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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



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FORM 10-K



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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED OCTOBER 31, 2001
COMMISSION FILE NUMBER: 0-22354



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MARTEK BIOSCIENCES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



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|                                                                        |  |                                                   
|----------------------------------------------------------------------- |  | --------------------------------------------------
|DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) |  | 52-1399362
(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



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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

|                       |  |                                                  
|---------------------- |  | -------------------------------------------------
|NONE
(TITLE OF CLASS:) |  | NONE
(NAME OF EACH EXCHANGE ON WHICH REGISTERED:)

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. [X] Yes [ ] 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. [X]

The aggregate market value of Common Stock held by non-affiliates of the
registrant is $329,333,672 (based upon a last sale price of $21.75 per share of
the Common Stock as reported on the NASDAQ National Market System on December
31, 2001. The number of shares of Common Stock outstanding as of December 31,
2001 was 20,756,786.

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PART I

ITEM I. BUSINESS.

OVERVIEW

Martek Biosciences Corporation (Martek, We, or the Company) develops and
sells products from microalgae. Microalgae are microplants. We have pioneered
the commercial development of microalgae into a portfolio of high value
products and product candidates consisting of the following:

NUTRITIONAL PRODUCTS- Over the past 8 years, we have developed production
methods and intellectual property for 2 important fatty acids. These fatty
acids are docosahexaenoic acid, commonly known as DHA, and arachidonic acid,
commonly known as ARA. 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 promote adult mental and cardiovascular health. An adult or newborn may
obtain DHA and ARA via foods such as red meats, fish and eggs, as well as
supplements and pharmaceuticals. While there are 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 mgs. 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.

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, cystic fibrosis, cancer, as
well as neurological and visual disorders. We have recently begun sponsoring
studies to further investigate the potential benefit of DHA supplementation on
cardiovascular health and breast cancer. Additionally, we, as well as others,
are conducting research regarding the impact of DHA supplementation on cystic
fibrosis and visual and neurological disorders. We are targeting the infant
formula market and the adult nutritional market for our nutritional oils. On
May 17, 2001, we received notice from the Food and Drug Administration (FDA)
that after completing its review of our generally recognized as safe (GRAS)
notification, the agency had no further questions regarding our conclusion that
our DHASCO® and ARASCO® oil blend is GRAS when used in specified ratios in
infant formulas. Our licensees are responsible for satisfying the required
statutory and regulatory pre-market notifications with the FDA before launching
infant formula products in the United States that contain our oils. On January
10, 2002, one of our licensees, Mead Johnson Nutritionals, announced that it
will be introducing a new infant formula supplemented with our oils in early
February under the brand name Enfamil LIPIL  in the United States.
Additionally, on January 10, 2002, another licensee, The Ross Products Division
of Abbott Laboratories, announced that it also plans to launch an infant
formula supplemented with our oils in the United States in early 2002.

Seven infant formula manufacturers, representing approximately 60% of the
estimated $6  $8 billion dollar worldwide infant formula market, have licensed
from us the right to include our nutritional oils in their products. Five of
these licensees are currently marketing term infant formula products containing
our oils in twenty-five countries and pre-term infant formula products
containing our oils in over sixty countries. Adult supplements containing our
nutritional oils are being marketed in the United States and to a lesser degree
in certain European markets.

ADVANCED DETECTION SYSTEMS- We are developing new fluorescent marker products
from microalgae that have potential applications in automated biological
screening to find new

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compounds or reduce drug discovery time. These fluorescent marker products
bring greater speed, sensitivity and simplicity to existing tests and
applications.

OTHER PRODUCTS- Our genomics group has developed key intellectual property
that some day may allow us to transfer the DHA producing genetic material of
microalgae into agricultural products like corn.

PRODUCTS AND PRODUCT CANDIDATES

Nutritional Oils for Infant Formula, Dietary Supplementation and Other
Applications.
Certain microalgae and fungi produce large quantities of oils and fats
containing long-chain, polyunsaturated fatty acids, known as PUFAs, that are
important to human nutrition and health. We have identified a strain of
microalgae which produces an oil rich in DHA and have developed the means to
grow it by fermentation, with a relatively high oil and DHA content. In
addition, we have isolated and cultured a strain of fungus that produces large
amounts of ARA.

DHA is the predominant structural fatty acid in the grey matter of the
brain and retinal tissues in humans and other mammals. Children and adults
obtain DHA primarily from their diets, since humans synthesize only small
amounts of DHA from dietary precursors. Brain development in humans takes place
primarily in the last trimester in utero and in the first 12 months of
postnatal life. For a fetus, DHA is provided through its mothers bloodstream
via the placenta. For a nursing infant, it is provided via breast milk. DHA is
generally the most abundant omega-3 long-chain PUFA in human milk. DHA and ARA
dietary supplementation may be particularly important for premature and low
birth weight infants who may not get their full in-utero allotment. Although
these fatty acids are naturally present in breast milk, they are not added to
most infant formulas today. Our blended oils containing DHA and ARA provide the
closest available match, with regard to the molecular form of these fatty
acids, to the DHA and ARA in human milk when added to infant formula.

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. This evidence is from retrospective studies comparing intelligence in
breast-fed versus formula-fed infants and from intervention studies in infants
using DHA/ARA-supplemented infant formula.

The following are examples of some of the studies which have found
benefits from DHA and ARA supplementation in the infant diet:



| |  |  | 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 6 years of age, children
who had received a DHA and ARA supplemented formula for the first 4
months of life had significantly lower diastolic blood pressure, were
significantly faster at making correct choices, and showed more
efficient information processing than un-supplemented children.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | A study reported by investigators at Baylor College of Medicine
in November, 2000, supported the importance of DHA supplementation
during breast-feeding by showing that breast-fed, 30 month-old
children whose mothers took a DHA supplement for four months after
delivery scored a mean of eight points higher on a standard test of
psychomotor development than infants whose mothers received a
placebo.                                                           
|
| |  |  | Research published from an 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 non-                                                                                                                                                          

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| |   |  | supplemented formula. 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 re-affirmed the
beneficial effects of adding Marteks pure source of pre-formed DHA and
ARA to infant formulas at the levels evaluated by the researchers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|
| |  |  | In 1999, a meta-analysis of over 20 published reports concluded
that infants deprived of the nutrients in breast milk are likely to
have a lower IQ, lower educational achievement, and poorer social
adjustment than breast-fed infants. The nutritional benefits of
breast-feeding were associated with at least a 3.2 point difference
in cognitive development compared to formula feeding, and the longer
the baby was breast fed, the greater the increase in cognitive
developmental benefit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | A National Institutes of Health (NIH) sponsored study published
in the August 1998 edition of Pediatric Research concluded 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
a standard 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(Vol. 101 No. 1 January
1998), 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 infant-formula fed
children. 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 could 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 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Preliminary data submitted to The Society of Pediatric Research in May
1994 and a separate study, presented in July 1995 at the Second International
Congress of the International Society for the Study of Fatty Acids and Lipids,
showed that low birth weight infants fed formula supplemented with Marteks
nutritional oils have blood lipid levels of DHA and ARA comparable to those of
breast-fed, low birth weight infants.

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 National Institutes of Health and International
Society for the Study of Fats and Lipids sponsored workshop, a panel sponsored
by the Child Health Foundation, and the British Nutrition Foundation (BNF).
Also, in addition to recommending the inclusion of DHA and ARA in infant
formula, the BNF and FAO/WHO Committees have recognized their importance in
pregnancy and lactation. To address these markets, we introduced Neuromins® PL,
which is a DHA dietary supplement specifically designed for pregnant and
lactating women.

Investigators at universities around the world and at other research
centers, such as the National Institutes of Health, have observed a
relationship between low levels of DHA and a variety of health risks, including
increased cardiovascular problems, cystic fibrosis, cancer, and various
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 have recently begun sponsoring studies to further
investigate the potential benefit of DHA supplementation on cardiovascular
health and breast cancer, and we, as well as others, are conducting research
regarding the impact of DHA supplementation on cystic fibrosis and certain
visual and neurological disorders.

We are also, along with our customers, developing other DHA delivery
methods to address these potential new markets, including powders, an emulsion,
use as a food ingredient, and use as a pharmaceutical.

We believe that our nutritional oils and Neuromins® capsules have the
following advantages over 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
and ARA derived from fish oil;                                                                                 
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|
| |  |  | our oils can be blended in a variety of mixtures in precise
ratios for specific applications;                                                                                                                                      
|
| |  |  | each of our oils is comprised of a fatty acid blend that has no
other bioactive PUFAs in significant quantities so that desirable
PUFAs can be included and undesirable ones (e.g., eicosapentaenoic
acid (EPA)) can be excluded;
|
| |  |  | our DHA and ARA-enriched oils are in an easily digestible
triglyceride form similar to that found in breast milk, but different
from that in fish oils or fish eye-socket oils;                                                    
|
| |  |  | 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; and                                                         
|
| |  |  | our oils can be produced in large quantities under controlled
conditions satisfying strict regulatory scrutiny.                                                                                                                    

We first realized revenues from license fees related to our nutritional
oils and sale of sample quantities of these oils in 1992. In late 1994, one of
our licensees launched the first pre-term infant formula containing our oils in
Europe, and in 1995, we recognized our first royalty revenue from sales of this
product. Additional product introductions have continued through 2001.

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Currently, five of our infant formula licensees are marketing term infant
formula products containing our oils in 25 countries and pre-term infant
formula containing the our oils in over 60 countries worldwide. At this time,
the U.S. is not among these countries, however, two of our licensees announced
on January 10, 2002 that they plan to introduce infant formulas supplemented
with our oils in early 2002 (see Regulatory below). In the latter part of
1996, we initiated sales of our first consumer products, Neuromins®, a DHA
dietary supplement, and Neuromins® PL, a DHA dietary supplement for pregnant
and lactating women. Since then, we have expanded distribution of our
Neuromins® DHA. We have entered into agreements with Natrol, Inc., Source
Naturals, Inc., Solgar Vitamin and Herb Company, Leiner Health Products,
Natures Way and Neutraceutical Corporation for the packaging and distribution
of these products in retail outlets nationwide, including Safeway, Vitamin
World, Eckerds, Luckys, Savon and Vitamin Shoppe stores. Neuromins® DHA is
also sold through several mail order distributors.

In 1999, we began selling bulk DHA oil and powder for additional
applications, including inclusion in childrens chewables and nutritional
drinks and adult combination supplements which not only include our DHA but
other ingredients such as Gingko and St. Johns Wort. We are continuing to
explore additional applications for DHA, including use in pharmaceuticals and
functional foods. Our sales and royalties on nutritional oils for infant
formula were approximately $1.4 million in 1999, $5 million in 2000, and $16
million in 2001. In addition, our sales of nutritional oils for adult
supplements and food additives totaled approximately $1.5 million in 1999, $2
million in 2000, and $1 million in 2001.

Advanced Detection Systems.We have identified, isolated and now market
powerful fluorescent dyes from various algae for use in scientific applications
for detection of certain biological processes. 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 products include the following:

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

CryptoLight dyes A product line of small molecular weight, yet high
intensity phycobiliproteins isolated from an unusual group of microalgae. These
dyes are capable of entering permeabilized cells and are used for internal
detection of markers in cells which could be used for discovering diseases, and
in flow cytometry and Fluorescence In Situ Hybridization (FISH). Different
CryptoLight dyes have different fluorescence emission wavelengths and,
therefore, provide the possibility of multi-colored assays. They have also been
used in fluorescence microscopy and fluorescence energy transfer applications.

SensiLight dyes Our Sensilight dye technology was developed to
match the sensitivity of chemiluminescent methods. Sensilight 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 Sensilight 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;
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| |  |  | 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 Sensilight 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.
These dyes have been used in immunodiagnostic detection, DNA arrays, flow
cytometry, western blotting and other applications. In 1999, we began
beta-testing Sensilight-based Western blot detection kits and our proprietary
XLExpress Rapid Labeling system which allows individual researchers to
label their own molecules with the Sensilight dye of their choice in a simple
and convenient format.

Our sales of advanced detection system products were less than $200,000 in
1999 and 2000, and were approximately $280,000 in 2001.

Algal Genomics.Microalgae are microplants and, as such, have many biochemical
pathways and genes in common with higher plants. They also possess the genetic
material required for the production of certain compounds, DHA for example,
that are not present in higher plants. Consequently, we believe that microalgae
represent a valuable gene pool for modern biotechnology. Genes coding for
enzymes in microalgal fatty acid biosynthesis are being identified, isolated
and characterized by our scientists. Gene sequencing from several different and
distinct algal species is also underway and many new genes have been
identified. As part of this project, in 2001 we initiated a joint research and
development project with the Torrey Mesa Research Institute to isolate and
characterize genes involved in the DHA pathway. If successful, this knowledge
could open up opportunities to add the health benefits of DHA to various
plants, other algae, or products such as corn or vegetable oils.

We have combined our understanding of heterotrophic (without light) and
autotrophic (with light) growth of microalgae with our proprietary technology
in microalgal transformation to develop a unique technology capable of
converting an otherwise autotrophic species of microalgae into one capable of
growing heterotrophically, utilizing sugars for its energy. We believe that
this represents the first time such a transformation has ever been made. Our
Trophic Conversion technology was selected as the feature cover story in
the June 15, 2001 issue of the journal Science,and is the subject of several
patent applications. The technology opens the door to the commercial
heterotrophic production (growth via fermentation) of algal species that could
only be grown previously using a photobioreactor system. The favorable
production economics associated with fermentation compared to those of the
photobioreactor will allow us to pursue new algal products not previously
believed to be economically feasible and potentially represents a means to
commercially exploit a greater portion of the kingdom of microalgae.

To date, we have received no revenues from our algal genomics technology.

TECHNOLOGY

We apply our microalgal expertise and culturing technology to our
expanding library of over 3,500 live 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; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Our scientists have developed and patented novel microalgal culturing
systems which allow for the routine scale-up of microalgae of commercial
interest. Proprietary closed-system, light-driven photobioreactors and numerous
techniques for maintaining and manipulating microalgal monocultures form the
basis of this culturing technology. Where possible, and for applications that
require large quantities of product (e.g., nutritional products), we have
selected and developed microalgae capable of growing without light by using
nutrient feeds in a manner similar to bacteria, yeast or fungi. These
microalgae can be grown in existing commercial fermenters using current
technology, resulting in economies of scale and substantially lower production
costs than microalgae grown in photobioreactors.

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
involving in-house algal expertise and experience, searches of scientific
literature and our proprietary microalgal database, biochemical analyses, and
preliminary product-yield experiments. 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. 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.

Modification of Microalgae and Growth Conditions.We apply standard
industrial microbiological techniques to microalgae and manipulate culturing
conditions (such as light intensity, temperature and growth medium composition)
to optimize productivity. After selecting strains with the best yields and
growth characteristics, we enhance their production through mutagenesis and
natural selection under biochemical stress. We have not used genetic
engineering techniques to develop any of our existing products, but may use
these methods for certain products currently in development.

