the U.S. at its Belvidere, New
Jersey facility. In April 2004, we began entering into foreign
currency cash flow hedges to reduce the related market risk.

We are subject to risk from adverse changes in
interest rates, primarily relating to variable-rate borrowings
used to maintain liquidity and finance our manufacturing
facility expansion. Based on our variable-rate debt outstanding
at October 31, 2004, a 1% change in LIBOR would change
annual interest by $850,000. At October 31, 2004, the
carrying amounts of debt approximate fair value.

42



---



##### 








|        |                                                 
|------- | ------------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY
    DATA.

INDEX TO THE CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                            |  |      |    | 
|----------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                            |  | Page |   
|                                                                                                            |  |      |   
|Report of
    Ernst &Young LLP, Independent Registered Public
    Accounting Firm                           |  |      | 44 | 
|Consolidated Balance Sheets
    as of October 31, 2004 and 2003                                             |  |      | 45 | 
|Consolidated Statements of
    Operations for the years ended October 31, 2004, 2003 and
    2002           |  |      | 46 | 
|Consolidated Statements of
    Stockholders Equity for the years ended October 31,
    2004, 2003 and 2002 |  |      | 47 | 
|Consolidated Statements of
    Cash Flows for the years ended October 31, 2004, 2003 and
    2002           |  |      | 48 | 
|Notes to Consolidated
    Financial Statements                                                              |  |      | 49 | 

43



---



##### 






REPORT OF ERNST & YOUNG
LLP,

INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM


The Board of Directors

Martek Biosciences Corporation


We have audited the accompanying consolidated
balance sheets of Martek Biosciences Corporation as of
October 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
October 31, 2004. Our audits also included the financial
statement schedule listed in the Index at Item 15. These
financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Martek
Biosciences Corporation at October 31, 2004 and 2003, and
the consolidated results of its operations and its cash flows
for each of the three years in the period ended October 31,
2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

McLean, Virginia

December 9, 2004, except for the last
paragraph of 
      Note 16, as to which the
date is January 4, 2005


44



---



##### 



MARTEK BIOSCIENCES CORPORATION



CONSOLIDATED BALANCE SHEETS


|                                               |                                                                                                                                                                             |                            |         |         |         |   |         |          |         | 
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ------- | ------- | - | ------- | -------- | ------- | 
|                                               |                                                                                                                                                                             |                           
|                                               |                                                                                                                                                                             | October 31,                |        
|                                               |                                                                                                                                                                             |                            |        
|                                               |                                                                                                                                                                             | 2004                       |         |         | 2003    |  
|In thousands, except share and per share data  |                                                                                                                                                                             |                            |         |         |         |  
|ASSETS                                        
|Current assets                                 |                                                                                                                                                                             |                            |         |         |         |   |         |         
|                                               | Cash and cash equivalents                                                                                                                                                   |                            | $       | 29,445  |         |   | $       | 29,924   |        
|                                               | Short-term investments and marketable securities                                                                                                                            |                            |         | 13,205  |         |   |         | 67,047   |        
|                                               | Accounts receivable, net                                                                                                                                                    |                            |         | 37,292  |         |   |         | 20,164   |        
|                                               | Inventories, net                                                                                                                                                            |                            |         | 30,379  |         |   |         | 14,543   |        
|                                               | Other current assets                                                                                                                                                        |                            |         | 6,793   |         |   |         | 6,666    |        
|                                               |                                                                                                                                                                             |                            |         |         |         |  
|                                               |                                                                                                                                                                             | Total current assets       |         |         | 117,114 |   |         |          | 138,344 | 
|Property, plant and equipment, net             |                                                                                                                                                                             |                            | 255,430 |         |         |   | 88,314  |         
|Deferred tax asset                             |                                                                                                                                                                             |                            | 49,378  |         |         |   |        |         
|Goodwill                                       |                                                                                                                                                                             |                            | 48,175  |         |         |   | 50,274  |         
|Other intangible assets, net                   |                                                                                                                                                                             |                            | 29,994  |         |         |   | 18,378  |         
|Other long-term assets                         |                                                                                                                                                                             |                            | 1,307   |         |         |   | 213     |         
|                                               |                                                                                                                                                                             |                            |         |         |         |  
|Total assets                                   |                                                                                                                                                                             | $                          | 501,398 |         |         | $ | 295,523 |         
|                                               |                                                                                                                                                                             |                            |         |         |         |  
|                                              
|LIABILITIES AND STOCKHOLDERS
    EQUITY      
|Current liabilities                            |                                                                                                                                                                             |                            |         |         |         |   |         |         
|                                               | Accounts payable                                                                                                                                                            |                            | $       | 28,902  |         |   | $       | 14,988   |        
|                                               | Accrued liabilities                                                                                                                                                         |                            |         | 13,040  |         |   |         | 12,020   |        
|                                               | Current portion of notes payable and other
    long-term obligations                                                                                                        |                            |         | 4,946   |         |   |         | 2,277    |        
|                                               | Current portion of unearned revenue                                                                                                                                         |                            |         | 2,031   |         |   |         | 2,841    |        
|                                               |                                                                                                                                                                             |                            |         |         |         |  
|                                               |                                                                                                                                                                             | Total current liabilities  |         |         | 48,919  |   |         |          | 32,126  | 
|Long-term debt under revolving credit facility |                                                                                                                                                                             |                            | 85,000  |         |         |   |        |         
|Notes payable and other long-term obligations  |                                                                                                                                                                             |                            | 12,175  |         |         |   | 10,441  |         
|Long-term portion of unearned revenue          |                                                                                                                                                                             |                            | 9,140   |         |         |   | 8,992   |         
|                                               |                                                                                                                                                                             |                            |         |         |         |  
|                                               |                                                                                                                                                                             | Total liabilities          |         |         | 155,234 |   |         |          | 51,559  | 
|                                               |                                                                                                                                                                             |                            |         |         |         |  
|Commitments                                    |                                                                                                                                                                             |                            |         |         |         |   |         |         
|Stockholders equity                           |                                                                                                                                                                             |                            |         |         |         |   |         |         
|                                               | Preferred stock, $.01 par value,
    4,700,000 shares authorized; none issued or outstanding                                                                                |                            |         |        |         |   |         |         |        
|                                               | Series A junior participating preferred
    stock, $.01 par value; 300,000 shares authorized; none
    issued or outstanding                                                |                            |         |        |         |   |         |         |        
|                                               | Common stock, $.10 par value;
    100,000,000 shares authorized; 29,491,127 and
    28,041,323 shares issued and outstanding at
    October 31, 2004 and 2003, respectively |                            |         | 2,949   |         |   |         | 2,804    |        
|                                               | Additional paid-in capital                                                                                                                                                  |                            |         | 407,667 |         |   |         | 352,728  |        
|                                               | Accumulated other comprehensive income                                                                                                                                      |                            |         | 68      |         |   |         |         |        
|                                               | Accumulated deficit                                                                                                                                                         |                            |         | (64,520 | )       |   |         | (111,568 | )      
|                                               |                                                                                                                                                                             |                            |         |         |         |  
|                                               |                                                                                                                                                                             | Total stockholders equity |         |         | 346,164 |   |         |          | 243,964 | 
|                                               |                                                                                                                                                                             |                            |         |         |         |  
|Total liabilities and stockholders equity     |                                                                                                                                                                             | $                          | 501,398 |         |         | $ | 295,523 |         
|                                               |                                                                                                                                                                             |                            |         |         |         |  

See accompanying notes.

45



---



##### 



MARTEK BIOSCIENCES CORPORATION



CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                              |                                              |                        |         |         |            |   |         |         |            |   |         |        |            |  
|--------------------------------------------- | -------------------------------------------- | ---------------------- | ------- | ------- | ---------- | - | ------- | ------- | ---------- | - | ------- | ------ | ---------- | -
|                                              |                                              |                       
|                                              |                                              | Year Ended October 31, |        
|                                              |                                              |                        |        
|                                              |                                              | 2004                   |         |         | 2003       |   |         | 2002    |           
|In thousands, except share and per share data |                                              |                        |         |         |            |   |         |         |           
|Revenues                                      |                                              |                        |         |         |            |   |         |         |            |   |         |       
|                                              | Product sales                                |                        | $       | 170,565 |            |   | $       | 112,298 |            |   | $       | 46,055 |           
|                                              | Contract manufacturing sales                 |                        |         | 13,928  |            |   |         | 2,439   |            |   |         |       |           
|                                              |                                              |                        |         |         |            |   |         |         |           
|Total revenues                                |                                              |                        | 184,493 |         |            |   | 114,737 |         |            |   | 46,055  |       
|                                              |                                              |                        |         |         |            |   |         |         |           
|Costs and expenses                            |                                              |                        |         |         |            |   |         |         |            |   |         |       
|                                              | Cost of product sales                        |                        |         | 103,423 |            |   |         | 66,347  |            |   |         | 29,794 |           
|                                              | Cost of contract manufacturing sales         |                        |         | 11,570  |            |   |         | 2,192   |            |   |         |       |           
|                                              | Research and development                     |                        |         | 18,596  |            |   |         | 13,154  |            |   |         | 12,188 |           
|                                              | Selling, general and administrative          |                        |         | 25,774  |            |   |         | 16,275  |            |   |         | 11,804 |           
|                                              | Other operating expenses                     |                        |         | 4,000   |            |   |         | 1,943   |            |   |         | 406    |           
|                                              | Restructuring charge                         |                        |         |        |            |   |         | (250    | )          |   |         | 1,266  |           
|                                              | Acquired in-process research and development |                        |         |        |            |   |         |        |            |   |         | 15,788 |           
|                                              |                                              |                        |         |         |            |   |         |         |           
|Total costs and expenses                      |                                              |                        | 163,363 |         |            |   | 99,661  |         |            |   | 71,246  |       
|                                              |                                              |                        |         |         |            |   |         |         |           
|Income (loss) from operations                 |                                              |                        | 21,130  |         |            |   | 15,076  |         |            |   | (25,191 | )     
|                                              |                                              |                        |         |         |            |   |         |         |           
|Other income, net                             |                                              |                        |         |         |            |   |         |         |            |   |         |       
|                                              | Interest income, net                         |                        |         | 579     |            |   |         | 633     |            |   |         | 598    |           
|                                              | Other income                                 |                        |         | 193     |            |   |         | 283     |            |   |         | 360    |           
|                                              |                                              |                        |         |         |            |   |         |         |           
|Total other income, net                       |                                              |                        | 772     |         |            |   | 916     |         |            |   | 958     |       
|                                              |                                              |                        |         |         |            |   |         |         |           
|Income (loss) before income tax benefit       |                                              |                        | 21,902  |         |            |   | 15,992  |         |            |   | (24,233 | )     
|Income tax benefit                            |                                              |                        | 25,146  |         |            |   |        |         |            |   |        |       
|                                              |                                              |                        |         |         |            |   |         |         |           
|Net income (loss)                             |                                              | $                      | 47,048  |         |            | $ | 15,992  |         |            | $ | (24,233 | )     
|                                              |                                              |                        |         |         |            |   |         |         |           
|Net income (loss) per share                   |                                              |                        |         |         |            |   |         |         |            |   |         |       
|                                              |                                              | Basic                  |         | $       | 1.62       |   |         | $       | 0.63       |   |         | $      | (1.10      | )
|                                              |                                              | Diluted                |         | $       | 1.55       |   |         | $       | 0.58       |   |         | $      | (1.10      | )
|                                              |                                              |                        |         |         |            |   |         |         |           
|Weighted average common shares outstanding    |                                              |                        |         |         |            |   |         |         |            |   |         |       
|                                              |                                              | Basic                  |         |         | 29,033,241 |   |         |         | 25,510,376 |   |         |        | 21,982,117 |  
|                                              |                                              | Diluted                |         |         | 30,385,707 |   |         |         | 27,416,757 |   |         |        | 21,982,117 |  
|                                              |                                              |                        |         |         |            |   |         |         |           

See accompanying notes.