Culturing Microalgae.Successful exploitation of the unique
characteristics of microalgae is in large measure dependent upon the
availability of large-scale culturing technology. We have discovered and
uniquely cultured a microalga capable of producing large amounts of DHA
heterotrophically by using organic nutrients. Heterotrophic culturing of this
DHA-producing microalga was previously not believed to be possible at
commercially viable levels. Heterotrophic microalgae have the advantage of
being able to be cultured in conventional fermenters employed by the food,
pharmaceutical and biotechnology industries. Microalgal fermentation has an
advantage over photobioreactor production (i.e. with light) because
larger-scale production of products such as our nutritional oils can be
conducted in existing fermentation equipment, resulting in lower production
costs. Aspects of our technology for the heterotrophic growth of DHA-producing
microalgae are the subject of several U.S. patents. Similar patents have
issued in certain countries and are pending in certain other countries around
the world.

For many 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

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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.

COLLABORATIVE AND LICENSING AGREEMENTS

We have entered into licensing agreements with seven infant formula
manufacturers, including Mead Johnson & Company (a subsidiary of Bristol-Myers
Squibb Company), American Home Products (Wyeth-Ayerst division), Abbott
Laboratories, Numico, Maabarot and Novartis, that together comprise over 65% of
the worldwide infant formula market. We have one additional licensing agreement
with an infant formula manufacturer and have contractually agreed not to
disclose the licensees name. The undisclosed infant formula manufacturer has
less than 3% of the world-wide market for infant formula and has not purchased
products from us to date. Under these agreements, we received up-front
licensing fees and are entitled to royalties based on sales of infant formula
containing our nutritional oils. These licensees are not required to include
our oils in their formulas under the terms of these agreements, and there can
be no assurance that such infant formula manufacturers will include our oils in
all or any of their product lines. Each of these royalty-bearing license
agreements calls for us to provide to the licensees our nutritional oils at a
transfer price and receive a royalty from the licensee upon the final sale of
infant formula containing the oils. 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. We have
also recently begun selling our oils to several of our licensees under
all-inclusive pricing, which combines the transfer payment and royalty into a
flat price with a slight discount. Since December 2000, over 95% of all sales
to our licensees have been made under all-inclusive pricing arrangements, and
we anticipate that this trend will continue in the future. Our license
agreements have terms exceeding 20 years, contain no future funding commitments
on our part or the part of our licensees, and may be terminated by our
licensees upon proper notification. Under the terms of these licensing
agreements, our licensees are responsible for obtaining Food and Drug
Administration (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 they are
related to manufacturing impurities in the oils.

The infant formula industry represents over $2 billion in annual wholesale
sales in the United States and approximately $6  $8 billion worldwide. Our
current licensees cover over 60% of the worldwide infant formula market. To
date, however, their introductions of products containing our oils have
penetrated less than 5% into this market. We are actively pursuing licenses
with other infant formula producers throughout the world to continue
penetrating these markets. Our sales and royalties from infant formula
licensees were approximately $1.4 million in 1999, $5 million in 2000 and $16
million in 2001. American Home Products, an infant formula licensee, accounted
for approximately 18% of our total product sales and royalties in 1999, 33% in
2000, and 42% in 2001. Additionally, Mead Johnson & Company, another infant
formula licensee, accounted for approximately 1% of our total product sales and
royalties in 1999 and 2000 and 30% in 2001.

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 January 1997, we entered into an agreement with DSM Gist B.V. (DSM,
formerly Royal Gist-Brocades B.V.) under which they became our exclusive
contract supplier for

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nutritional oils containing ARA. DSM is a multi-billion dollar
international group of companies that is active worldwide in the fields of life
science, product performance materials and chemicals. At October 31, 2001 we
had outstanding inventory purchase commitments to DSM totaling approximately $3
million.

We market certain of our fluorescent detection products under a
royalty-bearing license from Stanford University and certain fluorescent
detection products under an exclusive royalty-bearing license from a private
inventor.

On November 1, 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 high-end protein labeling technology.

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. Existing agreements
have committed us to fund up to approximately $100,000 for future development
activities. 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.

COMMERCIAL AND U.S. GOVERNMENT RESEARCH AND DEVELOPMENT CONTRACTS

Our technology development has been funded in part by commercial and
federal government contracts. While not expected to be a primary source of
revenue in the future, we plan to continue applying for government contracts
and soliciting commercial research and development contracts on a selective
basis when such contracts involve research that may bring us future commercial
benefit.

As a result of us receiving Small Business Innovation Research grants, the
U.S. Government will have certain rights (the Government Rights) in the
technology that we developed with the funding. These rights include a
non-exclusive, paid-up, worldwide license to practice or have practiced such
inventions for any governmental purpose. In addition, the government has the
right to require us to grant licenses which may be exclusive under any of such
inventions to a third-party if the government determines that:



| |  |  | adequate steps have not been taken to commercialize such
inventions;                   
| | - |  | ---------------------------------------------------------------------------------------
|
| |  |  | such action is necessary to meet public health or safety needs;
or                     
|
| |  |  | such action is necessary to meet requirements for public use
under federal regulations.

The government also has the right to take title to a subject invention if
we fail to disclose the invention and elect title within specified time limits.
In addition, the government may acquire title in any country in which we fail
to file a patent application within specified time limits. Federal law requires
any licensor of an invention that was partially funded by federal grants to
obtain a covenant from any exclusive licensee to manufacture products using the
invention substantially in the United States. In addition, our licenses from
third parties may also relate to technology developed with federal funding and
therefore may also be subject to Government Rights.

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Costs under U.S. government contracts are subject to audit by the U.S.
government. We believe that cost disallowances, if any, arising from such
audits of costs charged to government contracts through October 31, 2001 will
not be material.

MANUFACTURING

We manufacture oils rich in DHA at our fermentation and oil processing
facility located in Winchester, Kentucky, by conventional fermentation
processes. We acquired the Winchester facility in 1995. The oils that we
produce in this facility have been certified kosher by the Orthodox Union and
certified Halal by the Islamic Food and Nutrition Council of America. We are
currently in the process of optimizing the production of our DHA oil at our
Winchester plant. While we believe that these optimization efforts will lead to
significant gains in production yields in the next one to two years, we
anticipate that these efforts will continue for the next several years and
beyond as new technologies and algal strains are tested to further increase
output and reduce costs. We have also entered into an agreement with a third
party, DSM, to produce our ARA oil, and may enter into additional production
agreements with other third parties if demand for our oil requires such
additional output. We believe that, along with DSM, we can increase our
production to meet approximately 20% to 30% of the world-wide infant formula
market demand for DHA and ARA-rich oils. Our ability, however, to maintain
commercial production at these levels at our plant has not yet been
successfully tested. In 2001, we initiated plans to expand our existing
facility in Winchester, KY to accommodate increased production. We believe that
this buildout,  which should more than double our production capacity at our plant, will cost as much
as $15 million. Additionally, we have signed a non-binding letter of intent to
acquire certain assets and assume certain liabilities of FermPro Manufacturing,
L.P.(FermPro), a contract fermentation company. FermPros production facility
consists of a 150 acre site in Kingstree, South Carolina with fermentation,
recovery, laboratory and warehousing components. The facility will provide us
with extensive production expansion capabilities for manufacturing our
nutritional oils, as well as a highly trained workforce. We have also
conducted DHA production trials with third party manufacturers. However, we do
not currently have a third party manufacturing agreement in place to supply us
with DHA-containing oil. 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 at a commercially acceptable cost. There can 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 Good Manufacturing Practices (GMP) requirements) or that we will
be able to successfully obtain sufficient facilities to meet the future demand
for our oils. 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
develop their own process of making our oils.

SOURCES OF SUPPLY

Our raw material suppliers for production of DHA oil includes major
chemical companies and food ingredient suppliers. We have identified and
validated several sources for each of our major ingredients and have never had
problems obtaining adequate quantities of any of these materials. Crude ARA oil
is provided to us by DSM, a third-party processor. DSM, through a fermentation
process, produces a fungal biomass rich in ARA oil, which is then sent to a
sub-contractor for extraction of the oil. After extraction, the crude ARA oil
is sent to our Winchester, Ky, production facility for final processing. If DSM
fails to supply us with required amounts under the contract, we would not be
able to meet our customers demands. In this case, we would either have to
manufacture the ARA containing oil at our plant, which would reduce our DHA
containing oil production capacity, or enter into other third party
manufacturer supply agreements. Although we feel that DSM can fill our ARA
needs for at least the next several years, there is no guarantee the DSM will
be able to adequately supply all of our ARA needs in the long-term. Additional
capacity may need to be obtained, either within DSM or at another facility.

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RESEARCH AND DEVELOPMENT

The primary focus of our research and development activities has been on the
development and optimization of our nutritional oils. Approximately two-thirds
of the research and development costs of our nutritional oils have been
incurred at our Winchester, KY plant. We purchased this plant in 1995, and
since that time have continued an ongoing program to develop and refine
processes for manufacturing our DHA and ARA oils at large scale. We currently
have numerous development projects underway at our plant aimed at increasing
our production yields, reducing waste and improving the quality of our
nutritional oils. In addition, we currently have numerous projects ongoing at
our lab in Columbia, MD surrounding, among other issues, analytical work on our
DHA and ARA, sensory issues and genomics work. We also have numerous ongoing
clinical trials involving our nutritional oils. Less than 5% of our current
research and development efforts relate to our advanced detection technology.

SALES AND MARKETING

Our nutritional oils are marketed and sold primarily to the infant formula
and natural products industries. To use our DHA or ARA in infant formula,
manufacturers must enter into a license agreement with us. Currently, seven
major infant formula manufacturers have entered into such an agreement.
Neuromins® DHA dietary supplements are sold principally through private-label
distributors, but they are also sold directly to consumers and health care
professionals through our toll-free call center. We have entered into
agreements with Natrol, Inc. and Leiner Health Products for the packaging and
distribution of Neuromins DHA supplements to mass market retail outlets.
Nutraceuticals Corporation, Solgar Vitamin and Herb Company, Source Naturals®,
and Natures Way, Inc. privately label and distribute Neuromins DHA supplements
to natural foods markets. Neuromins DHA is currently sold in over 10,000
retail stores nationwide, including Safeway, Vitamin World, Eckerds, Luckys,
Savon and Vitamin Shoppe. Neuromins DHA is also marketed through several mail
order distributors. In the aggregate, these distributors have access to
approximately 58,000 health food and mass retail outlets nationwide.

In 2002, we will continue to support our sales efforts through a
coordinated marketing campaign, including, but not limited to, national
advertising, trade-show participation, and targeted public relations and
educational efforts. However, there can be no assurances that we will be able
to successfully market our nutritional products for use in infant formula or as
a dietary supplement.

We market our diagnostic products directly to large pharmaceutical and
research institutions and through distribution agreements with Intergen
Company, Perkin Elmer Life Sciences Products and Kirkegaard & Perry
Laboratories.

COMPETITION

The health care and biological sciences industries are characterized by
rapidly evolving technology and intense competition. Our competitors include
major pharmaceutical, chemical and specialized biotechnology companies, many of
whom have financial, technical and marketing resources significantly greater
than us. 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. 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.

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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. Though 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. Though microencapsulation of the oil
resolves much of the odor, stability and taste issues associated with fish oil,
it also increases the cost of the product considerably.

Published reports, however, have cited a number of fish oils as containing
chemical toxins not present in our oils. In addition, 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.
Several large companies are promoting ARA oil, but we are currently unable to
evaluate whether any of these companies have the ability to produce ARA oil, or
whether these companies will present a competitive threat to our ARA sales in
the future. We are also aware that OmegaTech, Inc., is able to produce DHA
from a strain of fungus containing DHA and is currently marketing this product
as an adult nutritional supplement. However, we are currently unable to
evaluate the degree of competitive threat that this source of DHA will present
in the future.

Small amounts of DHA and ARA can be derived from egg yolk lipids, but this
DHA and ARA are not in the same molecular form as that found in breast-milk
(i.e., phospholipid vs. triglyceride). DHA and ARA derived from egg yolks are
currently being added to infant formula by Milupa, which was acquired by Numico
in 1995. 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 milk will result in dietary levels of
lecithin and cholesterol far in excess of those found in human milk.

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

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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. Two U.S. patents were granted in 1997, one of 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 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.

Our success is dependent in part on our ability to obtain 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 through trade secrets in other cases. Additionally, in certain
cases, we rely on the licenses of patents and technology of third parties. We
have obtained approximately 25 U.S. patents, covering various aspects of our
technology, which will expire on various dates between 2007 and 2017. We have
filed, and intend to file, applications for additional patents covering both
our products and processes as appropriate. 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 issue, 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.

We have been issued seven U.S. patents covering certain aspects of our DHA
and/or ARA oils. We have applied for other patents in the United States
covering certain other aspects of our nutritional oils and have also filed
patent applications on a selective basis in other industrialized countries,
some of which are pending and some of which have been granted. We are unable to
predict, however, whether these patents will be challenged, invalidated or
circumvented by others.

OmegaTech, Inc., Monsanto Corporation, Aventis S.A. and
Nagase & Co. Ltd. are challenging our European patent covering our
DHA-containing oils. At a hearing in October, 2000, a division of the European
Patent Office revoked our patent on the grounds that it is too broad. We
immediately appealed this ruling, and as a result, our patent was reinstated
and it will remain in effect during the appeal process, which is not
expected to be completed until some time in 2004, at the earliest.

With respect to our ARA patent issued by the European Patent Office
(EPO), BASF A.G., F. Hoffman  LaRoche A.G., Friesland Brands B.V., OmegaTech
Inc., Societe des Produits

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Nestle S.A., 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. The opposition process is not
expected to be completed until sometime in 2006, at the earliest.

OmegaTech has indicated to us orally that it may undertake an effort in
Australia to challenge the validity of our DHA, ARA and mixed-oil patents.

We expect that, in the future, as our nutritional oils continue to be
commercialized, opposition to our intellectual property by our competitors will
continue and most likely increase. We believe that challenges to our European
patent covering our blend of DHA and ARA as well as our suite of U.S. patents
may arise in the future. We will likely incur substantial costs in the future
defending our patents.

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, future
royalties on sales of infant formula containing these oils or license fees
related thereto. 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 Food and Drug Administration
(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 the 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. FDA has
established detailed good manufacturing practice (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. Five of our infant
formula licensees have obtained the regulatory approval, where

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required, to sell term or pre-term infant formula supplemented with our
oils in over 60 countries. No company has yet launched an infant formula
containing our oils in the United States.