46



---



##### 



MARTEK BIOSCIENCES CORPORATION



CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


|                                |                                                                                       |                                                   |                      |           |            |             |       |               |   |   |               |        |   |         |    |   |       |   |          |         |   |   |         |         |    |         |  
|------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------------- | -------------------- | --------- | ---------- | ----------- | ----- | ------------- | - | - | ------------- | ------ | - | ------- | -- | - | ----- | - | -------- | ------- | - | - | ------- | ------- | -- | ------- | -
|                                |                                                                                       |                                                   |                      |           |            | Accumulated |       |               |   |   |              
|                                |                                                                                       | Common Stock                                      |                      |           | Additional |             |       | Other         |   |   |               |        |  
|                                |                                                                                       |                                                   |                      |           | Paid-In    |             |       | Comprehensive |   |   | Accumulated   |        |   |        
|                                |                                                                                       | Shares                                            |                      |           | Amount     |             |       | Capital       |   |   | Income (Loss) |        |   | Deficit |    |   | Total |  
|In thousands, except share data |                                                                                       |                                                   |                      |           |            |             |       |               |   |   |               |        |   |         |    |   |       |  
|Balance at October 31, 2001     |                                                                                       |                                                   | 19,552,316           |           |            | $           | 1,955 |               |   | $ | 148,072       |        |   | $       | 1  |   |       | $ | (103,327 | )       |   | $ | 46,701  |        
|                                | Issuance of common stock and warrants in
    placement, net of issuance costs private |                                                   |                      | 1,177,000 |            |             |       | 118           |   |   |               | 21,171 |   |         |    |  |       |   |          |        |   |   |         | 21,289  |   
|                                | Exercise of stock options and warrants                                                |                                                   |                      | 836,047   |            |             |       | 84            |   |   |               | 9,977  |   |         |    |  |       |   |          |        |   |   |         | 10,061  |   
|                                | Amortization of deferred compensation                                                 |                                                   |                      |          |            |             |       |              |   |   |               | 218    |   |         |    |  |       |   |          |        |   |   |         | 218     |   
|                                | Common stock issued in connection with
    acquisition of OmegaTech                   |                                                   |                      | 1,765,728 |            |             |       | 176           |   |   |               | 51,766 |   |         |    |  |       |   |          |        |   |   |         | 51,942  |   
|                                | Net loss                                                                              |                                                   |                      |          |            |             |       |              |   |   |               |       |   |         |    |  |       |   |          | (24,233 | ) |   |         | (24,233 | ) 
|                                | Other comprehensive loss:                                                             |                                                   |                      |           |            |             |       |               |   |   |               |        |   |         |    |   |       |   |          |         |   |   |         |         |   
|                                |                                                                                       | Unrealized loss on investments                    |                      |           |           |             |       |               |  |   |               |        |  |         |    |   | (1    | ) |          |         |  |   |         |         | (1 | )      
|                                |                                                                                       |                                                   |                      |           |            |             |       |               |   |   |               |        |   |         |    |   |       |  
|                                |                                                                                       |                                                   | Comprehensive loss   |           |            |             |       |               |   |   |               |        |   |         |    |   |       |   |          |         |   |   |         |         |    | (24,234 | )
|                                |                                                                                       |                                                   |                      |           |            |             |       |               |   |   |               |        |   |         |    |   |       |  
|Balance at October 31, 2002     |                                                                                       |                                                   | 23,331,091           |           |            |             | 2,333 |               |   |   | 231,204       |        |   |         |   |   |       |   | (127,560 | )       |   |   | 105,977 |        
|                                | Issuance of common stock, net of issuance costs                                       |                                                   |                      | 2,922,250 |            |             |       | 292           |   |   |               | 82,903 |   |         |    |  |       |   |          |        |   |   |         | 83,195  |   
|                                | Common stock issued in connection with
    acquisition of OmegaTech                   |                                                   |                      | 358,566   |            |             |       | 36            |   |   |               | 14,116 |   |         |    |  |       |   |          |        |   |   |         | 14,152  |   
|                                | Common stock issued in connection with
    acquisition of FermPro                     |                                                   |                      | 124,788   |            |             |       | 12            |   |   |               | 5,578  |   |         |    |  |       |   |          |        |   |   |         | 5,590   |   
|                                | Exercise of stock options and warrants                                                |                                                   |                      | 1,304,628 |            |             |       | 131           |   |   |               | 18,907 |   |         |    |  |       |   |          |        |   |   |         | 19,038  |   
|                                | Amortization of deferred compensation                                                 |                                                   |                      |          |            |             |       |              |   |   |               | 20     |   |         |    |  |       |   |          |        |   |   |         | 20      |   
|                                | Net income                                                                            |                                                   |                      |          |            |             |       |              |   |   |               |       |   |         |    |  |       |   |          | 15,992  |   |   |         | 15,992  |   
|                                | Other comprehensive income (loss)                                                     |                                                   |                      |          |            |             |       |              |   |   |               |       |   |         |    |  |       |   |          |        |   |   |         |        |   
|                                |                                                                                       |                                                   |                      |           |            |             |       |               |   |   |               |        |   |         |    |   |       |  
|                                |                                                                                       |                                                   | Comprehensive income |           |            |             |       |               |   |   |               |        |   |         |    |   |       |   |          |         |   |   |         |         |    | 15,992  |  
|                                |                                                                                       |                                                   |                      |           |            |             |       |               |   |   |               |        |   |         |    |   |       |  
|Balance at October 31, 2003     |                                                                                       |                                                   | 28,041,323           |           |            |             | 2,804 |               |   |   | 352,728       |        |   |         |   |   |       |   | (111,568 | )       |   |   | 243,964 |        
|                                | Issuance of common stock, net of issuance costs                                       |                                                   |                      | 176,885   |            |             |       | 18            |   |   |               | 11,272 |   |         |    |  |       |   |          |        |   |   |         | 11,290  |   
|                                | Exercise of stock options and warrants                                                |                                                   |                      | 1,272,919 |            |             |       | 127           |   |   |               | 20,817 |   |         |    |  |       |   |          |        |   |   |         | 20,944  |   
|                                | Amortization of deferred compensation                                                 |                                                   |                      |          |            |             |       |              |   |   |               | 28     |   |         |    |  |       |   |          |        |   |   |         | 28      |   
|                                | Tax benefit of exercise of non-qualified stock
    options                            |                                                   |                      |          |            |             |       |              |   |   |               | 22,822 |   |         |    |  |       |   |          |        |   |   |         | 22,822  |   
|                                | Net income                                                                            |                                                   |                      |          |            |             |       |              |   |   |               |       |   |         |    |  |       |   |          | 47,048  |   |   |         | 47,048  |   
|                                | Other comprehensive income:                                                           |                                                   |                      |           |            |             |       |               |   |   |               |        |   |         |    |   |       |   |          |         |   |   |         |         |   
|                                |                                                                                       | Unrealized gain on exchange rate forward contract |                      |           |           |             |       |               |  |   |               |        |  |         |    |   | 68    |   |          |         |  |   |         |         | 68 |        
|                                |                                                                                       |                                                   |                      |           |            |             |       |               |   |   |               |        |   |         |    |   |       |  
|                                |                                                                                       |                                                   | Comprehensive income |           |            |             |       |               |   |   |               |        |   |         |    |   |       |   |          |         |   |   |         |         |    | 47,116  |  
|                                |                                                                                       |                                                   |                      |           |            |             |       |               |   |   |               |        |   |         |    |   |       |  
|Balance at October 31, 2004     |                                                                                       |                                                   | 29,491,127           |           |            | $           | 2,949 |               |   | $ | 407,667       |        |   | $       | 68 |   |       | $ | (64,520  | )       |   | $ | 346,164 |        
|                                |                                                                                       |                                                   |                      |           |            |             |       |               |   |   |               |        |   |         |    |   |       |  

See accompanying notes.



47



---



##### 



MARTEK BIOSCIENCES CORPORATION



CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                         |                                                                                                        |                                              |                                        |          |         |         |          |         |       |        |         |         |        |        |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | -------------------------------------------- | -------------------------------------- | -------- | ------- | ------- | -------- | ------- | ----- | ------ | ------- | ------- | ------ | ------ | -
|                                                         |                                                                                                        |                                             
|                                                         |                                                                                                        | Year Ended October 31,                       |                                       
|                                                         |                                                                                                        |                                              |                                       
|                                                         |                                                                                                        | 2004                                         |                                        |          | 2003    |         |          | 2002    |      
|In thousands                                             |                                                                                                        |                                              |                                        |          |         |         |          |         |      
|Operating activities                                     |                                                                                                        |                                              |                                        |          |         |         |          |         |       |        |         |        
|                                                         | Net income (loss)                                                                                      |                                              | $                                      | 47,048   |         |         | $        | 15,992  |       |        | $       | (24,233 | )     
|                                                         | Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities: |                                              |                                        |          |         |         |          |         |       |        |         |         |       
|                                                         |                                                                                                        | Depreciation and amortization                |                                        |          | 8,687   |         |          |         | 4,480 |        |         |         | 2,633  |       
|                                                         |                                                                                                        | Provision for inventory obsolescence         |                                        |          | 500     |         |          |         | 339   |        |         |         | 107    |       
|                                                         |                                                                                                        | Deferred tax benefit                         |                                        |          | (25,176 | )       |          |         |      |        |         |         |       |       
|                                                         |                                                                                                        | Loss on sale of assets and other             |                                        |          | 169     |         |          |         | 217   |        |         |         | 218    |       
|                                                         |                                                                                                        | Acquired in-process research and development |                                        |          |        |         |          |         |      |        |         |         | 15,788 |       
|                                                         |                                                                                                        | Changes in operating assets and liabilities: |                                        |          |         |         |          |         |       |        |         |         |        |       
|                                                         |                                                                                                        |                                              | Accounts receivable                    |          |         | (17,128 | )        |         |       | (8,214 | )       |         |        | (3,934 | )
|                                                         |                                                                                                        |                                              | Inventories                            |          |         | (15,525 | )        |         |       | (3,047 | )       |         |        | (2,074 | )
|                                                         |                                                                                                        |                                              | Other assets                           |          |         | 1,324   |          |         |       | (3,332 | )       |         |        | (746   | )
|                                                         |                                                                                                        |                                              | Accounts payable                       |          |         | 9,614   |          |         |       | 8,996  |         |         |        | (385   | )
|                                                         |                                                                                                        |                                              | Accrued liabilities                    |          |         | 1,088   |          |         |       | 4,092  |         |         |        | (588   | )
|                                                         |                                                                                                        |                                              | Unearned revenue and other liabilities |          |         | (511    | )        |         |       | 5,065  |         |         |        | (160   | )
|                                                         |                                                                                                        |                                              |                                        |          |         |         |          |         |      
|Net cash provided by (used in) operating
    activities  |                                                                                                        |                                              | 10,090                                 |          |         |         | 24,588   |         |       |        | (13,374 | )      
|                                                         |                                                                                                        |                                              |                                        |          |         |         |          |         |      
|Investing activities                                     |                                                                                                        |                                              |                                        |          |         |         |          |         |       |        |         |        
|                                                         | Sale (purchase) of short-term investments
    and marketable securities, net                           |                                              |                                        | 53,842   |         |         |          | (65,047 | )     |        |         | 4,033   |       
|                                                         | Expenditures for property, plant and equipment                                                         |                                              |                                        | (180,409 | )       |         |          | (45,219 | )     |        |         | (21,108 | )     
|                                                         | Proceeds from sale/leaseback transaction and other                                                     |                                              |                                        | 10,895   |         |         |          |        |       |        |         |        |       
|                                                         | Capitalization of intangible and other assets                                                          |                                              |                                        | (9,028   | )       |         |          | (1,002  | )     |        |         | (1,230  | )     
|                                                         | Cash impact of FermPro and OmegaTech
    acquisitions, net                                             |                                              |                                        | (355     | )       |         |          | (5,038  | )     |        |         | 191     |       
|                                                         |                                                                                                        |                                              |                                        |          |         |         |          |         |      
|Net cash used in investing activities                    |                                                                                                        |                                              | (125,055                               | )        |         |         | (116,306 | )       |       |        | (18,114 | )      
|                                                         |                                                                                                        |                                              |                                        |          |         |         |          |         |      
|Financing activities                                     |                                                                                                        |                                              |                                        |          |         |         |          |         |       |        |         |        
|                                                         | Repayments of notes payable and other long-term
    obligations                                        |                                              |                                        | (2,748   | )       |         |          | (1,010  | )     |        |         | (88     | )     
|                                                         | Borrowings under revolving credit facility                                                             |                                              |                                        | 85,000   |         |         |          |        |       |        |         |        |       
|                                                         | Proceeds from the exercise of warrants and stock
    options                                           |                                              |                                        | 20,944   |         |         |          | 19,038  |       |        |         | 10,061  |       
|                                                         | Proceeds from the issuance of common stock and
    warrants, net of issuance costs                     |                                              |                                        | 11,290   |         |         |          | 83,195  |       |        |         | 21,289  |       
|                                                         |                                                                                                        |                                              |                                        |          |         |         |          |         |      
|Net cash provided by financing activities                |                                                                                                        |                                              | 114,486                                |          |         |         | 101,223  |         |       |        | 31,262  |        
|                                                         |                                                                                                        |                                              |                                        |          |         |         |          |         |      
|Net (decrease) increase in cash and cash
    equivalents |                                                                                                        |                                              | (479                                   | )        |         |         | 9,505    |         |       |        | (226    | )      
|Cash and cash equivalents, beginning of year             |                                                                                                        |                                              | 29,924                                 |          |         |         | 20,419   |         |       |        | 20,645  |        
|                                                         |                                                                                                        |                                              |                                        |          |         |         |          |         |      
|Cash and cash equivalents, end of year                   |                                                                                                        | $                                            | 29,445                                 |          |         | $       | 29,924   |         |       | $      | 20,419  |        
|                                                         |                                                                                                        |                                              |                                        |          |         |         |          |         |      
|Supplemental cash flow disclosures:                      |                                                                                                        |                                              |                                        |          |         |         |          |         |       |        |         |        
|                                                         | Common stock issued related to the acquisition of
    OmegaTech                                        |                                              | $                                      |         |         |         | $        | 14,152  |       |        | $       | 51,942  |       
|                                                         | Common stock issued related to the acquisition of
    FermPro                                          |                                              | $                                      |         |         |         | $        | 5,590   |       |        | $       |        |       
|                                                         | Purchase of DSM license through long-term
    obligation                                               |                                              | $                                      | 6,000    |         |         | $        |        |       |        | $       |        |       
|                                                         | Interest paid                                                                                          |                                              | $                                      | 2,084    |         |         | $        | 80      |       |        | $       | 4       |       
|                                                         | Income taxes paid                                                                                      |                                              | $                                      | 30       |         |         | $        | 150     |       |        | $       |        |       

See accompanying notes.

48



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##### 






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                                             
|-- | --------------------------------------------
|1. | ORGANIZATION AND DESCRIPTION OF
    BUSINESS

Martek Biosciences Corporation (the
Company or Martek), a Delaware
corporation, was founded in 1985. The Company develops,
manufactures and sells products primarily derived from
microalgae and other microbes. The Companys products
include: (1) nutritional oils used in infant formula,
nutritional supplements and food fortification ingredients and
(2) powerful fluorescent markers for diagnostics and rapid
miniaturized screening.

Marteks nutritional oils are comprised of
fatty acid components, primarily docosahexaenoic acid, commonly
known as DHA, and arachidonic acid, commonly known as ARA. Many
researchers believe that these fatty acids may enhance mental
and visual development in infants and play a pivotal role in
brain function throughout life. Low levels of DHA in adults have
also been linked to a variety of health risks, including
cardiovascular problems and various neurological and visual
disorders. Additional research is underway to assess what
impact, if any, supplementation with the Companys DHA will
have on these health risks. Marteks fluorescent detection
products and technologies can aid researchers in drug discovery
and diagnostics.

In April 2002, the Company acquired OmegaTech,
Inc. (OmegaTech), a low-cost algal DHA producer
located in Boulder, Colorado. Subsequent to the acquisition,
OmegaTechs name was changed to Martek Biosciences Boulder
Corporation (Martek Boulder). OmegaTech had been in
the fermentable DHA business since 1987 and had accumulated over
100 issued and pending patents protecting its DHA technology.

In September 2003, Martek Biosciences Kingstree
Corporation (Martek Kingstree) was created as a
wholly-owned subsidiary of Martek to purchase certain assets and
assume certain liabilities of FermPro Manufacturing, LP
(FermPro), which operated a fermentation facility
located in Kingstree, South Carolina. FermPro provided contract
fermentation services and had an experienced workforce of over
100 personnel on a site of over 500 acres with extensive
fermentation, recovery, laboratory and warehousing capabilities.



|   |                                               
|-- | ----------------------------------------------
|2. | SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES

Basis of
PresentationThe consolidated
financial statements include the accounts of Martek and its
wholly-owned subsidiaries, Martek Boulder and Martek Kingstree,
(collectively, the Company) after elimination of all
significant intercompany balances and transactions. In the
opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair
presentation have been included.

Use of EstimatesThe
preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United
States requires management to make estimates and assumptions
that affect the amounts reported in the Companys
consolidated financial statements and accompanying notes. On an
ongoing basis, the Company evaluates its estimates and
judgments, which are based on historical and anticipated results
and trends and on various other assumptions that the Company
believes to be reasonable under the circumstances. By their
nature, estimates are subject to an inherent degree of
uncertainty and, as such, actual results may differ from the
Companys estimates.

Segment InformationThe Company currently operates in one business segment, the
development and commercialization of novel products from
microalgae and other microbes. The Company is managed and
operated as one business. The entire business is comprehensively
managed by a single management team that reports to the Chief
Executive Officer. The Company does not operate any material
separate lines of business or separate business entities with
respect to its products or product candidates. Accordingly, the
Company does not accumulate discrete financial information with
respect to separate product areas and does not have separately
reportable segments as defined by Statement of Financial
Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related
Information.

49



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Revenue RecognitionThe Company derives revenue principally from two sources:
product sales and contract manufacturing. The Company recognizes
revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable and
collectibility is probable. Typical infant formula license
contracts include an upfront license fee, a prepayment of
product sales and established pricing on future product sales.
In accordance with Emerging Issues Task Force No. 00-21
(EITF No. 00-21), Revenue Arrangements
with Multiple Deliverables, the consideration from these
contracts is allocated based on the relative fair values of the
separate elements. Revenue is recognized on product sales when
goods are shipped. Cash received as a prepayment on future
product purchases is deferred and recognized as revenue when
product is shipped. Revenue from product licenses is deferred
and recognized on a straight-line basis over the term of the
agreement. Royalty income is recorded when earned, based on
information provided by the Companys licensees. Royalty
income was approximately $2.2 million, $700,000 and
$400,000 in fiscal 2004, 2003 and 2002, respectively, and is
included with product sales revenue in the consolidated
statements of operations.

Contract manufacturing revenue is recognized when
goods are shipped to customers and all other conditions for
revenue recognition are met. Cash received that is related to
future performance under such contracts is deferred and
recognized as revenue when earned.

Foreign Currency
TransactionsForeign currency
transactions are translated into U.S. dollars at prevailing
rates. Gains or losses resulting from foreign currency
transactions are included in current period income or loss as
incurred. All material transactions of the Company are
denominated in U.S. dollars with the exception of purchases
of ARA from DSM Food Specialties (DSM) Capua,
Italy plant, which are denominated in euros.

Research and
DevelopmentResearch and development
costs are charged to operations as incurred and include internal
labor, materials and overhead costs associated with the
Companys ongoing research and development activity, in
addition to third-party costs for contracted work as well as
ongoing clinical trials costs.

Other Operating
ExpensesOther operating expenses
relate primarily to production start-up costs, including
materials, training and other such costs, incurred in connection
with the expansion of the Companys internal manufacturing
operations, costs incurred in connection with qualification of
certain third-party manufacturers, and amounts related to the
Winchester wastewater treatment matter (see Note 13). All
such costs are expensed as incurred.

Deferred Income
TaxesDeferred tax assets and
liabilities are determined based on temporary differences
between the financial reporting bases and the tax bases of
assets and liabilities. Deferred tax assets are also recognized
for certain tax net operating loss carryforwards. These deferred
tax assets and liabilities are measured using the enacted tax
rates and laws that will be in effect when such amounts are
expected to reverse or be utilized. The realization of total
deferred tax assets is contingent upon the generation of future
taxable income. Valuation allowances are provided to reduce such
deferred tax assets to amounts more likely than not to be
ultimately realized.

Net Income (Loss) Per
ShareBasic net income (loss) per
share is computed using the weighted average number of shares of
common stock outstanding during the period. Diluted net income
(loss) per share is computed using the weighted average number
of shares of common stock outstanding, giving effect to stock
options and warrants using the treasury stock method (see
Note 15).

Comprehensive Income
(Loss)Comprehensive income (loss) is
comprised of net earnings (loss) and other comprehensive income
(loss), which includes certain changes in equity that are
excluded from net income (loss). The Company includes unrealized
holding gains and losses on available-for-sale securities, if
any, as well as changes in the market value of exchange rate
forward contracts in other comprehensive income (loss) in the
Consolidated Statements of Stockholders Equity.

Cash and Cash
EquivalentsCash equivalents consist
of highly liquid investments with an original maturity of three
months or less.

50



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Short-Term Investments and Marketable
SecuritiesThe Company has classified
all short-term investments and marketable securities as
available-for-sale. Unrealized gains and losses on these
securities, if any, are reported as accumulated other
comprehensive income (loss), which is a separate component of
stockholders equity. Realized gains and losses are
included in other income based on the specific identification
method.

The Company periodically evaluates whether any
declines in the fair value of investments are other than
temporary. This evaluation consists of a review of several
factors, including, but not limited to: length of time and
extent that a security has been in an unrealized loss position;
the existence of an event that would impair the issuers
future earnings potential; the near term prospects for recovery
of the market value of a security; and the intent and ability of
the Company to hold the security until the market value
recovers. Declines in value below cost for debt securities where
it is considered probable that all contractual terms of the
security will be satisfied, the decline is due primarily to
changes in interest rates (and not because of increased credit
risk), and where the Company intends and has the ability to hold
the investment for a period of time sufficient to allow a market
recovery, are not assumed to be other than temporary. If
management determines that such an impairment exists, the
carrying value of the investment will be reduced to the current
fair value of the investment and the Company will recognize a
charge in the consolidated statements of income equal to the
amount of the carrying value reduction.

Fair Value of Financial
InstrumentsThe Company considers the
recorded cost of its financial assets and liabilities, which
consist primarily of cash and cash equivalents, short-term
investments and marketable securities, accounts receivable,
accounts payable, notes payable and long-term debt, to
approximate the fair value of the respective assets and
liabilities at October 31, 2004 and 2003.

Trade ReceivablesTrade receivables are reported in the consolidated balance
sheets at outstanding principal less any allowance for doubtful
accounts. The Company writes off uncollectible receivables
against the allowance for doubtful accounts when the likelihood
of collection is remote. The Company may extend credit terms up
to 50 days and considers receivables past due if not paid
by the due date. The Company performs ongoing credit evaluations
of its customers and extends credit without requiring
collateral. The Company maintains an allowance for doubtful
accounts, which is determined based on historical experience,
existing economic conditions and managements expectations
of losses. The Company analyzes historical bad debts, customer
concentrations, customer credit-worthiness, and current economic
trends when evaluating the adequacy of the allowance for
doubtful accounts. Losses have historically been within
managements expectations. The allowance for doubtful
accounts was approximately $100,000 as of October 31, 2004
and 2003.

Concentration of Credit Risk and Significant
CustomersFinancial instruments that
potentially subject the Company to concentrations of credit risk
consist principally of accounts receivable. Concentrations of
credit risk with respect to accounts receivable are present due
to the small number of customers comprising the Companys
customer base. However, the credit risk is reduced through the
Companys efforts to monitor its exposure for credit losses
and by maintaining allowances, if necessary. Four customers
accounted for approximately 90% of the Companys product
sales in fiscal 2004, three customers accounted for
approximately 87% of the Companys product sales in fiscal
2003, and two customers accounted for approximately 79% of the
Companys product sales in fiscal 2002. At October 31,
2004, four customers accounted for approximately 80% of the
Companys outstanding accounts receivable balance and at
October 31, 2003, three customers accounted for
approximately 75% of the Companys outstanding accounts
receivable balance. Included in these amounts, one of the
Companys customers, Mead Johnson Nutritionals, accounted
for approximately 55%, 57% and 54% of total product sales in
fiscal 2004, 2003 and 2002, respectively, and represented 54%
and 51% of the Companys outstanding accounts receivable
balance at October 31, 2004 and 2003, respectively. The
Companys policy is to perform an analysis of the
recoverability of its trade accounts receivable at the end of
each reporting period and to establish allowances for those
accounts considered uncollectible.

51



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


InventoriesInventories are stated at the lower of cost or market and
include appropriate elements of material, labor and indirect
costs. Inventories are valued using a weighted average approach
that approximates the first-in, first-out method. The Company
analyzes both historical and projected sales volumes and, when
needed, reserves for inventory that is either obsolete, slow
moving or impaired.

Property, Plant and
EquipmentProperty, plant and
equipment, including leasehold improvements, are stated at cost
and depreciated or amortized when placed into service using the
straight-line method, based on useful lives as follows:

|                               |  |                    
|------------------------------ |  | -------------------
|Asset Description              |  | Useful Life (Years)
|                               |  |                    
|Building                       |  | 15 - 30            
|Fermentation equipment         |  | 10 - 20            
|Oil processing equipment       |  | 10 - 20            
|Other machinery and equipment  |  | 5 - 10             
|Furniture and fixtures         |  | 5 - 7              
|Computer hardware and software |  | 3 - 7              

Leasehold improvements are amortized over the
shorter of the useful life of the asset or the lease term. Costs
for capital assets not yet placed into service, including those
related to expansion of the Companys Kingstree, South
Carolina fermentation facility, have been capitalized as
construction in progress and will be depreciated in accordance
with the above guidelines once placed into service. Costs for
repairs and maintenance are expensed as incurred.

Goodwill and Other Intangible
AssetsThe Company recorded goodwill
and purchased intangible assets in its acquisition of OmegaTech
in April, 2002 and goodwill in its acquisition of FermPro in
September 2003 (see Notes 3 and 4). The goodwill acquired
in the OmegaTech and FermPro acquisitions is subject to the
provisions of SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142), and,
accordingly, is not being amortized. In accordance with
SFAS 142, goodwill is tested for impairment on an annual
basis and between annual tests in certain circumstances, and
written down when impaired. Furthermore, SFAS 142 requires
purchased intangible assets other than goodwill to be amortized
over their useful lives unless these lives are determined to be
indefinite. Purchased intangible assets and patents are carried
at cost less accumulated amortization. Amortization is computed
over the estimated useful lives of the respective assets,
generally ten to seventeen years (see Note 9).

Impairment of Long-Lived
AssetsIn accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144),
the Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated
by the asset. Recoverability measurement and estimating of
undiscounted cash flows is done at the lowest possible level for
which there are identifiable assets. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of assets
exceeds the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value
less costs to sell. To date, the Company has not recognized any
impairment losses.

Stock-Based
CompensationIn October 1995, the
Financial Accounting Standards Board (FASB) issued
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). SFAS 123
allows companies to account for employee stock-based
compensation under the fair value-based method or using the
intrinsic value method provided by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and related
interpretations, but requires pro forma disclosure in the
footnotes to the financial statements as if the measurement
provisions of SFAS 123 had been adopted. In December 2002,
the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure
(SFAS 148). SFAS 148 amends SFAS 123
to provide alternative methods of transition for

52



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


a voluntary change to the fair value-based method
of accounting for stock-based compensation. In addition,
SFAS 148 amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting
for employee stock-based compensation and the effect of the
method used on reporting results.

The Company has elected to continue accounting
for its employee stock-based compensation in accordance with the
provisions of APB 25, and to present the pro forma
disclosures required by SFAS 123, as amended by
SFAS 148. No stock-based employee compensation cost for
stock options is reflected in net income, as all options granted
under the plans had an exercise price equal to the market value
of the underlying common stock on the date of grant. Stock-based
compensation for non-employees is accounted for using the fair
value-based method in accordance with SFAS 123. The Company
has adopted the disclosures outlined in SFAS 123, as
amended by SFAS 148.

The following table illustrates the effect on net
income (loss) and earnings (loss) per share as if the Company
had applied the fair value recognition provisions of
SFAS 123, as amended by SFAS 148, to stock-based
employee compensation (in thousands):

|                                                                                                                     |                       |                        |         |      |      |   |         |      |  |   |         |       |  
|-------------------------------------------------------------------------------------------------------------------- | --------------------- | ---------------------- | ------- | ---- | ---- | - | ------- | ---- |  | - | ------- | ----- | -
|                                                                                                                     |                       |                       
|                                                                                                                     |                       | Year Ended October 31, |        
|                                                                                                                     |                       |                        |        
|                                                                                                                     |                       | 2004                   |         |      | 2003 |   |         | 2002 | 
|                                                                                                                     |                       |                        |         |      |      |   |         |      | 
|Net income (loss), as reported                                                                                       |                       | $                      | 47,048  |      |      | $ | 15,992  |      |  | $ | (24,233 | )    
|Deduct: Total stock-based employee compensation
    expense determined under fair value-based methods for all awards |                       |                        | (17,920 | )    |      |   | (15,815 | )    |  |   | (15,967 | )    
|                                                                                                                     |                       |                        |         |      |      |   |         |      | 
|Pro forma net income (loss)                                                                                          |                       | $                      | 29,128  |      |      | $ | 177     |      |  | $ | (40,200 | )    
|                                                                                                                     |                       |                        |         |      |      |   |         |      | 
|Net income (loss) per share:                                                                                         |                       |                        |         |      |      |   |         |      |  |   |         |      
|                                                                                                                     | Basic  as reported   |                        | $       | 1.62 |      |   | $       | 0.63 |  |   | $       | (1.10 | )
|                                                                                                                     |                       |                        |         |      |      |   |         |      | 
|                                                                                                                     | Basic  pro forma     |                        | $       | 1.00 |      |   | $       | 0.01 |  |   | $       | (1.83 | )
|                                                                                                                     |                       |                        |         |      |      |   |         |      | 
|                                                                                                                     | Diluted  as reported |                        | $       | 1.55 |      |   | $       | 0.58 |  |   | $       | (1.10 | )
|                                                                                                                     |                       |                        |         |      |      |   |         |      | 
|                                                                                                                     | Diluted  pro forma   |                        | $       | 0.96 |      |   | $       | 0.01 |  |   | $       | (1.83 | )
|                                                                                                                     |                       |                        |         |      |      |   |         |      | 

ReclassificationCertain amounts in the prior years financial statements
have been reclassified to conform to the current year
presentation.

Recently Issued Accounting
PronouncementsIn May 2003, the FASB
issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity (SFAS 150). This statement
establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both
liabilities and equity in its balance sheets. It requires that
an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances) because
that financial instrument embodies an obligation of the issuer.
This statement is effective for financial instruments entered
into or modified after May 31, 2003, and is otherwise
effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatory redeemable
financial instruments of nonpublic entities. The FASB has
deferred implementation of SFAS 150 indefinitely for
certain noncontrolling interests, the provisions of which are
currently not applicable to the Company. The adoption of
SFAS 150 had no material impact on the Companys
consolidated financial statements.

In March 2004, the Emerging Issues Task Force
(EITF) reached a consensus on Issue No. 03-01,
The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments
(EITF 03-1). EITF 03-1 provides guidance
on other-than-temporary impairment models for marketable debt
and equity securities accounted for under
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities (SFAS 115),
and non-marketable equity securities accounted for under the
cost method. The EITF developed a basic three-step model to
evaluate whether an investment is other-than-temporarily
impaired. On September 30, 2004, the FASB issued FSP
03-1-1, Effective Date of

53



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Paragraphs 10-20 of EITF Issue 03-1,
The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments, delaying the
effective date for the recognition and measurement guidance of
EITF 03-1, as contained in paragraphs 10-20, until
certain implementation issues are addressed and a final FSP
providing implementation guidance is issued. The disclosure
requirements of the consensus remain in effect. The Company does
not expect the adoption of EITF 03-1s three-step
model to have a material effect on its results of operations and
financial condition. Quantitative and qualitative disclosures
for investments accounted for under SFAS 115 are effective
for the Companys fiscal year ended October 31, 2004.