On May 17, 2001, we received notice from the FDA that after completing its
review of our generally recognized as safe (GRAS) notification, the agency
had no further questions regarding our conclusion that our DHASCO® and ARASCO®
oil blend is GRAS when used in specified ratios in infant formulas. Our
licensees are responsible for satisfying the required statutory and regulatory
pre-market notifications with the FDA before launching a product that contains
our oils in the United States. On January 10, 2002, one of our licensees, Mead
Johnson Nutritionals, announced that it will be introducing a new infant
formula supplemented with our oils in early February under the brand name
Enfamil LIPIL  in the United States. Additionally, on January 10, 2002,
another licensee, The Ross Products Division of Abbott Laboratories, announced
that it also plans to launch an infant formula supplemented with our oils in
the United States in early 2002. The ultimate timing of launches of
supplemented formula by our licensees is not under our
control, however, and there can be no assurance that these
launches
will not incur significant delays that may materially and adversely affect
the timing of the introduction of infant formulas containing our products in
the United States.

The Federal Dietary Supplement Health and Education Act of 1994 (DSHEA)
regulates the use and marketing of dietary supplements. We are currently
marketing a line of DHA dietary supplements, Neuromins® and Neuromins® PL. In
addition, we are researching and developing new applications for our DHA and
ARA oils. We believe that our 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.

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 Martek 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 Martek 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, as well as our lack of experience in obtaining FDA regulatory
clearances, 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 Martek 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

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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 our decision to manufacture certain of our products, we
will be 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 that presumably one day will be sold 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.

EMPLOYEES

As of October 31, 2001, we had 166 full-time employees, of whom one was an
M.D. and 18 had Ph.D.s. Approximately 48 employees are engaged in research and
development and contract related research and development activities, 88 are
engaged in production or production development related activities and 30 are
in administrative, business development, and sales and marketing positions. We
consider relations with our employees to be good. None of our employees are
covered by a collective bargaining agreement.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Our Directors are as follows:

Douglas J. MacMaster, Jr.Member  Compensation Committee.
Age 71      Mr. MacMaster served 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 2004.

John H. Mahar     Member  Compensation Committee.
Age 67      Mr. Mahar has 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 Corporation in February 1993. Prior to that time, he served as
a director of the Company from 1988 until 1991. His term expires in 2004.

Eugene H. Rotberg     Member  Audit Committee.
Age 72      Since 1990, Mr. Rotberg has been an independent advisor to international
development and financial institutions. 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 2004.

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Gordon S. Macklin     Member  Audit Committee.
Age 73      Mr. Macklin serves as Deputy Chairman for White Mountains Insurance
Group, Ltd, and is a director of MedImmune, Inc. (biotechnology), Overstock.com
(internet sales), WorldCom, Inc., Spacehab, Inc. (aerospace technology) and
director, trustee, or managing general partner, as the case may be, for 48 of
the investment companies in the Franklin Templeton Group of Funds. Mr. Macklin
was formerly the Chairman of White River Corporation (financial services), the
President of the National Association of Securities Dealers, Inc. (1970  1987)
and the Chairman of Hambrecht and Quist Group. Mr. Macklin has been a director
of the Company since November 1998. His term expires in 2003.

William D. Smart     Member  Compensation Committee.
Age 75      From 1955 until his retirement in 1987, Mr. Smart served in a variety of
capacities for Abbott Laboratories, a pharmaceutical and healthcare company,
most recently as President of Ross Laboratories, the nutritional products
division of Abbott Laboratories, and Corporate Vice President of Abbott
Laboratories. Mr. Smart has been a director of the Company since 1991. His term
expires in 2003.

Jules Blake, Ph.D.     Member  Audit Committee.
Age 77      Dr. Blake served 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
2002.

Ann L. Johnson, M.D.     Member  Compensation Committee.
Age 65      Dr. Johnson has served as a physician on the neonatology staff of Mills
Peninsula Hospital since 1992. 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 2002.

Sandra Panem, Ph.D.     Member  Audit Committee.
Age 55      Dr. Panem is 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) and Synaptic
Pharmaceutical Corporation (biotechnolgy). Her term expires in 2002.

Henry Linsert, Jr     Chairman, Chief Executive Officer and Director
Age 61      Mr. Linsert joined 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. He received an M.A. in economics from George Washington

18



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University and a B.A. from Duke University. His term expires in 2002.

Dr. Richard J. Radmer     President, Chief Scientific Officer and Director
Age 59      Dr. Radmer, a founder of Martek, has served since
1985 as a director and as President and Chief Scientific Officer of the
Company. 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. Dr. Radmer received a Ph.D. in biology, an M.S. in
botany and a B.S. in biochemistry from the University of Chicago. He completed
his Ph.D. studies while in residence at Harvard University. His term expires in 2003.

Executive Officers (in addition to Messrs. Linsert & Radmer):

Thomas C. Fisher     Senior Vice President, Operations
Age 55      Mr. Fisher joined Martek in 1991 and was named
Senior Vice President of Operations in 1992 after 18 years with Merck and
Dupont-Merck. Mr. Fishers last position was Vice President for Technical
Operations at Dupont-Merck, and in that capacity he was responsible for
world-wide pharmaceutical production, quality control and engineering. During
his tenure at Merck, Mr. Fisher was Director of Biological Manufacturing and
held management positions in sterile operations, development and quality
control. Mr. Fisher received an M.S. in genetics from West Virginia University
and a B.S. in biology from Waynesburg College.

Jerome C. Keller     Senior Vice President, Sales & Marketing
Age 59      Mr. Keller joined Martek in September 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. Some of the
products introduced under Mr. Keller included Pepcid, Mefoxin, Primaxin,
Vasotec, Mevocor, Zocor, Proscor and Prilosec. Mr. Keller has a M.S. degree
from the University of Pittsburgh and a B.S. degree from Duquesne University.

George P. Barker     Senior Vice President, General Counsel and Secretary
Age 62      Mr. Barker joined Martek in June 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. In these positions, Mr. Barker had both legal and business
responsibilities. 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.

Peter L. Buzy     Chief Financial Officer and Treasurer
Age 42      Mr. Buzy joined Martek in March 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 State
University.

19



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ITEM 2. PROPERTIES.

We lease an aggregate of approximately 40,000 square feet of laboratory,
manufacturing, technical and administrative space in Columbia, Maryland, 6,000
square feet of which is currently being subleased. Our lease expires in 2004,
but we have an option to extend the lease through 2009 at the expiration of the
initial lease.

We own a fermentation and oil processing facility in Winchester, KY where
we produce oils rich in DHA and ARA using our proprietary technology. The
facility is located on eight acres and occupies approximately 36,000 square
feet holding two 140,000 liter and one 90,000 liter production fermentation
vessels and supporting equipment. In addition, in 2001 we began building a new
25,000 square feet packaging and material handling building, and also initiated
plans to add an approximate 5,000 square feet addition to our existing
fermentation facility to house three 267,000 liter fermentors with additional
infrastructure, which should more than double our current DHA production capacity.

ITEM 3. LEGAL PROCEEDINGS.

OmegaTech, Inc., Monsanto Corporation, Aventis S.A. and Nagase & Co. Ltd.
are challenging our European patent covering our DHA-containing oils. At a
hearing in October, 2000, a division of the European Patent Office (EPO)
revoked our patent on the grounds that it is too broad. We immediately appealed
this ruling, and as a result, our patent was reinstated and it will remain in
effect during the appeal process, which is not expected to be completed
until sometime in 2004, at the earliest.

With respect to our ARA patent issued by the EPO, BASF A.G., F. Hoffman 
LaRoche A.G., Friesland Brands B.V., OmegaTech Inc., Societe des Produits
Nestle S.A., 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. The opposition process is not expected
to be completed until sometime in 2006, at the earliest.

We are not a party to any other material legal proceedings.

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

No matters were voted upon during the fourth quarter of 2001.

20



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PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Companys common stock is traded on the NASDAQ National Market System under
the symbol MATK. As of December 31, 2001, there were approximately 170 holders
of record of the Companys common stock. No cash dividends have been paid on
the common stock and the Company does not anticipate paying any cash dividend
in the foreseeable future. The following table sets forth, for the calendar
periods indicated, the range of high and low sale prices for the Companys
common stock as reported by NASDAQ:

PRICE RANGE OF COMMON STOCK

|                                    |  |      |        |     |  |   |        | 
|----------------------------------- |  | ---- | ------ | --- |  | - | ------ | 
|Fiscal 2000                         |  | High |        | Low
|                                   
|November 1, 1999 - January 31, 2000 |  | $    | 15.375 |     |  | $ | 7.375  | 
|February 1, 2000 - April 30, 2000   |  | $    | 32.000 |     |  | $ | 11.000 | 
|May 1, 2000 - July 31, 2000         |  | $    | 24.500 |     |  | $ | 13.875 | 
|August 1, 2000 - October 31, 2000   |  | $    | 24.875 |     |  | $ | 15.750 | 

|                                    |  |      |        |     |  |   |        | 
|----------------------------------- |  | ---- | ------ | --- |  | - | ------ | 
|Fiscal 2001                         |  | High |        | Low
|                                   
|November 1, 2000 - January 31, 2001 |  | $    | 21.625 |     |  | $ | 12.000 | 
|February 1, 2001 - April 30, 2001   |  | $    | 19.125 |     |  | $ | 12.250 | 
|May 1, 2001 - July 31, 2001         |  | $    | 28.500 |     |  | $ | 13.730 | 
|August 1, 2001 - October 31, 2001   |  | $    | 24.250 |     |  | $ | 14.000 | 

21



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Changes in Securities.

The following information relates to the sale of the Companys securities on
December 17, 2001 in reliance on the exemption set forth in Section 4(2) of the
Securities Act of 1933 and the rules and regulations therein:

|                                                                |                       |  |           | 
|--------------------------------------------------------------- | --------------------- |  | --------- | 
|Name of                                                         | Shares of Martek     
|Shareholder                                                     | common stock received
|Deerfield Partners, L.P.                                        |                       |  | 386,099   | 
|Deerfield International Limited                                 |                       |  | 163,901   | 
|Crosslink Crossover Fund III, L.P.                              |                       |  | 172,700   | 
|Crosslink Partners Fund, L.P.                                   |                       |  | 15,700    | 
|Offshore Crosslink Crossover Fund III, Unit Trust               |                       |  | 11,600    | 
|Addison Clark Offshore Fund, LTD                                |                       |  | 83,895    | 
|Addison Clark Fund, L.P.                                        |                       |  | 66,105    | 
|Catalyst Partners, L.P.                                         |                       |  | 50,450    | 
|Catalyst International Ltd.                                     |                       |  | 1,550     | 
|DMG Legacy Fund LLC                                             |                       |  | 3,000     | 
|DMG Legacy Institutional Fund LLC                               |                       |  | 27,000    | 
|DMG Legacy International Ltd.                                   |                       |  | 45,000    | 
|Westfield Life Sciences Fund L.P. II                            |                       |  | 10,800    | 
|Westfield Life Sciences Fund L.P.                               |                       |  | 19,200    | 
|The Gordon S. Macklin Family Trust under Agreement
dated 7/7/94 |                       |  | 20,000    | 
|Brady Retirement                                                |                       |  | 7,700     | 
|Presidio Partners                                               |                       |  | 56,400    | 
|Geary Partners                                                  |                       |  | 35,900    | 
|                                                                |                       |  |           | 
|                                                                |                       |  | 1,177,000 | 

The private placement brought net proceeds to the Company of approximately $21
million. Adams Harkness & Hill served as placement agent.

22



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ITEM 6. SELECTED FINANCIAL DATA.

The following selected financial data should be read in conjunction with Item 7
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the financial statements and the notes thereto included in Item
8 Financial Statements and Supplementary Data.

|                                                       |                                               |      |        |         |   |      |                        |         |   |      |       |         |   |   |       |         |   |   |       |         |  
|------------------------------------------------------ | --------------------------------------------- | ---- | ------ | ------- | - | ---- | ---------------------- | ------- | - | ---- | ----- | ------- | - | - | ----- | ------- | - | - | ----- | ------- | -
|                                                       |                                               |      |        |         |   |      | Year Ended October 31, |         |   |      |      
|                                                       |                                               |     
|In thousands except per share data                     |                                               | 2001 |        | 2000    |   | 1999 |                        | 1998    |   | 1997
|                                                      
|Statements
of Operations Data                         
|Revenues
Product sales and royalties                   |                                               | $    | 18,575 |         |   | $    | 8,726                  |         |   | $    | 5,744 |         |   | $ | 5,241 |         |   | $ | 3,594 |        
|                                                       | Research and development contracts and grants |      |        | 142     |   |      |                        | 879     |   |      |       | 383     |   |   |       | 484     |   |   |       | 530     |  
|                                                       | License fees and other revenues               |      |        | 107     |   |      |                        | 72      |   |      |       | 6       |   |   |       | 1,165   |   |   |       | 293     |  
|                                                       |                                               |      |        |         |   |      |                        |         |   |      |       |         |   |   |       |         |   |   |       |        
|                                                       | Total revenues                                |      |        | 18,824  |   |      |                        | 9,677   |   |      |       | 6,133   |   |   |       | 6,890   |   |   |       | 4,417   |  
|Costs and expenses
Cost of product sales and royalties |                                               |      | 12,554 |         |   |      | 7,092                  |         |   |      | 4,209 |         |   |   | 3,856 |         |   |   | 2,697 |        
|                                                       | Research and development                      |      |        | 12,705  |   |      |                        | 12,517  |   |      |       | 10,309  |   |   |       | 9,787   |   |   |       | 11,051  |  
|                                                       | Selling, general and administrative           |      |        | 7,969   |   |      |                        | 6,942   |   |      |       | 6,822   |   |   |       | 7,360   |   |   |       | 7,415   |  
|                                                       | Other operating expenses                      |      |        | 565     |   |      |                        |        |   |      |       |        |   |   |       |        |   |   |       |        |  
|                                                       |                                               |      |        |         |   |      |                        |         |   |      |       |         |   |   |       |         |   |   |       |        
|                                                       | Total costs and expenses                      |      |        | 33,793  |   |      |                        | 26,551  |   |      |       | 21,340  |   |   |       | 21,003  |   |   |       | 21,163  |  
|                                                       |                                               |      |        |         |   |      |                        |         |   |      |       |         |   |   |       |         |   |   |       |        
|                                                       | Loss from operations                          |      |        | (14,969 | ) |      |                        | (16,874 | ) |      |       | (15,207 | ) |   |       | (14,113 | ) |   |       | (16,746 | )
|                                                       | Other income, net                             |      |        | 1,267   |   |      |                        | 1,147   |   |      |       | 359     |   |   |       | 652     |   |   |       | 1,349   |  
|                                                       |                                               |      |        |         |   |      |                        |         |   |      |       |         |   |   |       |         |   |   |       |        
|                                                       | Net loss                                      |      | $      | (13,702 | ) |      | $                      | (15,727 | ) |      | $     | (14,848 | ) |   | $     | (13,461 | ) |   | $     | (15,397 | )
|                                                       |                                               |      |        |         |   |      |                        |         |   |      |       |         |   |   |       |         |   |   |       |        
|                                                       | Net loss per share, basic and diluted         |      | $      | (0.73   | ) |      | $                      | (0.91   | ) |      | $     | (0.95   | ) |   | $     | (0.94   | ) |   | $     | (1.14   | )
|                                                       |                                               |      |        |         |   |      |                        |         |   |      |       |         |   |   |       |         |   |   |       |        
|                                                       | Weighted average common shares outstanding    |      |        | 18,864  |   |      |                        | 17,335  |   |      |       | 15,581  |   |   |       | 14,330  |   |   |       | 13,559  |  
|                                                       |                                               |      |        |         |   |      |                        |         |   |      |       |         |   |   |       |         |   |   |       |        

|                                                                         |  |      |          |      |  |             |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------ |  | ---- | -------- | ---- |  | ----------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                         |  |      |          |      |  | October 31, |         |      |  |     
|                                                                         |  |     
|                                                                         |  | 2001 |          | 2000 |  | 1999        |         | 1998 |  | 1997
|                                                                        
|Balance Sheet and Other Data                                            
|Cash, cash equivalents, short-term investments
and marketable securities |  | $    | 26,682   |      |  | $           | 19,264  |      |  | $    | 16,331  |   |  | $ | 17,657  |   |  | $ | 20,674  |  
|Working capital                                                          |  |      | 31,501   |      |  |             | 21,266  |      |  |      | 20,162  |   |  |   | 21,011  |   |  |   | 21,988  |  
|Total assets                                                             |  |      | 56,603   |      |  |             | 45,442  |      |  |      | 39,145  |   |  |   | 40,747  |   |  |   | 41,340  |  
|Long-term portion of unearned revenue                                    |  |      | 2,353    |      |  |             | 2,460   |      |  |      |        |   |  |   |        |   |  |   |        |  
|Long-term debt                                                           |  |      |         |      |  |             |        |      |  |      | 472     |   |  |   | 1,951   |   |  |   | 3,292   |  
|Accumulated deficit                                                      |  |      | (103,327 | )    |  |             | (89,625 | )    |  |      | (73,898 | ) |  |   | (59,049 | ) |  |   | (45,588 | )
|Total stockholders equity                                               |  |      | 46,701   |      |  |             | 35,455  |      |  |      | 35,172  |   |  |   | 35,294  |   |  |   | 34,686  |  
|Cash dividends declared  common stock                                   |  |      |         |      |  |             |        |      |  |      |        |   |  |   |        |   |  |   |        |  