In October 2004, the FASB concluded that
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123R), which would require
all companies to measure compensation cost for all share-based
payments (including employee stock options) at fair value, would
be effective for interim or annual periods beginning after
June 15, 2005. SFAS 123R provides two tentative
adoption methods. The first method is a modified prospective
transition method whereby a company would recognize 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. Measurement and attribution of
compensation cost for awards that are unvested as of the
effective date of SFAS 123R would be based on the same
estimate of the grant-date fair value and the same attribution
method used previously under SFAS 123. The second adoption
method is a modified retrospective transition method whereby a
company would recognize employee compensation cost for periods
presented prior to the adoption of SFAS 123R in accordance
with the original provisions of SFAS 123; that is, an
entity would recognize employee compensation costs in the
amounts reported in the pro forma disclosures provided in
accordance with SFAS 123. A company would not be permitted
to make any changes to those amounts upon adoption of
SFAS 123R unless those changes represent a correction of an
error. For periods after the date of adoption of SFAS 123R,
the modified prospective transition method described above would
be applied. The Company currently expects to adopt
SFAS 123R in the quarter ended October 31, 2005, using
the modified prospective method, although the Company continues
to review its options for adoption under this new pronouncement.
After giving effect to the accelerated vesting of certain stock
options in December 2004 and January 2005, described in
Note 16, and based upon the Companys projection of
unvested stock options at the implementation date from stock
options granted and outstanding as of November 30, 2004,
the Company expects 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 December 2004, the FASB issued
SFAS No. 151, Inventory Costs
(SFAS 151). SFAS 151 requires abnormal
amounts of inventory costs related to idle facility, freight
handling and wasted material expenses to be recognized as
current period charges. Additionally, SFAS 151 requires
that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production
facilities. The standard is effective for fiscal years beginning
after June 15, 2005. The Company believes the adoption of
SFAS 151 will not have a material impact on its
consolidated financial statements.



|   |                               
|-- | ------------------------------
|3. | ACQUISITION OF OMEGATECH, INC.

In April 2002, the Company completed its
acquisition of OmegaTech, Inc.(OmegaTech), a DHA
producer located in Boulder, Colorado. Upon the completion of
the acquisition, OmegaTech became a wholly-owned subsidiary of
the Company and its name was changed to Martek Biosciences
Boulder Corporation.

In connection with the purchase, the Company
issued 1,765,728 shares of the Companys common stock
in exchange for all of the outstanding capital stock of
OmegaTech. The aggregate purchase price for OmegaTech was
approximately $54.1 million, of which approximately
$49.3 million was related to the value of
1,765,728 shares of the Companys common stock
($1.5 million of which related to OmegaTech transaction
costs paid by the Company), approximately $2.1 million was
for the Companys acquisition-related fees and expenses,
and approximately $2.7 million was related to the fair
value of 154,589 vested OmegaTech stock

54



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


options that were assumed as part of the
transaction. The purchase agreement also provided for additional
stock consideration of up to $40 million, subject to
certain pricing adjustments, if four milestones are met. Two of
these milestones relate to operating results (sales and gross
profit margin objectives by October 2003 and October 2004) and
two relate to regulatory and labeling approvals in the U.S. and
Europe. In June 2003, the Commission of the European Community
granted approval of the use of the OmegaTech DHA oil in certain
foods in Europe, meeting the conditions of one of the regulatory
milestones. Accordingly, approximately 358,566 shares of
Martek common stock, valued at approximately $14.2 million,
were issued during fiscal 2003 upon the achievement of this
milestone. The payment of this additional consideration was
recorded as goodwill.

As of October 31, 2004, the Company does not
believe the second regulatory milestone has been achieved. In
addition, the Company does not believe that either financial
milestone related to sales and gross profit margin for the
periods ended October 31, 2004 and 2003 have been achieved.
The representative of the former OmegaTech stockholders has
advised us that he believes that the common stock issuable with
respect to the second regulatory milestone as well as the
financial milestone related to the period ended October 31,
2003 should be issued. Martek disagrees with that conclusion.
The parties are currently involved in litigation to resolve this
dispute with respect to the second regulatory milestone. The
total Martek common stock that may be issued relating to the
three remaining milestones is subject to a formula that is based
on the average market price of the Companys stock on the
dates that the individual milestones are determined to have been
achieved, up to a maximum of 1.9 million shares. Any
contingent consideration paid related to these milestones would
be recorded as goodwill.

The results of operations of OmegaTech have been
included in the accompanying consolidated statements of
operations from the date of the acquisition. The purchase price
has been allocated to the assets and liabilities of OmegaTech
based on their relative fair values.

As part of the purchase price allocation, we
allocated approximately $15.8 million of the purchase price
to in-process research and development projects. This allocation
represented the estimated fair value based on risk-adjusted cash
flows pertaining to the incomplete research and development
related primarily to two projects. At the date of acquisition,
the development of these projects had not yet reached
technological feasibility and the research and development in
progress had no alternative future uses. Accordingly, the
acquired in-process research and development was charged to
expense as of the date of the merger.



|   |                                             
|-- | --------------------------------------------
|4. | ACQUISITION OF FERMPRO MANUFACTURING,
    LP

In September 2003, Martek Biosciences Kingstree
Corporation (Martek Kingstree) was created as a
wholly-owned subsidiary of Martek to purchase certain assets and
assume certain liabilities of FermPro Manufacturing, LP
(FermPro), which operated a fermentation facility
located in Kingstree, South Carolina. The addition of the
FermPro facility enabled the Company to add to its production
capabilities using the existing facility, coupled with the
extensive construction build-out that is nearing completion.

The purchase price of the assets acquired and
liabilities assumed included a payment of approximately
$12.2 million, comprised of $5.4 million in cash,
124,788 shares of the Companys common stock valued at
approximately $5.6 million, and approximately
$1.2 million in acquisition-related fees and expenses. In
addition, a $10 million note was assumed as part of the
transaction. The common stock issued was valued based on the
average closing price of Marteks common stock for the
period beginning two trading days prior to, and ending two
trading days after, the announcement of the acquisition.

The results of operations of FermPro have been
included in the accompanying consolidated statements of
operations from the date of the acquisition. The purchase price
has been allocated to the assets and liabilities of FermPro
based on their relative fair values.

As part of the purchase price allocation, no
material intangible assets were identified. The excess of the
purchase price over the fair value of tangible and identifiable
intangible net assets of approximately $11.6 million has
been allocated to goodwill.

55



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The aggregate purchase price of approximately
$12.2 million, including acquisition costs, was allocated
as follows (in thousands):

|                                         |                      |   |         |        | 
|---------------------------------------- | -------------------- | - | ------- | ------ | 
|Accounts receivable and inventory        |                      | $ | 5,625   |       
|Property, plant and equipment            |                      |   | 9,477   |       
|Goodwill                                 |                      |   | 11,578  |       
|Other assets                             |                      |   | 2,183   |       
|Accounts payable and accrued liabilities |                      |   | (3,123  | )     
|Deferred revenue                         |                      |   | (2,585  | )     
|Notes payable                            |                      |   | (10,939 | )     
|                                         |                      |   |        
|                                         | Total purchase price |   | $       | 12,216 | 
|                                         |                      |   |        

The following unaudited pro forma operating
results combine the results of the Company for the years ended
October 31, 2003 and 2002 with the results of the former
FermPro entity for the years ended October 31, 2003 and
2002, assuming the acquisition had been consummated at the
beginning of each period (in thousands, except per share data).

|                                             |  |                    |         |  |      |   |         |  
|-------------------------------------------- |  | ------------------ | ------- |  | ---- | - | ------- | -
|                                             |  |                   
|                                             |  | For the Year Ended |        
|                                             |  | October 31,        |        
|                                             |  |                    |        
|                                             |  | 2003               |         |  | 2002 |  
|                                             |  |                    |         |  |      |  
|Revenues                                     |  | $                  | 124,000 |  |      | $ | 58,000  |  
|Net income (loss)                            |  | $                  | 16,000  |  |      | $ | (24,000 | )
|Net income (loss) per share, basic           |  | $                  | 0.64    |  |      | $ | (1.07   | )
|Net income (loss) per share, diluted         |  | $                  | 0.59    |  |      | $ | (1.07   | )
|Weighted average shares outstanding, basic   |  |                    | 25,616  |  |      |   | 22,107  |  
|Weighted average shares outstanding, diluted |  |                    | 27,658  |  |      |   | 22,107  |  



|   |                                 
|-- | --------------------------------
|5. | DSM SUPPLY AND LICENSE AGREEMENT

In April 2004, the Company entered into a new
agreement with DSM Food Specialties B.V. (DSM)
extending the existing relationship between the two companies
involving the production and supply of arachidonic acid
(ARA), one of the Companys nutritional oils
that it sells to its infant formula licensees. Among other
things, this agreement provides for the sale to the Company by
DSM of a license related to certain technologies associated with
the manufacture of ARA. This sale involved a license fee
totaling $10 million, $4 million of which was paid
upon execution of the agreement, $4 million of which was
paid on November 2, 2004, and the remaining $2 million
of which will be paid by the Company on November 2, 2005.
The license fee is being amortized over the 15-year term of the
agreement using the straight-line method and the remaining
obligation as of October 31, 2004 is recorded as other
long-term obligations in the consolidated balance sheets. This
agreement also provides for the granting to DSM by the Company
an exclusive license under certain of the Companys patents
and intellectual property rights for the production by DSM of
products containing ARA that are not for human consumption,
including animal feed products. This agreement also provides for
the guarantee by Martek of DSMs recovery of certain
expansion costs incurred by them. This guarantee, which
currently relates to DSMs recent Belvidere expansion, will
decline in value as Martek purchases ARA from DSM in the future.
As of October 31, 2004, the value of the Companys
current guarantee to DSM is approximately $3.1 million.



|   |                                                     
|-- | ----------------------------------------------------
|6. | SHORT-TERM INVESTMENTS AND MARKETABLE
    SECURITIES

The Company has classified all short-term
investments and marketable securities as available-for-sale.
Available-for-sale securities are carried at fair value, based
on specific identification, and have average maturities of less
than one year. Unrealized gains and losses on these securities,
if any, are reported as accumulated other comprehensive income
(loss), which is a separate component of stockholders
equity. The Companys available-for-sale securities consist
of U.S. government obligations, U.S. agency
obligations and

56



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


taxable municipal auction rate securities, and
totaled $13.2 million and $67.0 million as of
October 31, 2004 and October 31, 2003, respectively.
There were no unrealized holding gains or losses on these
available-for-sale securities as of October 31, 2004 and
October 31, 2003. There were no realized gains or losses
during the years ended October 31, 2004, 2003 and 2002. At
October 31, 2004 and 2003, the estimated fair value of
these securities approximated cost.



|   |            
|-- | -----------
|7. | INVENTORIES

Inventories consist of the following (in
thousands):

|                        |  |             |        |   |      |   |        |  
|----------------------- |  | ----------- | ------ | - | ---- | - | ------ | -
|                        |  |            
|                        |  | October 31, |       
|                        |  |             |       
|                        |  | 2004        |        |   | 2003 |  
|                        |  |             |        |   |      |  
|Finished goods          |  | $           | 10,827 |   |      | $ | 5,168  |  
|Work in process         |  |             | 18,171 |   |      |   | 7,801  |  
|Raw materials           |  |             | 2,381  |   |      |   | 2,074  |  
|                        |  |             |        |   |      |  
|Total inventory         |  |             | 31,379 |   |      |   | 15,043 |  
|Less: inventory reserve |  |             | (1,000 | ) |      |   | (500   | )
|                        |  |             |        |   |      |  
|Inventories, net        |  | $           | 30,379 |   |      | $ | 14,543 |  
|                        |  |             |        |   |      |  



|   |                              
|-- | -----------------------------
|8. | PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the
following (in thousands):

|                                                |  |             |         |   |      |   |         |  
|----------------------------------------------- |  | ----------- | ------- | - | ---- | - | ------- | -
|                                                |  |            
|                                                |  | October 31, |        
|                                                |  |             |        
|                                                |  | 2004        |         |   | 2003 |  
|                                                |  |             |         |   |      |  
|Land                                            |  | $           | 712     |   |      | $ | 683     |  
|Building and improvements                       |  |             | 29,421  |   |      |   | 9,817   |  
|Machinery and equipment                         |  |             | 133,886 |   |      |   | 56,523  |  
|Furniture and fixtures                          |  |             | 2,772   |   |      |   | 2,442   |  
|Computer hardware and software                  |  |             | 5,173   |   |      |   | 285     |  
|Construction in progress                        |  |             | 104,053 |   |      |   | 33,533  |  
|                                                |  |             |         |   |      |  
|Property, plant and equipment                   |  |             | 276,017 |   |      |   | 103,283 |  
|Less: accumulated depreciation and amortization |  |             | (20,587 | ) |      |   | (14,969 | )
|                                                |  |             |         |   |      |  
|Property, plant and equipment, net              |  | $           | 255,430 |   |      | $ | 88,314  |  
|                                                |  |             |         |   |      |  

Depreciation and amortization expense on
property, plant and equipment totaled approximately
$6.8 million, $3.4 million and $1.9 million for
the years ended October 31, 2004, 2003 and 2002,
respectively.



|   |                                     
|-- | ------------------------------------
|9. | GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets and related accumulated
amortization consist of the following (in thousands):

|                 |  |                  |        |             |                  |   |        |     |  |   |             |  |  |              |        |  |     |   |        |   |  |   |        | 
|---------------- |  | ---------------- | ------ | ----------- | ---------------- | - | ------ | --- |  | - | ----------- |  |  | ------------ | ------ |  | --- | - | ------ | - |  | - | ------ | 
|                 |  |                  |        |            
|                 |  | October 31, 2004 |        |             | October 31, 2003 |  
|                 |  |                  |        |             |                  |  
|                 |  |                  |        | Accumulated |                  |   |        |     |  |   | Accumulated |  |  |             
|Intangible Asset |  | Gross            |        |             | Amortization     |   |        | Net |  |   | Gross       |  |  | Amortization |        |  | Net |  
|                 |  |                  |        |             |                  |   |        |     |  |   |             |  |  |              |        |  |     |  
|Trademarks       |  | $                | 2,023  |             |                  | $ | (284   | )   |  | $ | 1,739       |  |  | $            | 2,030  |  |     | $ | (170   | ) |  | $ | 1,860  | 
|Patents          |  |                  | 8,409  |             |                  |   | (1,226 | )   |  |   | 7,183       |  |  |              | 6,013  |  |     |   | (672   | ) |  |   | 5,341  | 
|Core technology  |  |                  | 1,708  |             |                  |   | (228   | )   |  |   | 1,480       |  |  |              | 1,708  |  |     |   | (114   | ) |  |   | 1,594  | 
|Current products |  |                  | 10,676 |             |                  |   | (1,805 | )   |  |   | 8,871       |  |  |              | 10,676 |  |     |   | (1,093 | ) |  |   | 9,583  | 
|Licenses         |  |                  | 11,091 |             |                  |   | (370   | )   |  |   | 10,721      |  |  |              |       |  |     |   |       |   |  |   |       | 
|Goodwill         |  |                  | 48,175 |             |                  |   |       |     |  |   | 48,175      |  |  |              | 50,274 |  |     |   |       |   |  |   | 50,274 | 
|                 |  |                  |        |             |                  |   |        |     |  |   |             |  |  |              |        |  |     |  
|                 |  | $                | 82,082 |             |                  | $ | (3,913 | )   |  | $ | 78,169      |  |  | $            | 70,701 |  |     | $ | (2,049 | ) |  | $ | 68,652 | 
|                 |  |                  |        |             |                  |   |        |     |  |   |             |  |  |              |        |  |     |  

57



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Core technology and current products relate to
the value assigned to the products purchased as part of the
OmegaTech acquisition. The Company recorded amortization expense
on intangible assets of approximately $1.9 million,
$1.1 million and $800,000 during the years ended
October 31, 2004, 2003 and 2002, respectively. Based on the
current amount of intangible assets subject to amortization, the
estimated amortization expense for each of the succeeding five
years will be approximately $2.4 million.

During the year ended October 31, 2004,
there was a net reduction to goodwill of approximately
$2.1 million, primarily as a result of the Companys
recognition of a deferred tax asset, a portion of which related
to certain basis differences and the net operating loss
carryforwards resulting from the Companys acquisition of
OmegaTech (see Note 17).



|    |                    
|--- | -------------------
|10. | ACCRUED LIABILITIES

Accrued liabilities consist of the following (in
thousands):

|                               |  |             |        |  |      |   |        | 
|------------------------------ |  | ----------- | ------ |  | ---- | - | ------ | 
|                               |  |            
|                               |  | October 31, |       
|                               |  |             |       
|                               |  | 2004        |        |  | 2003 |  
|                               |  |             |        |  |      |  
|Salaries and employee benefits |  | $           | 6,105  |  |      | $ | 4,668  | 
|Inventory receipt obligations  |  |             | 2,362  |  |      |   | 1,583  | 
|Other                          |  |             | 4,573  |  |      |   | 5,769  | 
|                               |  |             |        |  |      |  
|                               |  | $           | 13,040 |  |      | $ | 12,020 | 
|                               |  |             |        |  |      |  



|    |                                 
|--- | --------------------------------
|11. | NOTES PAYABLE AND LONG-TERM DEBT

In January 2004, the Company entered into an
$85 million secured revolving line of credit. In May 2004,
the Company entered into a $100 million secured revolving
credit facility which amended and expanded the $85 million
credit facility established in January 2004. The revolving
credit facility is collateralized by accounts receivable and
inventory and expires in February 2007. The weighted average
interest rate on the credit facility was approximately 3.7% for
the year ended October 31, 2004 and is based on LIBOR and
the Companys current leverage ratio. Among other things,
the credit facility agreement contains restrictions on future
debt, the payment of dividends and the further encumbrance of
assets. In addition, the credit facility requires that the
Company comply with specified financial ratios and tests,
including minimum liquidity, minimum coverage ratios and maximum
leverage ratios. As of October 31, 2004, the Company is in
compliance with all of these debt covenants and has borrowed
$85 million under the revolving credit facility. All
borrowings are due at maturity. This credit facility replaced
the $10 million secured working capital line of credit
established in February 2003. The Company did not have any
borrowings under the previous working capital line of credit.

In connection with the purchase of certain assets
and the assumption of certain liabilities of FermPro (see
Note 4), the Company assumed a $10 million secured
note. The note was amended in January 2004 and is now an
unsecured obligation of the Company with a maturity date of
December 31, 2008. The note has a stated interest rate of
5% and principal is amortized over a 20-year period with the
balance due at maturity. Also as part of the FermPro
acquisition, the Company assumed a long-term note of
approximately $400,000, due in 2023 with a 7% stated interest
rate.

58



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The annual maturities of the Companys notes
payable at October 31, 2004 are summarized as follows (in
thousands):

|                   |  |   |        | 
|------------------ |  | - | ------ | 
|Fiscal Year        |  |  
|                   |  |  
|2005               |  | $ | 609    | 
|2006               |  |   | 512    | 
|2007               |  |   | 513    | 
|2008               |  |   | 513    | 
|2009               |  |   | 7,598  | 
|Subsequent to 2009 |  |   | 332    | 
|                   |  |   |       
|                   |  | $ | 10,077 | 
|                   |  |   |       

During the years ended October 31, 2004 and
2003, the Company incurred interest on borrowings of
approximately $2.1 million and $100,000, respectively, and
recorded amortization of related debt fees of approximately
$200,000 in fiscal 2004. Substantially all of the interest
incurred and debt fee amortization recorded was capitalized as
part of the cost of the Companys construction at the
Kingstree, South Carolina manufacturing facility. There was no
interest expense on long-term debt in fiscal 2002.

The carrying amounts of notes payable at
October 31, 2004 and 2003 and the carrying amount of the
line of credit at October 31, 2004 approximate their fair
values.



|    |                     
|--- | --------------------
|12. | RESTRUCTURING CHARGE

In July 2002, the Company announced a
restructuring of the food and beverage sales and marketing
efforts at Martek Boulder. As part of this restructuring, eight
employees and five consultants associated with food and beverage
sales were terminated. A one-time operating charge of
approximately $1.3 million was recorded in fiscal 2002 to
account for severance and other costs associated with this
restructuring. Employee separation benefits of approximately
$766,000 under the restructuring plan include severance,
medical, and other benefits. Other costs of the restructuring,
totaling approximately $500,000, included consultant termination
costs, idle office space and professional fees. During the first
quarter of fiscal 2003, the Company reduced the liability for
employee separation benefits related to severance costs due to
changes in previous estimates. Additionally, the Company
increased the restructuring liability related to other charges
such as consultant termination fees and costs related to idle
space. The net result of the related adjustments to the
restructuring liability was a reversal of $250,000 in the fiscal
quarter ended January 31, 2003. As of October 31, 2004
and 2003, the Companys liability for restructuring costs
had a balance of $77,000 and $153,000, respectively. The
following table summarizes the activity related to the liability
for restructuring costs (in thousands):

|                                                   |  |                     |      |   |         |   |      |       |  |   |       |  
|-------------------------------------------------- |  | ------------------- | ---- | - | ------- | - | ---- | ----- |  | - | ----- | -
|                                                   |  | Employee            |      |   | Other   |   |      |      
|                                                   |  | Separation Benefits |      |   | Charges |   |      | Total | 
|                                                   |  |                     |      |   |         |   |      |       | 
|Initial charge in the third quarter of fiscal 2002 |  | $                   | 766  |   |         | $ | 500  |       |  | $ | 1,266 |  
|Cash payments                                      |  |                     | (242 | ) |         |   | (187 | )     |  |   | (429  | )
|                                                   |  |                     |      |   |         |   |      |       | 
|Balance at October 31, 2002                        |  |                     | 524  |   |         |   | 313  |       |  |   | 837   |  
|Cash payments                                      |  |                     | (260 | ) |         |   | (174 | )     |  |   | (434  | )
|Adjustments                                        |  |                     | (264 | ) |         |   | 14   |       |  |   | (250  | )
|                                                   |  |                     |      |   |         |   |      |       | 
|Balance at October 31, 2003                        |  |                     |     |   |         |   | 153  |       |  |   | 153   |  
|Cash payments                                      |  |                     |     |   |         |   | (76  | )     |  |   | (76   | )
|                                                   |  |                     |      |   |         |   |      |       | 
|Balance at October 31, 2004                        |  | $                   |     |   |         | $ | 77   |       |  | $ | 77    |  
|                                                   |  |                     |      |   |         |   |      |       | 

59



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##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                              
|--- | -----------------------------
|13. | COMMITMENTS AND CONTINGENCIES

LeasesThe Company
leases its Columbia, Maryland premises under an operating lease.
In May 2004, the Company amended its existing lease for
laboratory and administrative space at the Columbia, Maryland
office to extend the term of the lease as well as expand the
Companys leased space by approximately 15%. The term of
the lease has been extended through January 2011. The terms of
the lease include annual rent escalations of 2.5%.

The Company also leases its premises in Boulder,
Colorado under an operating lease that expires in May 2008. The
terms of the lease include annual rent escalations of 3.5%.
Additionally, the Company leases certain property classified as
operating leases at its Winchester, Kentucky manufacturing
facility and its Boulder offices. Rent expense was approximately
$1 million, $900,000 and $700,000 for the years ended
October 31, 2004, 2003 and 2002, respectively. The Company
received sublease income of approximately $100,000, $300,000 and
$400,000 for the years ended October 31, 2004, 2003 and
2002, respectively, for office and lab space that it had
previously subleased in Columbia, Maryland.

In October 2004, the Company entered an operating
lease for equipment at its Kingstree facility as part of a
sale/leaseback transaction. The equipment subject to lease was
sold at its cost basis and fair value of $10.8 million and
simultaneously leased back to the Company. The lease expires in
October 2009 and contains the same restrictions as the
Companys revolving credit facility. We are contingently
liable for a residual value guarantee of approximately
$1.7 million under this agreement.

Future minimum lease payments under operating
leases at October 31, 2004 are as follows (in thousands):

|            |  |   |        | 
|----------- |  | - | ------ | 
|Fiscal Year |  |  
|            |  |  
|2005        |  | $ | 2,726  | 
|2006        |  |   | 2,693  | 
|2007        |  |   | 2,725  | 
|2008        |  |   | 2,680  | 
|2009        |  |   | 2,607  | 
|After 2009  |  |   | 884    | 
|            |  |   |       
|            |  | $ | 14,315 | 
|            |  |   |       

Scientific Research
CollaborationsThe Company has entered
into various collaborative research and license agreements for
its non-nutritional algal technology. Under these agreements,
the Company is required to fund research or to collaborate on
the development of potential products. The Company currently has
no commitments to fund future development activities. Certain of
these agreements also commit the Company to pay royalties upon
the sale of certain products resulting from such collaborations.
For the year ended October 31, 2003, Martek incurred
approximately $121,000, in royalties under such agreements
pertaining to the Companys fluorescent detection products.
No such expenses were incurred in fiscal 2004.

RoyaltiesIn
connection with the purchase of OmegaTech, the Company assumed
an obligation to pay a minimum of $7 million over the next
eight years associated with an agreement with a third party
relating to human and animal applications for OmegaTechs
DHA. In December 2002, the Company signed an amendment to this
agreement under which the Company paid $500,000 and signed a
promissory note for approximately $3.3 million in exchange
for the discharge of all future obligations under the agreement.
The first payment under the note of $1 million was paid in
August 2003, and the remainder of $2.3 million was recorded
as a note payable at October 31, 2003 and subsequently paid
in December 2003.

Purchase CommitmentsThe Company has entered into an agreement to purchase a minimum
quantity of certain material used in DHA production from a
third-party manufacturer. The commitment expires on

60



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


June 30, 2006. As of October 31, 2004,
the Companys remaining obligation was approximately
$4.1 million. The Company has the option to extend the
contract for annual periods with minimum purchase requirements.

Kentucky Wastewater
MatterOn March 12, 2003, an
explosion occurred at a public wastewater treatment works in
Winchester, Kentucky, resulting in property damage. The Company
has entered into active discussions relating to the cause of and
determination of responsibility for the property damage with the
Winchester Municipal Utilities Commission and its insurer. The
Company learned in March 2004 that the federal Environmental
Protection Agency, utilizing personnel from its Criminal
Investigation Division, had asked questions of current and
former employees relating to the explosion at the wastewater
treatment plant. Current and former employees have testified
before a federal grand jury that is investigating the matter. As
of October 31, 2004, the Company has recorded a liability
totaling approximately $1.0 million as an estimate of
certain future costs that might be incurred as a result of this
incident. While the Company cannot be certain of the outcome,
the Company believes that the outcome will not have a material
adverse impact on its financial condition or results of
operations.

OtherThe Company is
involved in various other legal actions primarily concerning its
intellectual property. Management believes that these actions,
either individually or in the aggregate, will not have a
material adverse effect on the Companys results of
operations or financial condition. From time to time, Martek may
also be a party to litigation or administrative proceedings
relating to claims arising from its operations in the normal
course of business. Management believes that the ultimate
resolution of any such litigation or administrative proceedings
against the Company is unlikely, either individually or in the
aggregate, to have a material adverse effect on the
Companys financial condition or results of operations.



|    |                   
|--- | ------------------
|14. | LICENSE AGREEMENTS

The Company has licensed certain technologies and
recognized license fee revenue under various agreements. License
fees are recorded as unearned revenue and amortized on a
straight-line basis over the term of the agreement. During
fiscal 2004, the Company signed three new license agreements
relating to the use of its oils in infant formula and recorded
license fees and product prepayments of approximately $400,000.
There were approximately $5.5 million in license fees and
prepayments recorded in fiscal 2003. The Company recognized
approximately $400,000, $200,000 and $200,000 as license revenue
for the years ended October 31, 2004, 2003 and 2002,
respectively. The balance of these license fees and prepaid
product purchases remaining in unearned revenue was
approximately $11.2 million and $11.8 million at
October 31, 2004 and 2003, respectively.



|    |                            
|--- | ---------------------------
|15. | NET INCOME (LOSS) PER SHARE

Basic Earnings Per Share is computed using the
weighted average number of common shares outstanding. Diluted
Earnings Per Share is computed using the weighted average number
of common shares outstanding, giving effect to stock options and
warrants using the treasury stock method.