23



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

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

This Managements Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements concerning our
business and operations and we desire to take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Many of
the following important factors discussed below have been discussed in our
prior SEC filings:



| |  | expectations regarding future revenue growth, product introductions,
growth in nutritional product sales, production expansion, margin and
productivity improvements, applications and potential marketing
partnerships;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | expectations regarding sales and royalties by and from our formula
licensees;                                                                                                                                           
| 
| |  | expectations regarding potential marketing of our oils in infant formula
by our licensees in the U.S.;                                                                                                                  
| 
| |  | expectations regarding future efficiencies in manufacturing processes and
the costs of production of our nutritional oils and purchase of third
party manufactured oils;                                                
| 
| |  | expectations regarding future research and development costs;                                                                                                                                                           
| 
| |  | expectations regarding additional capital expenditures needed in relation
to our fermentation and oil processing activities; and                                                                                        
| 
| |  | expectations that our proposed acquisition of FermPro will be completed
and, if so, within the timeframe indicated.                                                                                                     

You should be cautioned that the above important factors have affected, and in
the future could affect, our actual results. There may also be additional
factors not discussed in this report that could also affect future results.
These factors could cause our future financial results to differ materially
from those expressed in any forward-looking statements made by us.
Forward-looking statements may include words such as will, should, could,
anticipate, believe, plan, estimate, expect, intend, and other
similar expressions. This list does not constitute all factors which you
should consider prior to making an investment decision in our securities. You
should also not assume that the information contained herein is complete or
accurate in all respects after the date of this filing. We disclaim any duty
to update the statements contained herein.

WE HAVE EXPERIENCED NET OPERATING LOSSES SINCE OUR INCEPTION, ARE LIKELY TO
CONTINUE TO EXPERIENCE NET OPERATING LOSSES IN THE SHORT TERM, AND MAY NEVER
BECOME PROFITABLE.

We have experienced net operating losses since our inception. As of October
31, 2001, we have an accumulated deficit of $103,327,000. Until we realize
significant revenues from sales of our nutritional products, we expect to
continue to experience net operating losses. Our balance of cash and cash
equivalents at October 31, 2001 was approximately $20.6 million and as of
October 31, 2001, we had approximately $6 million in short term investments
and marketable securities. In December 2001, we closed a private placement of
our stock which gave us additional net proceeds of approximately $21 million.
We have a current balance of cash and liquid investments of approximately $44
million at December 31, 2001. Although this cash should allow us to meet our
operating needs for at least the next 12 months, we must achieve sustained
profitability to generate the cash necessary to be a viable business in the
long term, and at this time we have not yet generated a sustained source of
revenues to achieve this.

24



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IF OUR INFANT FORMULA LICENSEES DELAY THE LAUNCHING
OF PRODUCTS CONTAINING OUR NUTRITIONAL OILS IN THE UNITED STATES,
OR INFANT FORMULA PRODUCTS CONTAINING OUR NUTRITIONAL OILS DO NOT
GAIN WIDESPREAD ACCEPTANCE IN THE UNITED STATES, OR OUR INFANT FORMULA
LICENSEES DO NOT BROADEN THEIR USE OF OUR NUTRITIONAL OILS IN THEIR
PRODUCTS OVERSEAS, WE MAY NOT BE ABLE TO REACH REVENUE LEVELS THAT WOULD
ALLOW US TO BE PROFITABLE.

Nutritional product sales and royalties are likely to be
our main source of revenues in the future.  Although we sell some of our
nutritional oils into the adult nutritional products market, over 90% of
our current nutritional product revenues come from our license agreements
with infant formula manufacturers.  As such, we depend on the licensees'
sales of products that include our nutritional oils. Although some of our
licensees have included our nutritional oils in some of their products
outside the United States, and two of our licensees have announced plans
to launch infant formula supplemented with our nutritional oils in the
United States in early 2002:

| |   |  |                                                                                                                                                    
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | our licensees in the United States may
delay launching or not follow through with their planned
          launches of products containing our oils;
| |  |  | infant formula supplemented with our
nutritional oils may not
gain widespread acceptance in the United States;                                     
| |  |  | additional licensees may not introduce infant formula products
containing our nutritional oils in the United States; or                            
| |  |  | our licensees may not broaden their use of our nutritional
oils overseas.                                                                          

If these events occur and we do not recognize significant revenues as a result of increased
product introductions, we do not expect to be profitable from the
sale of nutritional oils to our licensees.

Ultimately our success in the infant formula industry depends on growing
acceptance of our nutritional oils as necessary or beneficial additives to
infant formulas. Notwithstanding existing clinical results that have
demonstrated the beneficial effects of adding our nutritional oils to infant
formula, some experts in the field of infant nutrition do not believe that our
nutritional oils are necessary or that they provide any long-term beneficial
effects. There have also been clinical studies where no beneficial
effects have been found, possibly due to dose, duration or other
factors. Also, many experts recommend that mothers
breastfeed rather than use infant formulas whether or not they contain our
nutritional oils. Some experts also believe that infant formula without our
oils contains sufficient precursor fats that infants can convert into DHA and
ARA as needed. In addition, some physicians are unimpressed by studies showing
that infant formulas fortified with our oils improve infants cognitive ability
at early ages, suggesting that these results may not carryover to improved
results later in life. Due to these differences in opinion, we are subject to
the risk that the use of DHA and ARA in infant formula may never gain
widespread acceptance.

IF OUR LICENSEES DO NOT SATISFY RELEVANT REGULATORY REQUIREMENTS FOR THE USE OF
OUR NUTRITIONAL SUPPLEMENTS IN INFANT FORMULAS, THEY WILL NOT BE ABLE TO MARKET
FORMULA CONTAINING OUR PRODUCTS.

Many of our products and the manufacturing and marketing of these products are
subject to extensive regulation by the FDA and similar regulatory authorities
in other countries depending on the product type and method of manufacture.
For example, the FDA regulates, to varying degrees and sometimes in very
different ways, infant formulas, dietary supplements, foods, medical foods,
animal feed and pharmaceutical products.

In May 2001, the FDA completed its review of our generally recognized as safe
(GRAS) notification. The agency issued a letter notifying us that the FDA
had no further questions regarding our conclusion that our DHASCO® and ARASCO®
oil blend is GRAS when used in specific ratios in infant formula. Our licensees
are responsible for satisfying the required statutory and regulatory pre-market
notifications with the FDA before launching a product that contains our oils in
the United States. On January 10, 2002, one of our licensees, Mead Johnson
Nutritionals, announced that it will be introducing a new infant formula
supplemented with our oils in early February under the brand name Enfamil LIPIL
 in the United States. Additionally, on January 10, 2002, another licensee,
The Ross Products Division of Abbott Laboratories, announced that it also plans
to launch an infant formula supplemented with our oils in the United States in
early 2002. The ultimate timing of launches of supplemented formula by our licensees,
however, is not under our control, and there can be no assurance that these launches
will not incur significant delays that may materially and adversely affect the timing
of the introduction of infant formulas containing our products in the United States.

25



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##### 



IF ADDITIONAL POSITIVE CLINICAL RESULTS ARE NOT OBTAINED, WE MAY NOT BE ABLE TO
DEVELOP A PROFITABLE MARKET FOR OUR NUTRITIONAL OILS OUTSIDE OF THE INFANT
FORMULA MARKET.

Approximately 10% of our current nutritional product revenues come from sales
of our nutritional oils to distributors and directly to consumers in the adult
supplement market. Investigators at universities and at other research
centers, such as the National Institutes of Health, have observed a
relationship between low levels of DHA and a variety of health risks, including
increased cardiovascular problems, cystic fibrosis, cancer, and neurological
and visual disorders. We are currently trying to establish what contribution,
if any, supplementation with our oils will make in addressing these problems.
Although clinical data is not required to market nutritional supplements to
consumers or distributors outside of the infant formula market, we believe that
further clinical studies are needed to validate the benefits of DHA
supplementation. Accordingly, we have recently begun sponsoring studies to
further investigate the potential benefit of DHA supplementation on
cardiovascular health and breast cancer, and we, as well as others, are
conducting research regarding the impact of DHA supplementation on cystic
fibrosis and certain visual and neurological disorders. Unless these studies,
which are more extensive than earlier pilot studies, establish and quantify the
positive impact of DHA supplementation, we may only have a limited adult
nutritional supplement market opportunity.

EVEN IF OUR PRODUCTS DO OBTAIN WIDESPREAD ACCEPTANCE, WE MAY NOT BE ABLE TO
PRICE THE PRODUCTS AT A LEVEL THAT WOULD ALLOW US TO BE PROFITABLE.

Infant formula pricing is very competitive and the market is very sensitive to
product price changes. Because the inclusion of our oils into infant formula
may add 10% to 20% to the retail cost of standard infant formula, there is the
risk that our licensees may never be able to sell supplemented products at a
price that will allow them to gain broad market acceptance while at the same
time be profitable. Although our current contracts with licensees outline
product pricing and royalty rates, we cannot predict whether these pricing
structures will allow our licensees to be competitive in the future. If we
have to reduce our prices, we may not be able to sell products at a price that
would enable us to be profitable. Since December 2000, over 95% of our sales
to infant formula licensees have been made under all-inclusive pricing, and we
anticipate that this trend will continue for future sales to infant formula
licensees. We do not believe that this change is material to investors as the
economics of all-inclusive pricing is similar to the royalty bearing
arrangements, with the current transfer price and royalty combined into one
price with a slight discount. Although either our all-inclusive pricing
structure or the royalty bearing arrangements will enable us to achieve
profitability if our products receive widespread acceptance, we cannot predict
whether either of these pricing structures will enable our licensees to achieve
success marketing these products. None of our license agreements requires our
licensees to purchase any minimum amount of products from us now or in the
future and all of our license agreements allow our licensees to manufacture our
products themselves or purchase nutritional oils from other sources.

IF WE ARE UNABLE TO INCREASE OUR PRODUCTION CAPACITY OR ENTER INTO FAVORABLE
AGREEMENTS WITH THIRD PARTIES TO PRODUCE OUR OILS, OUR CUSTOMERS MAY NOT BE
ABLE TO OBTAIN A SUFFICIENT SUPPLY OF DHA AND ARA AT A COMMERCIALLY REASONABLE
PRICE TO GAIN A BROAD ACCEPTANCE OF THESE PRODUCTS AND OUR FUTURE REVENUES FROM
THESE PRODUCTS MAY BE LIMITED.

To meet our customers projected demand for our nutritional oils, we have
developed a process for the large-scale production of our oils at our
Winchester, Kentucky manufacturing plant. We estimate the worldwide infant
formula market to be approximately $6 to $8 billion. If our licensees were to
penetrate 100% of this market with DHA and ARA supplemented formulas, we
estimate that we would receive approximately $350 to $400 million in revenues
annually from

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these sales. To date, our licensees have penetrated less than 5% of the
worldwide infant formula market. While our current production level in our
plant is sufficient to meet this current demand, if demand increases beyond our
current production capabilities, we may be unable to produce the required
quantities of oil cost effectively. Although our licensees have a right to
manufacture DHA and ARA, we are not aware of any of our licensees doing so or
preparing to do so. We estimate that it may take a licensee approximately one
year or more to develop their process of making our oils. Accordingly, if we
are unable to meet demand, our licensees may not be able to manufacture product
themselves for at least one year. We believe that we can increase production
to supply approximately 20% to 30% of the worldwide infant formula market with
additional capital expenditures. However, our ability to maintain commercial
production at those levels at our plant has not been successfully tested. In 2001,
we initiated plans to expand our existing facility in
Winchester, KY to accommodate increased production. We believe that this
buildout, which should more than double our production capacity at our plant, will cost as much as $15
million. In addition, to further increase our production capacity, in December
2001 we signed a non-binding letter of intent to acquire certain assets and
assume certain liabilities of FermPro, a contract fermentation company.
FermPros production facility consists of a 150 acre site in Kingstree, South
Carolina with fermentation, recovery, laboratory and warehousing components.
The facility will provide us with extensive production expansion capabilities
for manufacturing our nutritional oils, as well as a highly trained workforce.
We have also conducted DHA production trials with third party manufacturers.
However, we do not currently have a third party manufacturing agreement in
place to supply us with DHA-containing oil. If we are unable to cost
effectively manufacture our DHA-containing oils at our plant, unable to
complete the acquisition of FermPro, unable to enter into a favorable third
party manufacturing agreement, or our licensees are unable to find alternative
sources for our DHA-containing oils, our licensees may not be able to meet
demand and our revenues may be limited in the future.