61



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The following table presents the calculation of
basic and diluted net income (loss) per share (in thousands,
except per share amounts):

|                                             |                        |                        |        |       |      |   |        |       |  |   |         |   | 
|-------------------------------------------- | ---------------------- | ---------------------- | ------ | ----- | ---- | - | ------ | ----- |  | - | ------- | - | 
|                                             |                        |                       
|                                             |                        | Year Ended October 31, |       
|                                             |                        |                        |       
|                                             |                        | 2004                   |        |       | 2003 |   |        | 2002  | 
|                                             |                        |                        |        |       |      |   |        |       | 
|Net income (loss)                            |                        | $                      | 47,048 |       |      | $ | 15,992 |       |  | $ | (24,233 | )
|Weighted average shares outstanding, basic   |                        |                        | 29,033 |       |      |   | 25,510 |       |  |   | 21,982  |  
|Effect of dilutive potential common shares:  |                        |                        |        |       |      |   |        |       |  |   |         |  
|                                             | Employee stock options |                        |        | 1,315 |      |   |        | 1,821 |  |   |         |  | 
|                                             | Warrants               |                        |        | 38    |      |   |        | 86    |  |   |         |  | 
|                                             |                        |                        |        |       |      |   |        |       | 
|Total dilutive potential common shares       |                        |                        | 1,353  |       |      |   | 1,907  |       |  |   |        |  
|                                             |                        |                        |        |       |      |   |        |       | 
|Weighted average shares outstanding, diluted |                        |                        | 30,386 |       |      |   | 27,417 |       |  |   | 21,982  |  
|                                             |                        |                        |        |       |      |   |        |       | 
|Net income (loss) per share, basic           |                        | $                      | 1.62   |       |      | $ | 0.63   |       |  | $ | (1.10   | )
|                                             |                        |                        |        |       |      |   |        |       | 
|Net income (loss) per share, diluted         |                        | $                      | 1.55   |       |      | $ | 0.58   |       |  | $ | (1.10   | )
|                                             |                        |                        |        |       |      |   |        |       | 

Employee stock options to purchase approximately
400,000, 47,000 and 4.2 million shares were outstanding but
were not included in the computation of diluted net income per
share for the years ended October 31, 2004, 2003 and 2002,
respectively because the effects would have been antidilutive.



|    |                     
|--- | --------------------
|16. | STOCKHOLDERS EQUITY

Private Placement of Common
StockIn December 2001, the Company
sold 1,177,000 shares of its common stock in a private
placement resulting in net proceeds to the Company of
approximately $21.3 million. The stock was issued at a
price of $19.25 per share.

Issuance of Common
StockIn April 2003, the Company
completed a follow-on issuance of its common stock in which
2,922,250 shares were issued at a price of $30.25 per
share. Net proceeds to the Company, after deducting
underwriters fees and expenses, amounted to approximately
$83.2 million.

In February 2004, the Company completed an
underwritten issuance of 176,885 shares of common stock at
a price of $65.59 per share pursuant to a shelf
registration. Net proceeds to the Company, after deducting
underwriters fees and expenses, amounted to approximately
$11.3 million.

At October 31, 2004, the Company had
warrants outstanding to purchase up to 31,496 shares of
common stock. These warrants had an exercise price of
$19.05 per share and a remaining contractual life of
1.3 years at October 31, 2004.

Stock Option PlanOptions to purchase common stock under the Companys 1997
Stock Option Plan, 2002 Stock Incentive Plan, 2003 New Employee
Stock Option Plan and 2004 Stock Incentive Plan, collectively
referred to as the Option Plans, are granted at
prices as determined by the Compensation Committee, but shall
not be less than the fair market value of the Companys
common stock on the date of grant. Stock options granted include
both qualified and non-qualified options and vest over a period
of up to five years. The Companys Compensation Committee
determines the exercise dates and term of options (up to a
maximum of ten years from the date of grant).

As result of the Companys purchase of
OmegaTech, the Company assumed 154,589 options from the
OmegaTech, Inc. 1996 Stock Option Plan (OmegaTech
Plan). No new options may be issued under this plan as of
the date of the purchase. Under the OmegaTech Plan, exercise
prices were determined by the Compensation Committee, but at an
exercise price not less than the fair market value of
OmegaTechs common stock on the date of grant. Stock
options granted include both qualified and non-qualified options
and

62



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


were all 100% vested as of the purchase date. The
2003 New Employee Stock Option Plan (2003 Plan) was
adopted in conjunction with the acquisition of FermPro.

Details of shares under option were as follows
(shares in thousands):

|                                            |  |        |        |   |             |   |       | 
|------------------------------------------- |  | ------ | ------ | - | ----------- | - | ----- | 
|                                            |  | Number |        |   | Weighted    |  
|                                            |  | of     |        |   | Average     |  
|                                            |  | Shares |        |   | Price/Share |  
|                                            |  |        |        |   |             |  
|Options outstanding at October 31,
    2001 |  |        | 3,436  |   |             | $ | 14.17 | 
|Options exercisable at October 31,
    2001 |  |        | 1,907  |   |             | $ | 14.63 | 
|                                            |  |        |        |   |             |  
|Granted                                     |  |        | 1,554  |   |             | $ | 25.99 | 
|Exercised                                   |  |        | (500   | ) |             | $ | 12.86 | 
|Canceled                                    |  |        | (332   | ) |             | $ | 25.14 | 
|                                            |  |        |        |   |             |  
|Options outstanding at October 31,
    2002 |  |        | 4,158  |   |             | $ | 17.82 | 
|Options exercisable at October 31,
    2002 |  |        | 2,603  |   |             | $ | 15.74 | 
|                                            |  |        |        |   |             |  
|Granted                                     |  |        | 1,112  |   |             | $ | 33.85 | 
|Exercised                                   |  |        | (977   | ) |             | $ | 13.68 | 
|Canceled                                    |  |        | (101   | ) |             | $ | 28.34 | 
|                                            |  |        |        |   |             |  
|Options outstanding at October 31,
    2003 |  |        | 4,192  |   |             | $ | 22.68 | 
|Options exercisable at October 31,
    2003 |  |        | 2,412  |   |             | $ | 18.50 | 
|                                            |  |        |        |   |             |  
|Granted                                     |  |        | 1,067  |   |             | $ | 59.60 | 
|Exercised                                   |  |        | (1,188 | ) |             | $ | 16.39 | 
|Canceled                                    |  |        | (71    | ) |             | $ | 36.39 | 
|                                            |  |        |        |   |             |  
|Options outstanding at October 31,
    2004 |  |        | 4,000  |   |             | $ | 34.11 | 
|Options exercisable at October 31,
    2004 |  |        | 2,088  |   |             | $ | 26.53 | 
|                                            |  |        |        |   |             |  

The Company did not issue any options to
non-employees during the years ended October 31, 2004 and
2003. The Company issued 9,000 options to non-employees during
the year ended October 31, 2002. All of these options were
vested as of January 2003. These options had vesting periods of
between 0 to 24 months. The fair value of these options was
recorded as deferred compensation and amortized over the
performance period, which was primarily 12 months.

At October 31, 2004, approximately
400,000 shares of common stock were available for future
grants under the Option Plans. The weighted average contractual
life for all options outstanding under the Option Plans at
October 31, 2004 was 7.6 years.

Detailed information on the options outstanding
on October 31, 2004 by price range is set forth as follows:

|                         |  |                     |           |             |                     |  |          |          |  |   |             |          |  |          |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ----------- | ------------------- |  | -------- | -------- |  | - | ----------- | -------- |  | -------- | --------- |  |  | - | ----- | 
|                         |  |                     |           |            
|                         |  | Options Outstanding |           |             | Options Exercisable | 
|                         |  |                     |           |             |                     | 
|                         |  |                     |           | Weighted    |                     |  |          |          | 
|                         |  |                     |           | Average     |                     |  |          |          | 
|                         |  |                     |           | Remaining   |                     |  | Weighted |          |  |   |             | Weighted | 
|                         |  |                     |           | Contractual |                     |  | Average  |          |  |   |             | Average  | 
|                         |  | Options             |           |             | Life                |  |          | Exercise |  |   | Options     |          |  | Exercise |          
|Range of Exercise Prices |  | Outstanding         |           |             | (Years)             |  |          | Price    |  |   | Exercisable |          |  | Price    |          
|                         |  |                     |           |             |                     |  |          |          |  |   |             |          |  |          |          
|$ 6.25 - $ 9.37          |  |                     | 91,030    |             |                     |  | 4.4      |          |  | $ | 7.16        |          |  |          | 84,120    |  |  | $ | 7.09  | 
|$ 9.38 - $14.07          |  |                     | 326,370   |             |                     |  | 4.7      |          |  | $ | 12.16       |          |  |          | 301,550   |  |  | $ | 12.17 | 
|$14.08 - $21.12          |  |                     | 772,504   |             |                     |  | 6.5      |          |  | $ | 16.40       |          |  |          | 522,444   |  |  | $ | 15.98 | 
|$21.13 - $31.69          |  |                     | 1,310,559 |             |                     |  | 7.6      |          |  | $ | 27.44       |          |  |          | 778,811   |  |  | $ | 27.86 | 
|$31.70 - $47.55          |  |                     | 121,140   |             |                     |  | 4.3      |          |  | $ | 34.44       |          |  |          | 80,840    |  |  | $ | 33.33 | 
|$47.56 - $68.08          |  |                     | 1,377,920 |             |                     |  | 9.3      |          |  | $ | 57.35       |          |  |          | 320,654   |  |  | $ | 57.39 | 
|                         |  |                     |           |             |                     |  |          |          |  |   |             |          |  |          |          
|                         |  |                     | 3,999,523 |             |                     |  | 7.6      |          |  | $ | 34.11       |          |  |          | 2,088,419 |  |  | $ | 26.53 | 
|                         |  |                     |           |             |                     |  |          |          |  |   |             |          |  |          |          

63



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##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Directors Stock Option
PlanIn 1994, the Company established
a Directors Stock Option Plan (Directors
Plan). The Directors Plan provided for the award of
stock options to non-employee directors. At October 31,
2004, 49,500 options were outstanding and no additional options
were available for future grant under the Directors Plan.
The weighted average remaining contractual life for all options
outstanding under the Directors Plan at October 31,
2004 was 2.4 years. No awards have been made under the
Directors Plan since 1998. During 2004, 2003 and 2002,
Directors of the Company received option grants under the
Companys Option Plans.

Pro Forma DisclosureThe weighted average fair market values of the options at the
date of grant for options granted during the years ended
October 31, 2004, 2003 and 2002 were $39.21, $37.59 and
$18.74, respectively. The fair market value of each option grant
is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions
for the respective periods:

|                                 |  |                        |          |   |      |  |          |      |  |  |          |  
|-------------------------------- |  | ---------------------- | -------- | - | ---- |  | -------- | ---- |  |  | -------- | -
|                                 |  |                       
|                                 |  | Year Ended October 31, |         
|                                 |  |                        |         
|                                 |  | 2004                   |          |   | 2003 |  |          | 2002 | 
|                                 |  |                        |          |   |      |  |          |      | 
|Expected volatility              |  |                        | 78.9     | % |      |  | 71.2     | %    |  |  | 68.2     | %
|Risk-free interest rate          |  |                        | 3.9      | % |      |  | 3.5      | %    |  |  | 4.5      | %
|Expected average life of options |  |                        | 5  years |   |      |  | 7  years |      |  |  | 7  years |  
|Expected dividend yield          |  |                        | 0        | % |      |  | 0        | %    |  |  | 0        | %

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

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

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

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

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

Accelerated Vesting of Stock
OptionsIn December 2004 and January
2005, the Company modified the terms of all outstanding and
unvested stock options whose exercises prices were greater than
Marteks closing stock price on the modification dates. The
modifications served to immediately vest approximately
1.1 million

64



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##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


unvested stock options. Under the accounting
guidance of APB 25, the accelerated vesting did not result
in any compensation to be recognized as these unvested stock
options had no intrinsic value. The acceleration, however, will
enable the Company to avoid recording approximately
$28 million of future compensation expense that would have
been required to be recognized under the recently issued
SFAS 123R, which the Company will implement beginning in
the fourth quarter of fiscal 2005.



|    |             
|--- | ------------
|17. | INCOME TAXES

The difference between the tax provision and the
amount that would be computed by applying the statutory Federal
income tax rate to income before taxes is attributable to the
following (in thousands):

|                                                                                 |  |                        |         |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                 |  |                       
|                                                                                 |  | Year Ended October 31, |        
|                                                                                 |  |                        |        
|                                                                                 |  | 2004                   |         |   | 2003 |   |        | 2002 | 
|                                                                                 |  |                        |         |   |      |   |        |      | 
|Federal income tax expense (benefit) at 35% in
    2004 and 34% in 2003 and 2002 |  | $                      | 7,656   |   |      | $ | 5,438  |      |  | $ | (8,239 | )
|Acquired in-process research and development                                     |  |                        |        |   |      |   |       |      |  |   | 5,088  |  
|State taxes                                                                      |  |                        | 791     |   |      |   | 400    |      |  |   | (428   | )
|Change in valuation allowance                                                    |  |                        | (33,593 | ) |      |   | (5,838 | )    |  |   | 3,579  |  
|                                                                                 |  |                        |         |   |      |   |        |      | 
|Total benefit                                                                    |  | $                      | (25,146 | ) |      | $ |       |      |  | $ |       |  
|                                                                                 |  |                        |         |   |      |   |        |      | 

As of October 31, 2004, Martek, for the
first time in its history, generated three years of cumulative
operating profits. As a result of this positive earnings trend
and projected operating results over the next five years, the
Company reversed approximately $51 million of its deferred
tax asset valuation allowance, having now determined that it is
more likely than not that this portion of the deferred tax asset
will be realized. This reversal resulted in the recognition of
an income tax benefit totaling $25.2 million, a direct
increase to stockholders equity of approximately
$22.8 million due to historical non-qualified stock option
exercises and a decrease to goodwill of approximately
$2.6 million due to certain basis differences and net
operating loss carryforwards resulting from the Companys
acquisition of OmegaTech. Of the total income tax benefit
recognized, approximately $23.3 million relates to a
Federal deferred tax benefit with the remainder representing the
state deferred tax benefit.

65



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys net deferred income taxes are as follows (in
thousands):

|                                               |                   |             |         |        |      |   |         |        |  
|---------------------------------------------- | ----------------- | ----------- | ------- | ------ | ---- | - | ------- | ------ | -
|                                               |                   |            
|                                               |                   | October 31, |        
|                                               |                   |             |        
|                                               |                   | 2004        |         |        | 2003 |  
|                                               |                   |             |         |        |      |  
|Deferred tax assets:                           |                   |             |         |        |      |   |         |       
|Accruals and reserves                          |                   | $           | 1,342   |        |      | $ | 964     |       
|Patent expenses                                |                   |             | 1,791   |        |      |   | 546     |       
|Net operating loss carryforwards               |                   |             | 75,061  |        |      |   | 67,392  |       
|Deferred revenue                               |                   |             | 3,643   |        |      |   | 3,699   |       
|Other                                          |                   |             | 257     |        |      |   | 357     |       
|                                               |                   |             |         |        |      |  
|                                               | Total assets      |             |         | 82,094 |      |   |         | 72,958 |  
|                                               |                   |             |         |        |      |  
|Deferred tax liabilities:                      |                   |             |         |        |      |   |         |       
|Property, plant and equipment                  |                   |             | (3,522  | )      |      |   | (1,217  | )     
|Identified intangibles                         |                   |             | (5,389  | )      |      |   | (5,960  | )     
|Other                                          |                   |             | (316    | )      |      |   |        |       
|                                               |                   |             |         |        |      |  
|                                               | Total liabilities |             |         | (9,227 | )    |   |         | (7,177 | )
|                                               |                   |             |         |        |      |  
|Total deferred tax asset                       |                   |             | 72,867  |        |      |   | 65,781  |       
|Valuation allowance                            |                   |             | (22,077 | )      |      |   | (65,781 | )     
|                                               |                   |             |         |        |      |  
|Deferred tax asset, net of valuation allowance |                   |             | 50,790  |        |      |   |        |       
|Less: current deferred tax asset               |                   |             | (1,412  | )      |      |   |        |       
|                                               |                   |             |         |        |      |  
|Long-term deferred tax asset                   |                   | $           | 49,378  |        |      | $ |        |       
|                                               |                   |             |         |        |      |  

As of October 31, 2003, the Company
recognized a valuation allowance to the full extent of its
deferred tax asset of $65.8 million since the likelihood of
realization of the benefit could not be determined.

As of October 31, 2004, the Company had net
operating loss carryforwards for Federal income tax purposes of
approximately $200 million. Approximately $3 million
of this amount will expire, if unused, by the end of fiscal 2007
with the remainder expiring through fiscal 2023.

Section 382 of the Internal Revenue Code
limits the utilization of net operating losses when ownership
changes, as defined by that section, occur. The Company has
performed an analysis of its Section 382 ownership changes
and has determined that the utilization of certain of its net
operating loss carryforwards may be limited. Such limitation may
defer the utilization of as much as $56 million of its net
operating loss carryforwards until periods after fiscal 2009.
Due to the length of time prior to the potential utilization and
the uncertainty of having sufficient taxable income in those
periods, the Company believes it is not more likely than not
that these assets will be realized. As such, these net operating
loss carryforwards continue to be fully reserved through a
valuation allowance as of October 31, 2004. Should
realization of these and other deferred tax assets become more
likely than not, approximately $9.4 million of the
resulting benefit will be reflected as an income tax benefit
upon reversal of the allowance, approximately $8.8 million
will be reflected as a reduction to goodwill and approximately
$3.9 million will be reflected as an increase to
stockholders equity.



|    |                     
|--- | --------------------
|18. | EMPLOYEE 401(K) PLAN

The Company maintains an employee 401(k) Plan
(the Plan). The Plan, which covers all employees
21 years of age or older, stipulates that participating
employees may elect an amount up to 100% of their total
compensation to contribute to the Plan, not to exceed the
maximum allowable by Internal Revenue Service

66



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


regulations. The Company may make matching
contributions equal to a discretionary percentage up to 3%
of a participants salary, based on deductions of up to 6%
of a participants salary. All amounts deferred by a
participant under the 401(k) Plans salary reduction
feature vest immediately in the participants account while
contributions the Company may make would vest over a five-year
period in the participants account. The Company
contribution was approximately $600,000 and $300,000 for the
years ended October 31, 2004 and 2003, respectively. The
Company did not make a contribution for the year ended
October 31, 2002.



|    |                                                
|--- | -----------------------------------------------
|19. | QUARTERLY FINANCIAL INFORMATION
    (unaudited)

Quarterly financial information for fiscal 2004
and 2003 is presented in the following table (in thousands,
except per share data):

|                              |  |         |        |  |         |   |        |         |  |   |         |  |  |   |        |    
|----------------------------- |  | ------- | ------ |  | ------- | - | ------ | ------- |  | - | ------- |  |  | - | ------ | ---
|                              |  | 1st     |        |  | 2nd     |   |        | 3rd     |  |   | 4th     | 
|                              |  | Quarter |        |  | Quarter |   |        | Quarter |  |   | Quarter | 
|                              |  |         |        |  |         |   |        |         |  |   |         | 
|2004                          |  |         |        |  |         |   |        |         |  |   |         |  |  |   |        |    
|Total revenues                |  | $       | 35,575 |  |         | $ | 41,920 |         |  | $ | 47,337  |  |  | $ | 59,661 |    
|Cost of sales                 |  |         | 22,234 |  |         |   | 27,181 |         |  |   | 29,176  |  |  |   | 36,402 |    
|Income from operations        |  |         | 3,097  |  |         |   | 3,274  |         |  |   | 4,769   |  |  |   | 9,990  |    
|Net income                    |  |         | 3,351  |  |         |   | 3,399  |         |  |   | 5,011   |  |  |   | 35,287 | (1)
|Net income per share, basic   |  |         | 0.12   |  |         |   | 0.12   |         |  |   | 0.17    |  |  |   | 1.20   | (1)
|Net income per share, diluted |  |         | 0.11   |  |         |   | 0.11   |         |  |   | 0.16    |  |  |   | 1.16   | (1)
|2003                          |  |         |        |  |         |   |        |         |  |   |         |  |  |   |        |    
|Total revenues                |  | $       | 20,545 |  |         | $ | 26,447 |         |  | $ | 29,115  |  |  | $ | 38,630 | (2)
|Cost of sales                 |  |         | 12,342 |  |         |   | 15,642 |         |  |   | 17,017  |  |  |   | 23,538 | (2)
|Income from operations        |  |         | 1,924  |  |         |   | 2,921  |         |  |   | 4,254   |  |  |   | 5,977  |    
|Net income                    |  |         | 2,061  |  |         |   | 3,091  |         |  |   | 4,603   |  |  |   | 6,237  |    
|Net income per share, basic   |  |         | 0.09   |  |         |   | 0.13   |         |  |   | 0.17    |  |  |   | 0.23   |    
|Net income per share, diluted |  |         | 0.08   |  |         |   | 0.12   |         |  |   | 0.16    |  |  |   | 0.21   |    



---



|    |                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------
|(1) | In the fourth quarter, Martek recognized a
    deferred tax benefit of $25.2 million (see Note 17).                     
|   
|(2) | Approximately $2.4 million of the sales and
    $2.2 million of the cost of sales relate to the FermPro
    acquisition.

67



---



##### 








|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH
    ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
    DISCLOSURE.

None.






|         |                         
|-------- | ------------------------
|ITEM 9A. | CONTROLS AND PROCEDURES.



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | Evaluation of Disclosure Controls and
    Procedures.The Chief Executive
    Officer and the Chief Financial Officer of Martek Biosciences
    Corporation have evaluated the effectiveness of the design and
    operation of our disclosure controls and procedures (as defined
    under Rules 13a-15(e) and 15d-15(e)) of the Securities
    Exchange Act of 1934, as amended (the Exchange Act),
    as required by paragraph (b) of Rules 13a-15 and
    15d-15 under the Exchange Act, and have concluded as of the end
    of the period covered by this report that the disclosure
    controls and procedures were effective.
|
| | b) | Changes in Internal
    Controls.There were no changes in our
    internal controls over financial reporting in connection with
    the evaluation required by paragraph (d) of
    Rules 13a-15 or 15d-15 under the Exchange Act that occurred
    during Marteks last fiscal quarter that materially
    affected or are reasonably likely to materially affect the
    internal controls over financial reporting.                                                                                                                                                                                                                   






|         |                   
|-------- | ------------------
|ITEM 9B. | OTHER INFORMATION.

None.




PART III






|         |                                                        
|-------- | -------------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE
    REGISTRANT.

Information relating to our Directors and
Executive Officers is set forth in Part I of this report
under the caption Item 1  Business
Directors and Executive Officers of the Registrant.
The additional information required by this item is contained in
the following sections of our 2005 Definitive Proxy Statement,
which sections are hereby incorporated by reference:

Board Committees 
 Section 16(a) Beneficial Ownership Reporting
Compliance

As part of our system of corporate governance,
our Board of Directors has adopted a code of ethics that is
specifically applicable to our chief executive officer,
president, chief financial officer and controller. This code of
ethics is available on our website at
http://media.corporate-ir.net/mediaIfiles/nsd/
matk/codeofconduct.pdf.






|         |                        
|-------- | -----------------------
|ITEM 11. | EXECUTIVE COMPENSATION.

The information required by this item is
contained in the following sections of our 2005 Definitive Proxy
Statement, which sections are hereby incorporated by reference:

Directors Fees 
 Compensation





|         |                                                                                                        
|-------- | -------------------------------------------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
    OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
    MATTERS.

The information required by this item is
contained in the following sections of our 2005 Definitive Proxy
Statement, which sections are hereby incorporated by reference:

Beneficial Ownership of Common Stock 
 Equity Compensation Plan Information

68



---



##### 







|         |                                                    
|-------- | ---------------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS.

The information required by this item is
contained in the following sections of our 2005 Definitive Proxy
Statement, which section is hereby incorporated by reference:

Certain Relationships and Related
Transactions





|         |                                            
|-------- | -------------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND
    SERVICES.

The information required by this item is
contained in the following sections of our 2005 Definitive Proxy
Statement, which section is hereby incorporated by reference:

Independent Auditors




PART IV





|         |                                                
|-------- | -----------------------------------------------
|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT
    SCHEDULES.

(a)(1) Index to Financial Statements

The Financial Statements listed in the Index to
Financial Statements are filed as part of this Annual Report on
Form 10-K. See Part II, Item 8-Financial
Statements and Supplementary Data.

(a)(2) Financial Statement Schedules

|                                                                                |  |  |    | 
|------------------------------------------------------------------------------- |  |  | -- | 
|Schedule II Valuation and Qualifying
    Accounts  Year Ended October 31, 2004 |  |  | 70 | 

Other financial statement schedules for the year
ended October 31, 2004 and financial statement schedules
for the years ended October 31, 2003 and 2002 have been
omitted since they are either not required, not applicable, or
the information is otherwise included in the consolidated
financial statements or the notes to consolidated financial
statements.

(a)(3) Exhibits

The Exhibits listed in the accompanying
Exhibit Index are filed or incorporated by reference as
part of this report.

69



---



##### 



SCHEDULE II

MARTEK BIOSCIENCES CORPORATION

VALUATION AND QUALIFYING ACCOUNTS


YEAR ENDED OCTOBER 31, 2004(1)

|                                   |  |                   |        |  |           |   |       |            |            |   |             |      |  |   |        | 
|---------------------------------- |  | ----------------- | ------ |  | --------- | - | ----- | ---------- | ---------- | - | ----------- | ---- |  | - | ------ | 
|In thousands                       |  |                   |        |  |           |   |       |           
|                                   |  | Balance at        |        |  |           |   |       |            | Balance at |  
|Description                        |  | Beginning of Year |        |  | Additions |   |       | Deductions |            |   | End of Year |     
|                                   |  |                   |        |  |           |   |       |            |            |   |             |     
|Deferred tax valuation allowance   |  | $                 | 65,781 |  |           | $ | 6,936 |            |            | $ | (50,640     | )(2) |  | $ | 22,077 | 
|Reserve for inventory obsolescence |  | $                 | 500    |  |           | $ | 500   |            |            | $ |            |      |  | $ | 1,000  | 



---



|    |                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | This schedule is omitted for the years ended
    October 31, 2003 and 2002 since it was either not required
    or the information is otherwise included in the consolidated
    financial statements or the notes to consolidated financial
    statements.
|   
|(2) | A portion of the valuation allowance was reversed
    due to our determination that it is more likely than not that we
    will realize these deferred tax assets.                                                                                          

70



---



##### 






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized on January 13, 2005.



| |                               
| | ------------------------------
| | MARTEK BIOSCIENCES CORPORATION



| |    |                       
| | -- | ----------------------
| | By | /s/ Henry Linsert, Jr.

| |                                     
| | ------------------------------------
| |                                     
| | Henry Linsert, Jr.                  
| | Chief Executive Officer and Director

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person
whose signature appears below constitutes and appoints Henry
Linsert, Jr. and Peter L. Buzy, and each of them
individually, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for
him and his name, place and stead in any and all capacities, to
sign the report and any and all amendments to this report, and
to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents,
full power and authority to perform each and every act and thing
requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully
do or cause to be done by virtue thereof.

Pursuant to the requirement of the Securities
Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the date indicated.

|                                         |  |                                                                                            |  |                  |  | 
|---------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | ---------------- |  | 
|                                         |  |                                                                                            |  |                 
|Signatures                               |  | Title                                                                                      |  | Date            
|                                         |  |                                                                                            |  |                 
|                                        
|/s/ Henry Linsert, Jr.Henry Linsert, Jr. |  | Chief Executive Officer and Director (Principal
    Executive Officer)                     |  | January 13, 2005
|                                        
|/s/ Peter L. BuzyPeter L. Buzy           |  | Chief Financial Officer and Treasurer (Principal
    Financial and
    Accounting Officer) |  | January 13, 2005
|                                        
|/s/ James R. BeeryJames R. Beery         |  | Director                                                                                   |  | January 13, 2005
|                                        
|/s/ Jules BlakeJules Blake               |  | Director                                                                                   |  | January 13, 2005
|                                        
|/s/ Robert J. FlanaganRobert J. Flanagan |  | Director                                                                                   |  | January 13, 2005
|                                        
|/s/ Ann L. JohnsonAnn L. Johnson         |  | Director                                                                                   |  | January 13, 2005
|                                        
|/s/ Gordon S. MacklinGordon S. Macklin   |  | Director                                                                                   |  | January 13, 2005

71



---



##### 



|                                                       |  |          |  |                  |  | 
|------------------------------------------------------ |  | -------- |  | ---------------- |  | 
|                                                       |  |          |  |                 
|Signatures                                             |  | Title    |  | Date            
|                                                       |  |          |  |                 
|                                                      
|/s/ Douglas J. MacMaster, Jr.Douglas J. MacMaster, Jr. |  | Director |  | January 13, 2005
|                                                      
|/s/ John H. MaharJohn H. Mahar                         |  | Director |  | January 13, 2005
|                                                      
|/s/ Sandra PanemSandra Panem                           |  | Director |  | January 13, 2005
|                                                      
|Richard J. Radmer                                      |  | Director |  | January 13, 2005
|                                                      
|/s/ Eugene H. Rotberg Eugene H. Rotberg                |  | Director |  | January 13, 2005