Although we are able to produce ARA-containing oil at our Winchester plant, we
have entered into an agreement with a third party manufacturer, DSM, to supply
our ARA-containing oil. We believe that DSM can provide us with sufficient
quantities of ARA oil to supply approximately 20% to 30% of the worldwide
infant formula market. If DSM fails to supply us with required amounts under
the contract, we would not be able to meet our customers demands. In this
case, we would have to either manufacture the ARA-containing oil at our plant,
which would reduce our DHA-containing oil production capacity, or enter into
other third party manufacturer supply agreements. If we are unable to find
alternative supply sources or are unable to cost effectively manufacture the
ARA-containing oil in our Winchester plant, our licensees may not be able to
meet future product demand and our future revenues from sales of ARA-containing
oils may be limited.

BECAUSE WE ARE STILL IN THE EARLY STAGES OF PRODUCT DEVELOPMENT, WE WILL NEED
SIGNIFICANT ADDITIONAL CAPITAL TO EXPAND OUR PRODUCTION CAPABILITY, CONTINUE
OUR RESEARCH AND DEVELOPMENT EFFORTS, CONDUCT PRODUCT TESTING, INCLUDING
PRECLINICAL AND CLINICAL TRIALS, AND MARKET OUR PRODUCTS.

We have a number of products that are in the early stages of research and
development, product testing, manufacturing or marketing. Our nutritional oils
sales are increasing, and meeting future demand will require expanding our
production capability for DHA oil. We estimate that our initial expansion plan
may cost up to $15 million. Although at December 31, 2001 we had approximately
$44 million in cash and cash equivalents available to meet these capital
requirements, we believe that additional funds of $10 to $20 million may be
needed in the longer-term to fund additional expansion of our production
capacity (either at our Winchester, KY facility or at other third party
manufacturing facilities), our research and development, product testing, and
marketing activities. The timing and extent of our additional cash needs will
primarily depend on the timing and extent of future launches of infant formula
products containing our oils by our licensees, and our ability to generate
profits from the sales of these oils.

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To continue to fund our growth, we will pursue various sources of funding,
which may include equity issuances, debt financing, asset based borrowing,
lease financing, and collaborative arrangements with partners. Because debt
financing arrangements may require us to comply with financial covenants, we
may not be able to secure debt financing on terms acceptable to us.
Additionally, funding from other sources may not be available, or may not be
available on terms that would be commercially acceptable or permit us to
continue the planned commercialization of our products or expansion of our
production capacity. If we obtain funds through collaborative or strategic
partners, these partners may require us to give them technology or product
rights, including patents, that could ultimately diminish our value. If we
cannot secure adequate funding, we may need to scale back our research,
development, manufacturing, and commercialization programs which may have a
materially adverse affect on our future business.

THE MARKET PRICE OF OUR COMMON STOCK MAY EXPERIENCE A HIGH LEVEL OF VOLATILITY
DUE TO FACTORS SUCH AS ITS RELATIVE ILLIQUIDITY, THE VOLATILITY IN THE MARKET
FOR BIOTECHNOLOGY STOCKS GENERALLY, AND THE EFFECT OF SHORT TERM EVENTS LIKE
PRODUCT LAUNCHES AND LICENSE ANNOUNCEMENTS.

We are a public emerging growth company in the biosciences sector. As
frequently occurs among these companies, the market price for our common stock
may experience a high level of volatility. During the fifty-two week period
ending October 31, 2001, our common stock price has traded between $28.50 and
$12.00. During the fifty-two week period ending October 31, 2000, our common
stock price ranged from $7.375 to $32.00. The following are examples of items
that may significantly impact the market price for our common stock:



| |  | announcements of technical innovations, new commercial products,
product launches, new license arrangements or strategic
partnerships by us or our competitors;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | patent or other intellectual property disputes;                                                                                                                
| 
| |  | quarterly fluctuations in our results of operations;                                                                                                           
| 
| |  | regulatory decisions (approvals or disapprovals) concerning our
products and our competitors products; and                                                    
| 
| |  | general market conditions for emerging growth companies and bioscience
companies.                                                                              

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

The market liquidity for our stock is very low. As of December 31, 2001, we
had 20,756,786 shares of common stock outstanding. Since our initial public
offering of common stock on November 23, 1993, the average daily trading volume
in our common stock as reported on the NASDAQ National market has been 73,629
shares. The average trading volume in our common stock during the fifty-two
week period ending October 31, 2001 was 76,087 shares. Although a more active
trading market may develop in the future, the limited market liquidity for our
stock may affect your ability to sell and the price at which you are able to
sell your shares of common stock.

IF SIGNIFICANT SHARES ELIGIBLE FOR FUTURE SALE ARE SOLD OR REGISTRATION RIGHTS
ARE EXERCISED, THE RESULT MAY DEPRESS OUR STOCK PRICE BY INCREASING THE SUPPLY
OF OUR SHARES IN THE MARKET AT A TIME WHEN DEMAND MAY BE LIMITED.

Because we continue to require additional outside sources of capital to
finance, among other things, our research and development, product testing, and
the manufacturing or marketing of our

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products, we may need to raise additional capital through the sale of equity
securities. As of December 31, 2001, we had 20,756,786 shares of common stock
outstanding, stock options outstanding to purchase an aggregate of 3,478,730
shares of common stock at various exercise prices ranging from $6.25 to $34.25
per share, and warrants outstanding to purchase up to 664,072 shares of common
stock at exercise prices between $7.51 and $19.05. To the extent that these
options and warrants for our common stock are exercised, the increase in the
number of our outstanding shares of common stock may adversely affect the price
for our common stock. This could hurt our ability to raise capital through the
sale of equity securities. Additionally, some of our stockholders who bought
shares or warrants from us in private placements have registration rights. If
the stockholders were to exercise their registration rights when we are seeking
to raise capital by selling stock in a registered offering, the result could
effectively prevent us from doing so.

OUR CURRENT PATENTS MAY NOT BE ABLE TO PROVIDE PROTECTION AGAINST COMPETITIVE
PRODUCTS AND WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY PORTFOLIO IN
THE FUTURE.

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

OmegaTech, Inc., Monsanto Corporation, Aventis S.A. and Nagase & Co. Ltd. are
challenging our European patent covering our DHA-containing oils. At a hearing
in October 2000, a division of the European Patent Office revoked our patent on
the grounds that it is too broad. We immediately appealed this ruling, and as
a result, our patent was reinstated so that it will remain in effect during the
appeal process, which is not expected to be completed until sometime in
2004, at the earliest. If the revocation is upheld upon our appeal, or any other
challenges to our patents are successful, our competitors may be able to
produce our products and, as a result, we may experience decreases in the
future sales of our nutritional oils, decreases in the revenues on sales of
infant formula containing our oils and decreases in license fees related to our
oils. Although our revenues may decrease under our license agreements, the
revocation of our European DHA patent would not terminate any of our license
agreements.

With respect to our ARA patent issued by the European Patent Office (EPO),
BASF A.G., F. Hoffman  LaRoche A.G., Friesland Brands B.V., OmegaTech Inc.,
Societe des Produits Nestle S.A., 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. The opposition process is not
expected to be completed until sometime in 2006, at the earliest.

OmegaTech has indicated to us orally that it may undertake an effort in
Australia to challenge the validity of our DHA, ARA and mixed-oil patents.

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 are aware that our European DHA and ARA
patents are being challenged and believe that challenges to our European patent
covering our blend of DHA and ARA as well as our suite of U.S. patents may
arise in the future. We may also incur substantial costs in the future
defending our patents.

WE ARE AWARE OF SEVERAL PRODUCTS THAT ARE CURRENTLY AVAILABLE, AND PRODUCTS
UNDER DEVELOPMENT, THAT MAY PRESENT A SERIOUS COMPETITIVE THREAT TO OUR
PRODUCTS.

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Our success depends upon achieving and maintaining a superior competitive
position in infant formula and adult nutritional product markets. Many of our
competitors, which include BASF, F. Hoffman-LaRoche Ltd., OmegaTech, Inc.,
Monsanto Corporation, Aventis S.A. and Nagase & Co. Ltd., have substantially
greater research and development capabilities, marketing, financial and
managerial resources and experience in the industry. If a competitor develops a
better product or technology, our products or technologies may be rendered
obsolete.

We believe that, to date, we have developed the most efficient production
method and purest forms of DHA and ARA oils; however, we are aware that other
methods of producing DHA and ARA are available. Although no company has yet
received approval to market these products in infant formula in the United
States, some infant formulas and other products now on the market outside the
United States use oils derived from other sources, such as fish or eggs. We are
aware of the development of a DHA-containing fish oil which provides an
alternative to our DHA oil for infant formula applications. Although it is a
lower cost product relative to our DHA, fish oil has odor, stability and taste
characteristics that may limit its usefulness. Only a very small percentage of
currently marketed supplemented infant formulas contain DHA and ARA that have
not been produced by us. Currently, fish oil based products dominate the adult
DHA supplement market. We are aware of the development of microencapsulated
fish oil products by several large companies, including BASF and F.
Hoffman-LaRoche Ltd. Although microencapsulation of the oil resolves much of
the odor, stability and taste issues found with fish oil, a microencapsulated
product is significantly more costly than regular fish oil. Because fish oil
is significantly less costly than our DHA oil, fish oil presents a substantial
competitive threat to our Neuromins® DHA. None of these companies has yet
received approval to include DHA derived from fish oil or eggs in infant
formula within the United States; however, some of these companies have
received approval to include DHA derived from fish oil in infant formula in
Asia and DHA and ARA derived from eggs in infant formula in Europe.

We are also aware that OmegaTech, Inc., an early stage company, is able to
produce DHA from a strain of fungus and is presently marketing this product in
animal feeds as well as in adult nutritional supplements. OmegaTech, Inc. is
currently challenging our European DHA and ARA patents and, if their
challenges are upheld on appeal, their ability to compete with us would be
strengthened. Although, based on the strength of our intellectual property, we
do not believe that OmegaTechs source of DHA will present a significant threat
in infant formula supplementation, we are currently unable to predict the
future degree of competitive threat that OmegaTechs DHA may present to us in
the areas of adult nutrition.

GENERAL

Martek was founded in 1985. We are a leader in the development and
commercialization of products derived from microalgae. Our leading products are
nutritional oils used as ingredients in infant formula and foods, and as
ingredients in, and encapsulated for use as, dietary supplements. Our
nutritional oils are comprised of fatty acid components, primarily
docosahexaenoic acid, commonly known as DHA, and arachidonic acid, commonly
known as ARA. Many researchers believe that these fatty acids may enhance
mental and visual development in infants, and play a pivotal role in brain
function throughout life. Low levels of DHA in adults have also been linked
with a variety of health risks, including cardiovascular problems, cancer, and
various neurological and visual disorders. Additional applications of our
patented technology based upon microalgae include our algal genomics technology
and our currently marketed fluorescent detection products and technologies 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 new phycobilisome fluorescent
detection products. We

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currently have license agreements with seven infant formula manufacturers
representing approximately 60% of the estimated $6 to $8 billion worldwide market for
infant formula. Five of these licensees are now marketing term infant formula
products containing our oils in 25 countries and pre-term infant formula
products containing our oils in over 60 countries around the world.

We have incurred losses in each year since our inception. At October 31, 2001,
our accumulated deficit was approximately $103,327,000. Although we anticipate
a continuation of our sales growth, we also expect our research and
development, production optimization and product marketing activities to remain
high, and as a result, expect our operating losses to continue for at least the
first three quarters of 2002. In addition, we expect to continue to experience
quarter-to-quarter and year-to-year fluctuations in revenues, expenses and
losses, some of which may be significant. The timing and extent of such
fluctuations will depend, in part, on the timing and receipt of oils-related
revenues. The extent and timing of future oils-related revenues are largely
dependent upon:



| |  | favorable FDA and other regulatory actions related to products containing our
oils;
|- |  | -----------------------------------------------------------------------------------
| 
| |  | market introductions of products by our licensees; and/or                          
| 
| |  | agreements with other future third-party collaborators.                            

Because of this, the timing or likelihood of future profitability is largely
dependent on factors over which we have no control.

MANAGEMENT OUTLOOK AND REGULATORY ISSUES

We believe that while quarterly results may show fluctuations in product sales,
the outlook for future revenue growth remains positive and that fiscal 2002
sales will surpass prior year levels. Specifically, we believe that for fiscal
2002 as a whole, term infant formulas containing our oils will be introduced in
additional countries and sales and royalties from our nutritional oils will
continue to grow. To date, five of our infant formula licensees have obtained
the regulatory approval, where required, to sell term infant formula products
containing our oils in 25 countries and pre-term infant formula products
containing our oils in over 60 countries around the world. No company has yet
launched an infant formula containing our oils in the United States.

On May 17, 2001, we received notice from the FDA that after completing its
review of our generally recognized as safe (GRAS) notification, the agency
had no further questions regarding our conclusion that our DHASCO® and ARASCO®
oil blend is GRAS when used in specified ratios in infant formulas. Our
licensees are responsible for satisfying the required statutory and regulatory
pre-market notifications with the FDA before launching a product that contains
our oils in the United States. On January 10, 2002, one of our licensees, Mead
Johnson Nutritionals, announced that it will be introducing a new infant
formula supplemented with our oils in early February under the brand name
Enfamil LIPIL  in the United States. Additionally, on January 10, 2002,
another licensee, The Ross Products Division of Abbott Laboratories, announced
that it also plans to launch an infant formula supplemented with our oils in
the United States in early 2002. The ultimate timing of launches of
supplemented formula by our licensees is not under our
control, however, and there can be no assurance that these launches
will not incur significant delays that may materially and adversely affect
the timing of the introduction of infant formulas containing our products in
the United States.

Nevertheless, we anticipate that new infant formula products containing our
oils will continue to be introduced in various countries around the world and
we will see continued growth in sales from infant formula related products,
independent of U.S. introductions.

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RESULTS OF OPERATIONS

Revenues

Our revenues increased from $6,133,000 in 1999 to $9,677,000 in 2000, an
increase of 58%, and increased to $18,824,000 in 2001, a 95% increase over
2000, mainly due to increased nutritional product sales and royalties.

Our total product sales and royalties increased $2,982,000, or 52% in 2000 over
1999 and increased $9,849,000, or 113% in 2001 over 2000. Our sales of
nutritional products increased $2,780,000, or 88% in 2000 over 1999, and
increased an additional $9,655,000, or 163% in 2001 over 2000. Our royalties
on sales of infant formula products increased from $394,000 in 1999 to $948,000
in 2000, an increase of 141%, and increased to $1,222,000 in 2001, a 29%
increase over 2000. The increase in our nutritional product sales and
royalties is primarily due to increased sales of oil to infant formula
licensees. Our licensees launched premium term infant formulas with our oils in
twelve additional countries in 2001, including the United Kingdom and Spain.
We are optimistic that as market acceptance of these products grows, more term
infant formula launches will occur in additional countries around the world.