72



---



##### 



EXHIBIT INDEX

|        |       |   |             |                                                                                                                                                                                                                                                                                                            
|------- | ----- | - | ----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |   |            
|Number  |       |   | Description
|        |       |   |            
|        | 3.01  |   |             | Revised Restated Certificate of Incorporation of
    Registrant.                                                                                                                                                                                                                                           
|       
|        | 3.02  |   |             | Amendment to the Restated Certificate of
    Incorporation, effective March 14, 1995 (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 Designation, Preferences and
    Rights of Series A Junior Participating Preferred Stock
    (filed as Exhibit 4 to the Companys Form 8-K,
    File No. 0-22354, filed January 29, 1996, and incorporated
    by reference herein).                                                        
|       
|        | 3.04  |   |             | Amended By-Laws of Registrant.                                                                                                                                                                                                                                                                             
|       
|        | 3.05  |   |             | Amendment to Bylaws effective March 2, 2001
    (filed as exhibit 3.06 to the Companys 2001
    Form 10-K, File No. 22354, and Incorporated by
    reference herein).                                                                                                                                     
|       
|        | 3.06  |   |             | Certificate of Amendment to the Restated
    Certificate of Incorporation of Martek Biosciences Corporation
    (filed as exhibit 3.07 to the Companys quarterly
    report on Form 10-Q, File No. 22354, for the quarter ended
    January 31, 2002, and incorporated by reference herein).              
|       
|        | 3.07  |   |             | Martek Biosciences Corporation Amendment to
    By-laws effective April 25, 2002 (filed as
    exhibit 3.08 to the Companys quarterly report on
    Form 10-Q, File No. 22354, for the quarter ended
    April 30, 2002, and incorporated by reference herein).                                           
|       
|        | 4.01  |   |             | Specimen Stock Certificate for Common Stock.                                                                                                                                                                                                                                                               
|       
|        | 4.02  |   |             | Form of Rights Agreement dated as of
    January 24, 1996 between the Company and Registrar and
    Transfer Company, as Rights Agent (filed as Exhibit 1 to
    the Companys Form 8-K, File No. 0-22354, filed
    January 29, 1996, and incorporated by reference herein).                              
|       
|        | 4.03  |   |             | Form of First Amendment to Rights Agreement
    between the Company and Registrar and Transfer Company, as
    Rights Agent (filed as Exhibit 99.1 to the Companys
    Form 8-K, File No. 0-22354, filed November 9, 1998 and
    incorporated by reference herein).                                      
|       
|        | 10.01 |   |             | Form Indemnification Agreement for directors.                                                                                                                                                                                                                                                              
|       
|        | 10.02 |   |             | 1986 Stock Option Plan, as amended.                                                                                                                                                                                                                                                                       
|       
|        | 10.03 |   |             | Employment Agreement, dated May 4, 1990,
    between the Company and Henry Linsert, Jr.                                                                                                                                                                                                                   
|       
|        | 10.04 |   |             | Form of Proprietary Information, Inventions and
    Non-Solicitation Agreement.                                                                                                                                                                                                                            
|       
|        | 10.05 |   |             | Collaborative Research and License Agreement,
    dated April 30, 1993, as amended June 11, 1993,
    between the Company and the Trustees of Columbia University.                                                                                                                                         
|       
|        | 10.06 |   |             | Lease, commencement date October 15, 1992,
    between the Company and Aetna Life Insurance Company, as
    modified on August 5, 1993.                                                                                                                                                                    
|       
|        | 10.07 |   |             | License Agreement, dated September 10, 1992,
    between the Company and Bestuurcentrum Der Verenigde Bedrijven
    Nutricia B.V.*                                                                                                                                                                         
|       
|        | 10.07 | A |             | Exhibits to September 10, 1992 License
    Agreement between the Company and Bestuurcentrum Der Verenigde
    Bedrijven Nutricia B.V.*                                                                                                                                                                     
|       
|        | 10.08 |   |             | License Agreement, dated October 28, 1992,
    between the Company and Mead Johnson & Company.*                                                                                                                                                                                                            
|       
|        | 10.08 | A |             | Exhibits to October 28, 1992 License
    Agreement between the Company and Mead
    Johnson & Company.*                                                                                                                                                                                                    
|       
|        | 10.09 |   |             | 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).*      
|       
|        | 10.09 | A |             | Exhibits to January 28, 1993 License
    Agreements between the Company and American Home Products
    Corporation represented by the Wyeth-Ayerst Division (Domestic
    Version) and American Home Products Corporation represented by
    its agent Wyeth-Ayerst International (International Version).*



---



##### 



|        |       |  |             |                                                                                                                                                                                                                                                                                                                                                                           
|------- | ----- |  | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |            
|Number  |       |  | Description
|        |       |  |            
|       
|        | 10.10 |  |             | Lease Modification Agreement, dated
    October 14, 1993 between the Company and Aetna Life
    Insurance Company.                                                                                                                                                                                                                                                        
|       
|        | 10.11 |  |             | 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 1995 Form 10-K, File No. 0-22354, and
    incorporated by reference herein).                                                                                                                     
|       
|        | 10.12 |  |             | 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).                                                                                                                                                                     
|       
|        | 10.13 |  |             | 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).                                                                                                                                       
|       
|        | 10.14 |  |             | 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 1997 Form
    10-K, File No. 000-22354, and incorporated by reference herein).                                                                                                                                 
|       
|        | 10.15 |  |             | 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 1998 Form
    10-K, File No. 22354, and incorporated by reference herein).                                                                                                                                    
|       
|        | 10.16 |  |             | 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).                                                                                                                   
|       
|        | 10.17 |  |             | 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).                                                                                                                                                    
|       
|        | 10.18 |  |             | 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 Form 8-K, File No. 22354, dated
    March 2, 2001 and incorporated by reference herein).                                                                                                   
|       
|        | 10.19 |  |             | 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 2001 Form 10-K, File No. 22354, and
    Incorporated by reference herein).                                                                                                                  
|       
|        | 10.20 |  |             | 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 2001 Form 10-K, File No. 22354, and
    Incorporated by reference herein).                                                                                                              
|       
|        | 10.21 |  |             | Martek Biosciences Corporation Amended And
    Restated Management Cash Bonus Incentive Plan effective
    April 25, 2002 (filed as Exhibit 10.36 to the
    Companys quarterly report on Form 10-Q, File
    No. 22354, for the quarter ended April 30, 2002, and
    incorporated by reference herein).                                                               
|       
|        | 10.22 |  |             | OmegaTech, Inc. 1996 Stock Option Plan, as
    amended on April 26, 2001 (filed as Exhibit 10.37 to
    the Companys quarterly report on Form 10-Q, File
    No. 22354, for the quarter ended April 30, 2002, and
    incorporated by reference herein).                                                                                                                
|       
|        | 10.23 |  |             | Employment Agreement dated April 25, 2002
    between the Company and James Flatt (filed as Exhibit 10.39
    to the Companys quarterly report on Form 10-Q, File
    No. 22354, for the quarter ended April 30, 2002, and
    incorporated by reference herein).                                                                                                       
|       
|        | 10.24 |  |             | 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. 22354, for the quarter ended April 30, 2002, and
    incorporated by reference herein).*
|       
|        | 10.25 |  |             | Manufacturing Agreement between C.P. Kelco
    U.S. Inc. and OmegaTech, Inc. dated October 19, 2001
    (filed as Exhibit 10.42 to the Companys quarterly
    report on Form 10-Q, File No. 22354, for the quarter ended
    April 30, 2002, and incorporated by reference herein).                                                                                      
|       
|        | 10.26 |  |             | Agreement and Plan of Merger, dated
    March 25, 2002, by and among Martek Biosciences
    Corporation, OmegaTech, Inc. and OGTAQ Corp. (filed as
    Exhibit 99.2 to the Companys Current Report on Form
    8-K, File No. 22354, filed on May 3, 2002 and
    incorporated by reference herein).                                                                      



---



##### 



|        |       |  |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- | ----- |  | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |            
|Number  |       |  | Description
|        |       |  |            
|       
|        | 10.27 |  |             | First Amendment to the Agreement and Plan of
    Merger dated as of March 25, 2002 by and among OmegaTech,
    Inc., Martek Biosciences Corporation, and OGTAQ Corp., dated
    April 24, 2002 by and among Martek Biosciences Corporation,
    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. 22354, filed on May 3, 2002 and
    incorporated by reference herein).                                                                          
|       
|        | 10.28 |  |             | 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).                                                                                                                                                                                                                                                                                                                                                                                   
|       
|        | 10.29 |  |             | 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., Martek
    Biosciences Corporation 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. 22354,
    filed on July 31, 2002 and incorporated by reference
    herein).
|       
|        | 10.30 |  |             | Amendment No. 3 to Settlement Terms Related
    to Arbitration of License Agreement dated as of
    December 20, 2002 by and among Monsato Company and Martek
    Biosciences Boulder Corporation. (filed as Exhibit 10.48 to
    the Companys annual report on Form 10-K, File
    No. 22354, for the year ended October 31, 2002, and
    incorporated by reference herein).                                                                                                                                                                                                               
|       
|        | 10.31 |  |             | 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. 22354, for the quarter ended
    July 31, 2003, and incorporated by reference herein).                                                                                                                                                                                                                                                                                                                     
|       
|        | 10.32 |  |             | Asset Sale and Purchase Agreement dated
    July 21, 2003 by and among FermPro Manufacturing, LP, a
    Georgia limited partnership, Astral Technologies, Inc., a South
    Carolina corporation and Martek Biosciences Corporation (filed
    as Exhibit 10.51 to the Companys quarterly report on
    Form 10-Q, File No. 22354, for the quarter ended
    July 31, 2003, and incorporated by reference herein).                                                                                                                                                                           
|       
|        | 10.33 |  |             | Amendment No. 1 to Asset Sale and Purchase
    Agreement by and among FermPro Manufacturing, LP, a Georgia
    limited partnership, Astral Technologies, Inc., a South Carolina
    corporation and Martek Biosciences Corporation (filed as
    Exhibit 10.52 to the Companys quarterly report on
    Form 10-Q, File No. 22354, for the quarter ended
    July 31, 2003, and incorporated by reference herein).                                                                                                                                                                            
|       
|        | 10.34 |  |             | Amendment No. 2 to Asset Sale and Purchase
    Agreement by and among FermPro Manufacturing, LP, a Georgia
    limited partnership, Astral Technologies, Inc., a South Carolina
    corporation and Martek Biosciences Corporation (filed as
    Exhibit 10.53 to the Companys quarterly report on
    Form 10-Q, File No. 22354, for the quarter ended
    July 31, 2003, and incorporated by reference herein).                                                                                                                                                                            
|       
|        | 10.35 |  |             | Joinder Agreement by and among FermPro
    Manufacturing, LP, a Georgia limited partnership, Astral
    Technologies, Inc., a South Carolina corporation and Martek
    Biosciences Corporation (filed as Exhibit 10.54 to the
    Companys quarterly report on Form 10-Q, File
    No. 22354, for the quarter ended July 31, 2003, and
    incorporated by reference herein).                                                                                                                                                                                                               
|       
|        | 10.36 |  |             | 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. 22354, for the quarter ended July 31, 2003, and
    incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                       
|       
|        | 10.37 |  |             | Collaboration Agreement Between Martek
    Biosciences Corporation and SemBioSys Genetics, Inc., a Canadian
    corporation, dated December 1, 2003 (filed as
    Exhibit 10.59 to the Companys annual report on Form
    10-K, as amended, File No. 22354, for the year ended
    October 31, 2003, and incorporated by reference herein).*                                                                                                                                                                                                                                                 
|       
|        | 10.38 |  |             | Amendment to Manufacturing Agreement by and
    between C.P. Kelco U.S., Inc. and Martek Biosciences Boulder
    Corporation, dated October 1, 2003 (filed as
    Exhibit 10.60 to the Companys annual report on Form
    10-K, as amended, File No. 22354, for the year ended
    October 31, 2003, and incorporated by reference herein).*                                                                                                                                                                                                                                                 
|       
|        | 10.39 |  |             | 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. 22354,
    for the year ended October 31, 2003, and incorporated by
    reference herein).                                                                                                                                                                                                                                                                                    



---



##### 



|        |       |  |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- | ----- |  | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |            
|Number  |       |  | Description
|        |       |  |            
|       
|        | 10.40 |  |             | Loan and Security Agreement between Martek
    Biosciences Corporation, a Delaware Corporation, as Borrower,
    and Manufacturers And Traders Trust Company, as Administrative
    Agent, and as Sole Book Runner, and Bank of America, N.A., as
    Syndication Agent, and SunTrust Bank as Documentation Agent, and
    Manufacturers And Traders Trust Company And Various Other
    Financial Institutions Now or Hereafter Party Hereto As Lenders,
    dated January 26, 2004. (filed as Exhibit 10.62 to the
    Companys annual report on Form 10-K, File No. 22354,
    for the year ended October 31, 2003, and incorporated by
    reference herein).
|       
|        | 10.41 |  |             | ARA Alliance, Purchase and Production Agreement
    by and between Martek Biosciences Corporation 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. 22354, for the quarter ended April 30, 2004, and
    incorporated by reference herein).*                                                                                                                                                                                                                                                                                                                                 
|       
|        | 10.42 |  |             | Sixth Amendment of Lease, dated May 13,
    2004, by and between M.O.R. CBC LLC and Martek Biosciences
    Corporation (filed as Exhibit 10.64 to the Companys
    quarterly report on Form 10-Q, File No. 22354, for the
    quarter ended April 30, 2004, and incorporated by reference
    herein).                                                                                                                                                                                                                                                                                                                                                           
|       
|        | 10.43 |  |             | First Modification Agreement, effective
    April 30, 2004, between the Company and Manufacturers and
    Traders Trust Company, as Administrative Agent, Manufacturers
    and Traders Trust Company, Bank of America, N.A., SunTrust Bank,
    Comerica Bank, Fifth Third Bank, and Chevy Chase Bank, and
    Martek Biosciences Corporation (filed as Exhibit 10.65 to
    the Companys quarterly report on Form 10-Q, File
    No. 22354, for the quarter ended April 30, 2004, and
    incorporated by reference herein).                                                                                                                                   
|       
|        | 10.44 |  |             | Martek Biosciences Corporation 2004 Stock
    Incentive Plan (filed as Appendix A to the Companys
    Definitive Proxy, Schedule 14A, filed on February 11, 2004
    and incorporated by reference herein).                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       
|        | 10.45 |  |             | Master Equipment Lease, dated October 29,
    2004, between Martek Biosciences Kingstree Corporation and
    M&T Credit Services, LLC.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       
|        | 10.46 |  |             | Form of Stock Option Award Agreement under Martek
    Biosciences Corporation 2003 New Employee Stock Option
    Plan.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       
|        | 10.47 |  |             | Form of Stock Option Award Agreement under Martek
    Biosciences Corporation 2004 Stock Incentive Plan.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|        | 21.01 |  |             | Subsidiaries of the Registrant.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|       
|        | 23.01 |  |             | Consent of Ernst & Young LLP,
    Independent Registered Public Accounting Firm.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       
|        | 24.01 |  |             | Power of Attorney of the Board of Directors
    (included on signature page of this report).**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       
|        | 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.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       
|        | 99.01 |  |             | Cautionary Statements for purposes of the
    safe harbor provisions of the Private Securities
    Litigation Reform Act of 1995.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



---



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | 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 other
    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.