Our sales of stable isotopes and other products decreased by $352,000, or 16%
in 2000 compared to 1999, and decreased an additional $80,000, or 4% in 2001
over 2000. For 2001, decreased sales of stable isotopes were offset by
improved sales of fluorescent marker products, which increased primarily due to
a new distribution agreement with PerkinElmer Life Sciences, Inc. which was
entered into during the first quarter of fiscal year 2001. Although we
anticipate continued increases in fluorescent marker sales, our overall sales
of stable isotopes and other products will decrease in the short-term due to
our sale of the stable isotope product line. Effective November 1, 2001, we sold
the stable isotope product line to Spectra-Gases, retaining a royalty interest in
future isotope sales for five years up to a maximum of $500,000 and a 9%
ownership and royalty interest in a new company that was formed to market the
technology surrounding the fast-track protein labeling system.

Our revenues from research and development work increased from $383,000 in 1999
to $879,000 in 2000, an increase of 130%, and decreased to $142,000 in 2001, a
decrease of 84% compared to 2000. The decrease in 2001 is mainly due to a
third-party development project that occurred during 2000 at our Winchester, KY
plant that did not repeat in 2001.

Our revenues from license fees and other sources increased $66,000 in 2000 over
1999, and further increased $35,000 in 2001 over 2000, primarily due to the
amortization of unearned revenue from our license agreement with Abbott
Laboratories which was entered into in March, 2000.

Cost of Product Sales and Royalties

Our cost of product sales and royalties increased to 81% of product sales and
royalties in 2000, up from 73% in 1999, and decreased to 68% in 2001. The
improvement in margin in 2001 is primarily a result of the change in pricing to
most of our infant formula licensees from a royalty-based price to an
all-inclusive pricing structure. Under royalty-based pricing we sell products
to our licensees at an initial transfer price and there is an approximate three
to six month delay after this sale until royalties are received and recognized
as revenue. Under all-inclusive pricing, we incorporate a slightly discounted
royalty up-front into our sales price. The overall economics of an
all-inclusive price closely match those of our royalty-bearing arrangements;
however, the all-inclusive price eliminates major fluctuations that result from
the delayed impact of royalties. Since December 2000, over 95% of all sales to
infant formula licensees have been made under all-inclusive pricing, and
management anticipates that this trend will continue for future sales to infant
formula licensees.

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Our overall high cost of product sales and royalties includes costs associated
with both ARA and DHA production. Our gross profit margins are most
significantly impacted by the cost of ARA oil, which is manufactured by a third
party, DSM. ARA typically represents approximately two-thirds of our
product sales to infant formula licensees. We believe that, with the complete
amortization of the start up costs of DSM, currently included in the price of
ARA, and increased volume purchases, the cost of our ARA oil will decrease
significantly in 2002, resulting in improved gross profit margins. Our high DHA
production costs reflect the fact that our current DHA inventory was
manufactured during a period when we had not yet realized DHA production
efficiencies at our Winchester, KY plant due to the low volume of production
and because we have not yet optimized our DHA production process. To prepare
for increased production, in 2001 we began testing certain processing
improvements at large scale, including expensive scale-up experiments, which
resulted in certain lost batches and reduced overall DHA yields. We continue to
actively work toward improving our DHA production yields, and believe that the
additional costs incurred in 2001 will be more than offset by future benefits
of improved yields and lower production costs. In addition, our planned
expansion in Winchester, KY and proposed acquisition of the FermPro facility
will bring economies of scale, which should also lower our future production
costs.

Research and Development

Our research and development costs increased $2,208,000, or 21% in 2000 over
1999 and increased an additional $188,000, or 2% in 2001 over 2000. In 2001,
we incurred approximately $12.7 million in research and development
expenditures. Approximately 85% of these costs related to nutritional oils
development costs, approximately 12% related to stable isotope research, and
approximately 3% related to research and development on our advanced detection
technology. With the sale of our stable isotope product line in November 2001, we anticipate
that over 95% of our future research and development costs will be focused on
our nutritional oils and less than 5% focused on our advanced detection
technology.

Over two-thirds of the research and development costs of our nutritional oils
have been incurred at our Winchester, KY plant. We purchased this plant in
1995, and since that time have continued an ongoing program to develop and
refine processes for manufacturing our DHA and ARA oils at large scale. We
currently have numerous development projects underway at our plant aimed at
increasing our production yields, reducing waste and improving the quality of
our nutritional oils. These projects are expected to last several years and may
cost as much as $15 million. While we believe that these projects will
continue to yield production improvements throughout the next several years and
will result in reduced production costs and improved gross profit margins, the
ultimate timing and impact of these projects on our operations and financial
results cannot be accurately predicted.

In addition to the above, we incur approximately $2  $3 million annually on
lab-scale development work on our algal oils at our Columbia research facility.
We currently have numerous projects ongoing at our Columbia facility
surrounding, among other issues, analytical analysis of our DHA and ARA,
sensory issues and genomics work. These projects are expected to continue for
several years and may cost as much as $10 million. We also have numerous
ongoing clinical trials involving our nutritional oils, some of which may take
up to 5 years to complete. In 2001, we spent in excess of $1 million servicing
these trials, and anticipate spending as much as $5 million servicing these
trials over the next several years.

Selling, General and Administrative

Our selling, general and administrative costs increased by $120,000, or 2% in
2000 compared to 1999, and increased an additional $1,027,000, or 15%, in 2001
over 2000. These increases are primarily the result of increased general
corporate insurance and legal expenses.

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Other Operating Expenses

In 2001, we incurred other operating expenses of
$565,000 associated with evaluating and/or
obtaining additional capacity for the production of our DHA and ARA oils,
including costs associated with testing and validating the fermentation
technology at FermPro.

Other Income, Net

Our other income, net increased by $788,000 in 2000 over 1999, and increased an
additional $120,000 in 2001 over 2000, primarily due to higher cash balances on
which interest income was earned and a decrease in interest expense on
outstanding debt, which was extinguished during the second quarter of fiscal
2001.

Net Loss

As a result of the foregoing, our net loss increased from $14,848,000 in 1999
to $15,727,000 in 2000, an increase of 6%, and decreased to $13,702,000 in
2001, a decrease of 13% from 2000.

Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives. We do not expect adoption of SFAS No. 141
or 142 to have a material effect on our financial condition, results of
operations or liquidity.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets, which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supercedes SFAS No. 121 and APB No. 30. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001. We do not expect adoption
of SFAS No. 144 to have a material effect on our financial condition, results
of operations or liquidity.

Collaborative and Licensing Agreements

We have entered into licensing agreements with seven infant formula
manufacturers, including Abbott Laboratories, Mead Johnson & Company (a
subsidiary of Bristol-Myers Squibb Company), American Home Products, Numico,
Maarbarot and Novartis, that together comprise over 85% of the U.S. and 60% of
the worldwide infant formula market. We have contractually agreed not to
disclose the name of our seventh licensee, a small infant formula manufacturer
with less than 3% of the worldwide market who has yet to purchase any products
from us. Under all of these agreements, we received up-front license fees, will
receive a transfer price on sales of our oils to our licensees and will receive
ongoing royalties based on our licensees sales of infant formula products
containing our oils. The agreements have terms exceeding 20 years, contain no
future funding commitments on the part of us or our licensees, and may be
terminated by our licensees upon proper notification. We recognized total
product sales and royalties relating to our license agreements of approximately
$16,000,000 in 2001, $5,000,000 in 2000 and $1,400,000 in 1999.

Pursuant to our most recent license agreement with Abbott Laboratories entered
into on March 31, 2000, we received total consideration of $4.5 million, which
represents license fees and royalty

34



---



##### 



prepayments. We recorded these non-refundable payments as unearned revenue and
are recognizing them as revenue on a straight-line basis over the twenty-five
year term of the agreement. We will recognize the non-refundable royalty
prepayment, as well as potential ongoing royalties, as revenue as products are
introduced by Abbott in accordance with the terms of the agreement. The
license agreement may be terminated by Abbott upon proper notification to us in
accordance with the agreement. We recognized approximately $217,000 and $70,000
in revenues from this agreement in 2001 and 2000, respectively.

Nutritional Oils Production

We currently manufacture our DHA-rich nutritional oils at our production
facility in Winchester, KY. In response to the growing demand for our oils, we
initiated plans in 2001 which should more than double the production capacity at our Winchester
facility. We expect that this expansion, which includes three new large-scale
fermentors and a new facility to handle additional material handling and
packaging requirements, will be completed in late 2002.

We are also actively pursuing additional fementation at several other locations
both within and outside the United States. In relation to this search, we
recently signed a letter of intent to acquire FermPro, a contract fermentation
and processing facility located in South Carolina. This facility will provide
us with extensive production expansion capabilities for manufacturing our
nutritional oils as well as a highly trained workforce.

In January, 1997, we entered into an agreement with DSM under which they became
our contract supplier for nutritional oils containing ARA. DSM is a
multi-billion dollar international group of companies that is active worldwide
in the fields of life science, product performance materials and chemicals.
Our agreement with DSM expires in 2007 and allows for Martek or another third
party to produce certain quantities of ARA if customer demand requires it or if DSM
does not meet competitive pricing guidelines.
At October 31, 2001 we
had outstanding inventory purchase commitments to DSM totaling approximately $3
million.

Liquidity and Capital Resources

We have financed our operations primarily from:



| |  | proceeds from the sale of equity securities;                          
|- |  | ----------------------------------------------------------------------
| 
| |  | product sales and receipt of license fees;                            
| 
| |  | cash received from the exercise of stock options and warrants;        
| 
| |  | debt financing; and                                                   
| 
| |  | revenues received under research and development contracts and grants.

Since our inception, we have raised approximately $171 million from public and
private sales of our equity securities, as well as option and warrant
exercises. We recently raised approximately $21 million in December 2001 and
approximately $18.7 million in March 2001 from private placements of our common
stock.

Through October 31, 2001, we have incurred an accumulated deficit of
$103,327,000. Our balance of cash and cash equivalents at October 31, 2001 was
$20,645,000. In addition, at October 31, 2001, we had $6,038,000 in short-term
investments and marketable securities, which consist primarily of U.S.
Government securities with average maturities of less than one year. With the
private placement of our common stock in December 2001, we have a current
balance of cash and liquid investments of approximately $44 million at December
31, 2001. Our cash, cash equivalents, short-term investments and marketable
securities increased approximately $25 million since October 31, 2000,
primarily due to the funds received from the private placement of our common
stock and warrants in March and December 2001, offset by cash used to fund
operations.

35



---



##### 



The planned expansion and continuing development and optimization of our
production facility in Winchester, KY will have a material effect upon our
liquidity and capital resources. During fiscal year 2001 we spent approximately
$2 million on capital equipment at our plant. The initial
buildout, which should more than double
our production capacity at our Winchester, KY plant, may cost up to $15 million.
We believe that these expenditures can be funded with existing funds. In the
longer term, however, we may require additional funds in excess of $20 million
to:



| |  | further expand our production capacity at our Winchester, KY plant;                          
|- |  | ---------------------------------------------------------------------------------------------
| 
| |  | fund, or partially fund, expansion of third-party manufacturing
facilities;                  
| 
| |  | continue our research and development programs;                                              
| 
| |  | conduct pre-clinical and clinical studies; and                                               
| 
| |  | commercialize our nutritional oils, Neuromins® DHA, and our other
products under development.

The ultimate amount of additional funding, if any, 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 and nutritional product sales;                                                                                                                                                                          
| 
| |  | the extent and progress of our research and development programs;                                                                                                                                                                    
| 
| |  | the progress of pre-clinical and clinical studies;                                                                                                                                                                                   
| 
| |  | the time and costs of obtaining regulatory clearances for our products
that are subject to such clearances;                                                                                                                          
| 
| |  | the costs involved in filing, protecting and enforcing patent claims;                                                                                                                                                                
| 
| |  | competing technological and market developments;                                                                                                                                                                                     
| 
| |  | the cost of acquiring additional and/or operating existing manufacturing
facilities for our various products and potential products (depending on
which products we decide to manufacture and continue to manufacture
ourselves); and
| 
| |  | the costs of marketing and commercializing our products.                                                                                                                                                                             

If additional funds are needed in the future to continue to finance our
operations and/or additional capital needs, we would most likely raise these
funds through:



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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative disclosures regarding market risk have not
been presented because the underlying risk items are not material.

36



---



##### 



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Market Biosciences Corporation
Balance Sheets

|                                                                                                              |                                                                                                                                                                |   |             |              |      |   |            |             |  
|------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------- | ------------ | ---- | - | ---------- | ----------- | -
|                                                                                                              |                                                                                                                                                                |   | October 31,
|                                                                                                              |                                                                                                                                                                |   |            
|                                                                                                              |                                                                                                                                                                |   | 2001        |              | 2000
|                                                                                                             
|Assets                                                                                                       
|Current assets
Cash and cash equivalents                                                                      |                                                                                                                                                                | $ | 20,644,553  |              |      | $ | 2,682,013  |            
|                                                                                                              | Short-term investments and marketable securities                                                                                                               |   |             | 6,037,500    |      |   |            | 16,581,699  |  
|                                                                                                              | Accounts receivable, net                                                                                                                                       |   |             | 5,100,684    |      |   |            | 2,520,148   |  
|                                                                                                              | Inventories                                                                                                                                                    |   |             | 6,466,506    |      |   |            | 5,125,872   |  
|                                                                                                              | Other current assets                                                                                                                                           |   |             | 800,038      |      |   |            | 1,883,321   |  
|                                                                                                              |                                                                                                                                                                |   |             |              |      |   |            |            
|Total current assets                                                                                          |                                                                                                                                                                |   | 39,049,281  |              |      |   | 28,793,053 |            
|Property, plant and equipment, net                                                                            |                                                                                                                                                                |   | 16,724,091  |              |      |   | 16,146,306 |            
|Patents, net                                                                                                  |                                                                                                                                                                |   | 772,809     |              |      |   | 464,790    |            
|Other assets                                                                                                  |                                                                                                                                                                |   | 56,657      |              |      |   | 37,957     |            
|                                                                                                              |                                                                                                                                                                |   |             |              |      |   |            |            
|Total assets                                                                                                  |                                                                                                                                                                | $ | 56,602,838  |              |      | $ | 45,442,106 |            
|                                                                                                              |                                                                                                                                                                |   |             |              |      |   |            |            
|Liabilities and stockholders equity                                                                         
|Current liabilities
Accounts payable                                                                          |                                                                                                                                                                | $ | 1,451,211   |              |      | $ | 948,505    |            
|                                                                                                              | Accrued liabilities                                                                                                                                            |   |             | 4,107,568    |      |   |            | 3,979,244   |  
|                                                                                                              | Current portion of notes payable                                                                                                                               |   |             | - - -        |      |   |            | 471,907     |  
|                                                                                                              | Current portion of unearned revenue                                                                                                                            |   |             | 1,989,697    |      |   |            | 2,127,571   |  
|                                                                                                              |                                                                                                                                                                |   |             |              |      |   |            |            
|Total current liabilities                                                                                     |                                                                                                                                                                |   | 7,548,476   |              |      |   | 7,527,227  |            
|Long-term portion of unearned revenue                                                                         |                                                                                                                                                                |   | 2,353,066   |              |      |   | 2,460,209  |            
|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; 30,000,000 shares
authorized; 19,552,316 and 17,806,079 shares issued
and outstanding at October 31, 2001 and 2000,
respectively |   |             | 1,955,232    |      |   |            | 1,780,608   |  
|                                                                                                              | Additional paid-in capital                                                                                                                                     |   |             | 148,161,214  |      |   |            | 123,474,556 |  
|                                                                                                              | Deferred compensation                                                                                                                                          |   |             | (88,751      | )    |   |            | (173,156    | )
|                                                                                                              | Accumulated other comprehensive income (loss)                                                                                                                  |   |             | 1,015        |      |   |            | (2,388      | )
|                                                                                                              | Accumulated deficit                                                                                                                                            |   |             | (103,327,414 | )    |   |            | (89,624,950 | )
|                                                                                                              |                                                                                                                                                                |   |             |              |      |   |            |            
|Total stockholders equity                                                                                    |                                                                                                                                                                |   | 46,701,296  |              |      |   | 35,454,670 |            
|                                                                                                              |                                                                                                                                                                |   |             |              |      |   |            |            
|Total liabilities and stockholders equity                                                                    |                                                                                                                                                                | $ | 56,602,838  |              |      | $ | 45,442,106 |            
|                                                                                                              |                                                                                                                                                                |   |             |              |      |   |            |            

See accompanying notes.
37

Market Biosciences Corporation
Statements of Operations

|                                                               |                                                   |                                        |                                   |            |                        |            |              |            |           |           |              |            |           |           | 
|-------------------------------------------------------------- | ------------------------------------------------- | -------------------------------------- | --------------------------------- | ---------- | ---------------------- | ---------- | ------------ | ---------- | --------- | --------- | ------------ | ---------- | --------- | --------- | 
|                                                               |                                                   |                                        |                                   |            | Year Ended October 31,
|                                                               |                                                   |                                        |                                   |            |                       
|                                                               |                                                   |                                        |                                   |            | 2001                   |            | 2000         |            | 1999     
|                                                              
|Revenues
        Product sales and royalties:                  |                                                   |                                        |                                   |            |                        |            |              |            |           |           |              |           
|                                                               |                                                   | Nutritional product sales              |                                   | $          | 15,578,683             |            |              | $          | 5,923,583 |           |              | $          | 3,143,512 |          
|                                                               |                                                   | Stable isotope and other product sales |                                   |            | 1,773,908              |            |              |            | 1,854,195 |           |              |            | 2,206,133 |          
|                                                               |                                                   | Royalties                              |                                   |            | 1,222,022              |            |              |            | 947,851   |           |              |            | 394,003   |          
|                                                               |                                                   |                                        |                                   |            |                        |            |              |            |           |           |              |           
|                                                               |                                                   |                                        | Total product sales and royalties |            |                        | 18,574,613 |              |            |           | 8,725,629 |              |            |           | 5,743,648 | 
|                                                               | Research and development grants and other revenue |                                        |                                   | 142,121    |                        |            |              | 879,294    |           |           |              | 383,415    |          
|                                                               | License fees and related revenues                 |                                        |                                   | 107,143    |                        |            |              | 72,050     |           |           |              | 6,000      |          
|                                                               |                                                   |                                        |                                   |            |                        |            |              |            |           |           |              |           
|Total revenues                                                 |                                                   |                                        | 18,823,877                        |            |                        |            | 9,676,973    |            |           |           | 6,133,063    |           
|                                                              
|Costs and expenses
        Cost of product sales and royalties |                                                   |                                        | 12,554,049                        |            |                        |            | 7,091,700    |            |           |           | 4,208,488    |           
|                                                               | Research and development                          |                                        |                                   | 12,704,911 |                        |            |              | 12,517,063 |           |           |              | 10,309,452 |          
|                                                               | Selling, general and administrative               |                                        |                                   | 7,968,770  |                        |            |              | 6,942,383  |           |           |              | 6,822,440  |          
|                                                               | Other operating expenses                          |                                        |                                   | 565,097    |                        |            |              |           |           |           |              |           |          
|                                                               |                                                   |                                        |                                   |            |                        |            |              |            |           |           |              |           
|Total costs and expenses                                       |                                                   |                                        | 33,792,827                        |            |                        |            | 26,551,146   |            |           |           | 21,340,380   |           
|                                                               |                                                   |                                        |                                   |            |                        |            |              |            |           |           |              |           
|Loss from operations                                           |                                                   |                                        | (14,968,950                       | )          |                        |            | (16,874,173  | )          |           |           | (15,207,317  | )         
|                                                              
|Other income (expense)
        Miscellaneous income            |                                                   |                                        | 152,382                           |            |                        |            | 99,634       |            |           |           | 132,358      |           
|                                                               | Interest income                                   |                                        |                                   | 1,123,208  |                        |            |              | 1,240,535  |           |           |              | 806,238    |          
|                                                               | Interest expense                                  |                                        |                                   | (9,104     | )                      |            |              | (193,390   | )         |           |              | (579,387   | )        
|                                                               |                                                   |                                        |                                   |            |                        |            |              |            |           |           |              |           
|                                                               |                                                   |                                        | 1,266,486                         |            |                        |            | 1,146,779    |            |           |           | 359,209      |           
|                                                               |                                                   |                                        |                                   |            |                        |            |              |            |           |           |              |           
|Net loss                                                       |                                                   |                                        | ($13,702,464                      | )          |                        |            | ($15,727,394 | )          |           |           | ($14,848,108 | )         
|                                                               |                                                   |                                        |                                   |            |                        |            |              |            |           |           |              |           
|Net loss per share, basic and diluted                          |                                                   |                                        | ($0.73                            | )          |                        |            | ($0.91       | )          |           |           | ($0.95       | )         
|                                                               |                                                   |                                        |                                   |            |                        |            |              |            |           |           |              |           
|Weighted average common shares outstanding                     |                                                   |                                        | 18,863,924                        |            |                        |            | 17,335,403   |            |           |           | 15,580,791   |           
|                                                               |                                                   |                                        |                                   |            |                        |            |              |            |           |           |              |           

See accompanying notes.

38



---



##### 



Market Biosciences Corporation
Statements of Stockholders Equity

|                            |                                                                                   |                                |                    |           |              |   |              |         |         |   |              |            |               |   |             |          |       |   |         |   |             |   |              |             |   |   |            |             |         |             |  
|--------------------------- | --------------------------------------------------------------------------------- | ------------------------------ | ------------------ | --------- | ------------ | - | ------------ | ------- | ------- | - | ------------ | ---------- | ------------- | - | ----------- | -------- | ----- | - | ------- | - | ----------- | - | ------------ | ----------- | - | - | ---------- | ----------- | ------- | ----------- | -
|                            |                                                                                   |                                |                    |           |              |   |              |         |         |   |              |            |               |   |             |          |       |   |         |   | Accumulated |   |              |             |   |   |            |             |        
|                            |                                                                                   |                                |                    |           |              |   |              |         |         |   |              |            | Additional    |   |             |          |       |   | Other   |   |             |   |              |             |   |   |           
|                            |                                                                                   |                                |                    |           | Common Stock |   | Common Stock |         | Paid-in |   | Deferred     |            | Comprehensive |   | Accumulated |          |       |   |        
|                            |                                                                                   |                                |                    |           | Shares       |   | Amount       |         | Capital |   | Compensation |            | Income (Loss) |   | Deficit     |          | Total
|                           
|Balance at October 31, 1998 |                                                                                   |                                | 14,879,434         |           |              | $ | 1,487,943    |         |         | $ | 92,843,259   |            |               | $ |            |          |       | $ | 11,975  |   |             | $ | (59,049,448  | )           |   | $ | 35,293,729 |            
|                            | Issuance of common stock and warrants
in private placement, net of issuance costs |                                |                    | 1,528,935 |              |   |              | 152,894 |         |   |              | 13,592,001 |               |   |             |         |       |   |         |  |             |   |              |            |   |   |            | 13,744,895  |        
|                            | Exercise of stock options and
warrants                                            |                                |                    | 83,860    |              |   |              | 8,386   |         |   |              | 1,011,690  |               |   |             |         |       |   |         |  |             |   |              |            |   |   |            | 1,020,076   |        
|                            | Net loss                                                                          |                                |                    |          |              |   |              |        |         |   |              |           |               |   |             |         |       |   |         |  |             |   |              | (14,848,108 | ) |   |            | (14,848,108 | )      
|                            | Other comprehensive
income:                                                       |                                |                    |           |              |   |              |         |         |   |              |            |               |   |             |          |       |   |         |   |             |   |              |             |   |   |            |             |        
|                            |                                                                                   | Unrealized loss
on investments |                    |           |             |   |              |         |        |   |              |            |              |   |             |          |      |   |         |   | (38,917     | ) |              |             |  |   |            |             | (38,917 | )          
|                            |                                                                                   |                                |                    |           |              |   |              |         |         |   |              |            |               |   |             |          |       |   |         |   |             |   |              |             |   |   |            |            
|                            |                                                                                   |                                | Comprehensive loss |           |              |   |              |         |         |   |              |            |               |   |             |          |       |   |         |   |             |   |              |             |   |   |            |             |         | (14,887,025 | )
|                           
|Balance at October 31, 1999 |                                                                                   |                                | 16,492,229         |           |              |   | 1,649,223    |         |         |   | 107,446,950  |            |               |   |            |          |       |   | (26,942 | ) |             |   | (73,897,556  | )           |   |   | 35,171,675 |            
|                            | Issuance of common stock and warrants
in private placement, net of issuance costs |                                |                    | 845,652   |              |   |              | 84,565  |         |   |              | 10,127,932 |               |   |             |         |       |   |         |  |             |   |              |            |   |   |            | 10,212,497  |        
|                            | Exercise of stock options and
warrants                                            |                                |                    | 468,198   |              |   |              | 46,820  |         |   |              | 5,553,804  |               |   |             |         |       |   |         |  |             |   |              |            |   |   |            | 5,600,624   |        
|                            | Deferred compensation
on stock options                                            |                                |                    |          |              |   |              |        |         |   |              | 345,870    |               |   |             | (345,870 | )     |   |         |  |             |   |              |            |   |   |            |            |        
|                            | Amortization of
deferred compensation                                             |                                |                    |          |              |   |              |        |         |   |              |           |               |   |             | 172,714  |       |   |         |  |             |   |              |            |   |   |            | 172,714     |        
|                            | Net loss                                                                          |                                |                    |          |              |   |              |        |         |   |              |           |               |   |             |         |       |   |         |  |             |   |              | (15,727,394 | ) |   |            | (15,727,394 | )      
|                            | Other comprehensive
income:                                                       |                                |                    |           |              |   |              |         |         |   |              |            |               |   |             |          |       |   |         |   |             |   |              |             |   |   |            |             |        
|                            |                                                                                   | Unrealized gain
on investments |                    |           |             |   |              |         |        |   |              |            |              |   |             |          |      |   |         |   | 24,554      |   |              |             |  |   |            |             | 24,554  |            
|                            |                                                                                   |                                |                    |           |              |   |              |         |         |   |              |            |               |   |             |          |       |   |         |   |             |   |              |             |   |   |            |            
|                            |                                                                                   |                                | Comprehensive loss |           |              |   |              |         |         |   |              |            |               |   |             |          |       |   |         |   |             |   |              |             |   |   |            |             |         | (15,702,840 | )
|                           
|Balance at October 31, 2000 |                                                                                   |                                | 17,806,079         |           |              |   | 1,780,608    |         |         |   | 123,474,556  |            |               |   | (173,156    | )        |       |   | (2,388  | ) |             |   | (89,624,950  | )           |   |   | 35,454,670 |            
|                            | Issuance of common stock and warrants
in private placement, net of issuance costs |                                |                    | 1,279,237 |              |   |              | 127,924 |         |   |              | 18,582,496 |               |   |             |         |       |   |         |  |             |   |              |            |   |   |            | 18,710,420  |        
|                            | Exercise of stock options and
warrants                                            |                                |                    | 467,000   |              |   |              | 46,700  |         |   |              | 5,876,915  |               |   |             |         |       |   |         |  |             |   |              |            |   |   |            | 5,923,615   |        
|                            | Deferred compensation
on stock options                                            |                                |                    |          |              |   |              |        |         |   |              | 227,247    |               |   |             | (227,247 | )     |   |         |  |             |   |              |            |   |   |            |            |        
|                            | Amortization of
deferred compensation                                             |                                |                    |          |              |   |              |        |         |   |              |           |               |   |             | 311,652  |       |   |         |  |             |   |              |            |   |   |            | 311,652     |        
|                            | Net loss                                                                          |                                |                    |          |              |   |              |        |         |   |              |           |               |   |             |         |       |   |         |  |             |   |              | (13,702,464 | ) |   |            | (13,702,464 | )      
|                            | Other comprehensive
income:                                                       |                                |                    |           |              |   |              |         |         |   |              |            |               |   |             |          |       |   |         |   |             |   |              |             |   |   |            |             |        
|                            |                                                                                   | Unrealized gain
on investments |                    |           |             |   |              |         |        |   |              |            |              |   |             |          |      |   |         |   | 3,403       |   |              |             |  |   |            |             | 3,403   |            
|                            |                                                                                   |                                |                    |           |              |   |              |         |         |   |              |            |               |   |             |          |       |   |         |   |             |   |              |             |   |   |            |            
|                            |                                                                                   |                                | Comprehensive loss |           |              |   |              |         |         |   |              |            |               |   |             |          |       |   |         |   |             |   |              |             |   |   |            |             |         | (13,699,061 | )
|                           
|Balance at October 31, 2001 |                                                                                   |                                | 19,552,316         |           |              | $ | 1,955,232    |         |         | $ | 148,161,214  |            |               | $ | (88,751     | )        |       | $ | 1,015   |   |             | $ | (103,327,414 | )           |   | $ | 46,701,296 |            
|                           

See accompanying notes.

39



---



##### 



Market Biosciences Corporation
Statements of Cash Flows

|                      |                                                                             |                                                                              |                     |             |             |            |      |             |                        |            |   |             |             |          |  
|--------------------- | --------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------- | ----------- | ----------- | ---------- | ---- | ----------- | ---------------------- | ---------- | - | ----------- | ----------- | -------- | -
|                      |                                                                             |                                                                              |                     |             |             |            |      |             | Year Ended October 31, |            |   |             |            
|                      |                                                                             |                                                                              |                     |             |             |            |      |             |                       
|                      |                                                                             |                                                                              |                     |             | 2001        |            | 2000 |             | 1999                  
|                     
|Operating activities: |                                                                             |                                                                              |                     |             |             |            |      |             |                        |            |   |            
|                      | Net loss                                                                    |                                                                              | $                   | (13,702,464 | )           |            | $    | (15,727,394 | )                      |            | $ | (14,848,108 | )          
|                      | Adjustments to reconcile net loss to net cash
used in operating activities: |                                                                              |                     |             |             |            |      |             |                        |            |   |             |            
|                      |                                                                             | Depreciation and amortization                                                |                     |             | 1,959,164   |            |      |             | 1,558,571              |            |   |             | 1,461,159   |         
|                      |                                                                             | Amortization of deferred compensation                                        |                     |             | 311,652     |            |      |             | 172,714                |            |   |             | - - -       |         
|                      |                                                                             | Other non-cash items                                                         |                     |             | - - -       |            |      |             | 261,455                |            |   |             | 348,600     |         
|                      |                                                                             | Changes in assets and liabilities:                                           |                     |             |             |            |      |             |                        |            |   |             |             |         
|                      |                                                                             |                                                                              | Accounts receivable |             |             | (2,580,536 | )    |             |                        | (874,000   | ) |             |             | (309,880 | )
|                      |                                                                             |                                                                              | Inventories         |             |             | (1,340,634 | )    |             |                        | 90,393     |   |             |             | (214,275 | )
|                      |                                                                             |                                                                              | Other assets        |             |             | 1,064,583  |      |             |                        | (1,438,506 | ) |             |             | 36,601   |  
|                      |                                                                             |                                                                              | Accounts payable    |             |             | 502,706    |      |             |                        | 255,041    |   |             |             | 97,820   |  
|                      |                                                                             |                                                                              | Accrued liabilities |             |             | 128,324    |      |             |                        | 2,650,294  |   |             |             | (237,002 | )
|                      |                                                                             |                                                                              | Unearned revenue    |             |             | (245,017   | )    |             |                        | 4,587,780  |   |             |             | - - -    |  
|                      |                                                                             |                                                                              |                     |             |             |            |      |             |                        |            |   |            
|                      | Net cash used in operating activities                                       |                                                                              |                     | (13,902,222 | )           |            |      | (8,463,652  | )                      |            |   | (13,665,085 | )          
|Investing activities: |                                                                             |                                                                              |                     |             |             |            |      |             |                        |            |   |            
|                      |                                                                             | Purchase of short-term investments and marketable securities                 |                     |             | (37,028,398 | )          |      |             | (26,970,935            | )          |   |             | (21,175,362 | )       
|                      |                                                                             | Proceeds from sale of short-term investments and
marketable securities       |                     |             | 47,576,000  |            |      |             | 25,565,000             |            |   |             | 19,144,160  |         
|                      |                                                                             | Capitalization of patent costs                                               |                     |             | (547,061    | )          |      |             | (471,727               | )          |   |             | - - -       |         
|                      |                                                                             | Purchase of property, plant and equipment                                    |                     |             | (2,297,907  | )          |      |             | (2,229,104             | )          |   |             | (696,946    | )       
|                      |                                                                             |                                                                              |                     |             |             |            |      |             |                        |            |   |            
|                      | Net cash provided by (used in) investing activities                         |                                                                              |                     | 7,702,634   |             |            |      | (4,106,766  | )                      |            |   | (2,728,148  | )          
|Financing activities: |                                                                             |                                                                              |                     |             |             |            |      |             |                        |            |   |            
|                      |                                                                             | Repayment of notes payable                                                   |                     |             | (471,907    | )          |      |             | (1,479,333             | )          |   |             | (1,340,919  | )       
|                      |                                                                             | Proceeds from the exercise of warrants and stock options                     |                     |             | 5,923,615   |            |      |             | 5,339,169              |            |   |             | 671,476     |         
|                      |                                                                             | Proceeds from the issuance of common stock and warrants
in private placement |                     |             | 18,710,420  |            |      |             | 10,212,497             |            |   |             | 13,744,895  |         
|                      |                                                                             |                                                                              |                     |             |             |            |      |             |                        |            |   |            
|                      | Net cash provided by financing activities                                   |                                                                              |                     | 24,162,128  |             |            |      | 14,072,333  |                        |            |   | 13,075,452  |            
|                      |                                                                             |                                                                              |                     |             |             |            |      |             |                        |            |   |            
|                      | Net
increase (decrease) in cash and cash equivalents                        |                                                                              |                     | 17,962,540  |             |            |      | 1,501,915   |                        |            |   | (3,317,781  | )          
|                      | Cash and cash equivalents at beginning of year                              |                                                                              |                     | 2,682,013   |             |            |      | 1,180,098   |                        |            |   | 4,497,879   |            
|                      |                                                                             |                                                                              |                     |             |             |            |      |             |                        |            |   |            
|                      | Cash and cash equivalents at end of year                                    |                                                                              | $                   | 20,644,553  |             |            | $    | 2,682,013   |                        |            | $ | 1,180,098   |            
|                      |                                                                             |                                                                              |                     |             |             |            |      |             |                        |            |   |            

See accompanying notes.

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Martek Biosciences Corporation
Notes to Financial Statements

1.     ORGANIZATION
Martek Biosciences Corporation develops, manufactures and sells products from
microalgae. The Companys products include: (1) specialty, nutritional oils for
infant formula; (2) nutritional supplements and food ingredients that may play
a beneficial role in promoting mental and cardiovascular health, and in the
development of the eyes and central nervous system in newborns; and (3) new,
powerful fluorescent markers for diagnostics, rapid miniaturized screening, and
gene and protein detection. The Company sells to a broad range of companies
worldwide.

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

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

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

The Companys revenue from SBIR research and development contracts and
grants amounted to approximately $142,000 in 2001, $185,000 in 2000, and
$101,000 in 1999. Approximately 1% in 2001, 2% in 2000 and 6% in 1999 of the
Companys total revenues were generated from U.S. government contracts,
subcontracts and SBIR grants.

Costs for products, contracts and grants, and research and development are
based on direct costs incurred plus an allocation of indirect costs, which
include such items as utilities, insurance, indirect labor and supplies. Total
allocated indirect costs for the years ended October 31, 2001, 2000 and 1999
were approximately $18,000, $124,000 and $154,000, respectively. Estimated
losses on contracts, if any, are recorded as they become known.

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

Revenue RecognitionRevenue is recognized on product sales when goods are
shipped. Revenue from licensing agreements is recognized generally over the
term of the agreement, or in certain circumstances, when milestones are met.
Revenues on cost reimbursement and fixed price

41



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contracts are generally recognized on the percentage of completion method of
accounting as costs are incurred. Revenue recognized is not subject to
repayment. Cash received that is related to future performance under such
contracts is deferred and recognized as revenue when earned. At October 31,
2001, the Company had approximately $2.0 million in short-term and $2.4 million
in long-term unearned revenue relating to third-party license agreements.

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. Currently, all material transactions of the Company are denominated
in U.S. dollars, and the Company has not entered into any material transactions
that are denominated in foreign currencies.

Concentration of Credit Risk and Significant CustomersFinancial instruments,
which potentially subject the Company to concentrations of credit risk, consist
principally of accounts receivable. The Companys reserve for uncollectable
accounts at October 31, 2001 and 2000 was not material. The Company grants
credit to customers based on evaluations of their financial condition,
generally without requiring collateral. Concentrations of credit risk with
respect to accounts receivable are present due to the small number of customers
comprising the Companys customer base. However, the credit risk is reduced
through the Companys efforts to monitor its exposure for credit losses and
maintain allowances if necessary. Two customers accounted for approximately
72% of the Companys sales for fiscal 2001, 34% for fiscal 2000 and 19% for
fiscal 1999. These two customers accounted for approximately 80% and 47% of
the Companys outstanding accounts receivable balance at October 31, 2001 and
2000, respectively.

Research and DevelopmentResearch and development costs are charged to
operations as incurred and include internal labor, material and overhead costs
associated with the Companys ongoing research and development projects, in
addition to third party costs for contracted work as well as ongoing clinical
trial costs. Over 60% of the Companys research and development expenditures
are associated with internal projects at the Winchester, KY plant. The
Companys total research and development expense was approximately $12,705,000
in 2001, $12,517,000 in 2000, and $10,309,000 in 1999.

Advertising CostsAll advertising costs are expensed when incurred.
Advertising costs expensed for the years ended October 31, 2001, 2000 and 1999
approximated $1,164,000, $1,223,000, and $1,650,000 respectively.

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

Fair Value of Financial InstrumentsThe Company considers the recorded cost
of its financial assets and liabilities, which consists primarily of cash and
cash equivalents, short-term investments and marketable securities, accounts
receivable and accounts payable, to approximate the fair value of the
respective assets and liabilities at October 31, 2001.

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

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

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

InventoriesInventories are stated at the lower of cost or market, reflect
appropriate reserves for potential obsolete, slow-moving or otherwise impaired
material, and include appropriate elements of material, labor and indirect
costs. 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. Inventories include products
and materials held for sale as well as products and materials that can
alternatively be used in the Companys research and development activities.
Inventories identified for research and development activities are expensed in
the period in which such inventories are designated for such use.

PatentsPatents include issued and pending patents and are stated at
acquisition cost. Amortization of patents and patent related costs is recorded
using the straight-line method over the legal lives of the patents, generally
for periods ranging up to 17 years. The carrying value of patents is
periodically reviewed by the Company and impairments are recognized when the
expected future operating cash flows derived from such patents is less than
their carrying value. Patent-related amortization expense was approximately
$239,000 and $7,000 for the years ended October 31, 2001 and 2000,
respectively. Accumulated patent amortization totaled approximately $246,000
and $7,000 at October 31, 2001 and 2000, respectively.

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 which
are twenty years for the Companys fermentation plant, fifteen years for the
Companys oil processing plant, generally ten years for machinery and
equipment, five years for furniture and fixtures, and the shorter of the useful
life or the lease term for leasehold improvements. Costs for capital assets
not yet placed into service, including those related to expansion of the
Companys Winchester, KY fermentation facility, have been capitalized as
construction in progress and will be depreciated in accordance with the above
guidelines once placed into service.

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

Statements of Cash FlowsCash equivalents consist of highly liquid
investments with an original maturity of three months or less and are stated at
market value.

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Interest paid by the Company amounted to approximately $10,000 in 2001,
$197,000 in 2000 and $408,000 in 1999. For the years ended October 31, 2001,
2000 and 1999 the Company paid no income taxes.

ReclassificationCertain amounts in the prior years financial statements
have been reclassified to conform to the 2001 presentation.

3.     SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES
The Company has classified all debt securities as available-for-sale.
Available-for-sale securities are carried at specific identification and have
average maturities of approximately nine months. Unrealized gains and losses on
these securities are reported as accumulated other comprehensive income (loss),
which is a separate component of stockholders equity. The amount of unrealized
holding gain (loss) on these available-for-sale securities was $1,015 and
($2,388) at October 31, 2001 and 2000, respectively. Realized gains and losses
and declines in value judged to be other-than-temporary on available-for-sale
securities are included in other income, based on the specific identification
method. There were no realized gains or losses recorded for the years ended
October 31, 2001, 2000, or 1999. Available-for-sale securities consisted of
U.S. government obligations totaling approximately $6,038,000 and $16,582,000
for the years ended October 31, 2001 and 2000, respectively. At October 31,
2001 and 2000, the estimated fair value of these securities approximated cost.

4.     INVENTORIES
Inventories consisted of the following:

|                       |  |             |           |      |  |   |           |  
|---------------------- |  | ----------- | --------- | ---- |  | - | --------- | -
|                       |  | October 31,
|                       |  | 2001        |           | 2000
|                      
|Finished products      |  | $           | 5,574,739 |      |  | $ | 3,849,817 |  
|Work in process        |  |             | 711,459   |      |  |   | 1,035,496 |  
|Raw materials          |  |             | 273,752   |      |  |   | 520,559   |  
|Less inventory reserve |  |             | (93,444   | )    |  |   | (280,000  | )
|                       |  |             |           |      |  |   |           |  
|                       |  | $           | 6,466,506 |      |  | $ | 5,125,872 |  
|                       |  |             |           |      |  |   |           |  

5.     PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:

|                                               |  |             |            |      |  |   |            |  
|---------------------------------------------- |  | ----------- | ---------- | ---- |  | - | ---------- | -
|                                               |  | October 31,
|                                               |  | 2001        |            | 2000
|                                              
|Land                                           |  | $           | 149,860    |      |  | $ | 149,860    |  
|Building and improvements                      |  |             | 1,794,851  |      |  |   | 1,742,123  |  
|Machinery and equipment                        |  |             | 21,334,767 |      |  |   | 20,175,412 |  
|Furniture and fixtures                         |  |             | 1,017,098  |      |  |   | 833,163    |  
|Leasehold improvements                         |  |             | 496,086    |      |  |   | 496,086    |  
|Construction in progress                       |  |             | 1,605,591  |      |  |   | 703,702    |  
|                                               |  |             |            |      |  |   |            |  
|                                               |  |             | 26,398,253 |      |  |   | 24,100,346 |  
|Less accumulated depreciation
and amortization |  |             | (9,674,162 | )    |  |   | (7,954,040 | )
|                                               |  |             |            |      |  |   |            |  
|                                               |  | $           | 16,724,091 |      |  | $ | 16,146,306 |  
|                                               |  |             |            |      |  |   |            |  

Depreciation and amortization expense on property, plant & equipment amounted
to approximately $1,720,000, $1,552,000 and $1,461,000 for the years ended
October 31, 2001, 2000 and 1999, respectively.

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6.     NOTES PAYABLE
At October 31, 2001, the Company had no outstanding notes payable. Two term
loans, which were used to finance the Companys fermentation and extraction
facilities in Winchester, KY were paid down in full in July 2000 and March
2001.

7.     COMMITMENTSOperating LeasesThe Company leases its premises under an operating lease
agreement which expires in November 2004. The terms of the lease call for
annual rent escalations of 3%. The Company has an option to extend the lease
for five additional years at 95% of the then-prevailing fair rental value.
Additionally, the Company leases certain equipment classified as operating
leases for equipment at its Winchester, KY manufacturing facility. Rent
expense was approximately $434,000 in 2001, $403,000 in 2000, and $372,000 in
1999. The Company received sublease income of approximately $133,000, $98,000
and $122,000 for the years ended October 31, 2001, 2000 and 1999, respectively.

Future minimum lease payments under operating leases at October 31, 2001,
assuming the Company will not exercise any additional cancellation, renewal or
expansion rights it has under the leases, are as follows:

|               |  |              |           |               |  |             |         |  |  |   |         | 
|-------------- |  | ------------ | --------- | ------------- |  | ----------- | ------- |  |  | - | ------- | 
|               |  | Rent Expense |           | Sublet Income |  | Net Expense
|              
|2002           |  | $            | 443,000   |               |  | $           | 162,000 |  |  | $ | 281,000 | 
|2003           |  |              | 449,000   |               |  |             | 167,000 |  |  |   | 282,000 | 
|2004           |  |              | 460,000   |               |  |             | 171,000 |  |  |   | 289,000 | 
|2005 and after |  |              | 4,000     |               |  |             |        |  |  |   | 4,000   | 
|               |  |              |           |               |  |             |         |  |  |   |         | 
|               |  | $            | 1,356,000 |               |  | $           | 500,000 |  |  | $ | 856,000 | 
|               |  |              |           |               |  |             |         |  |  |   |         | 

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

Government GrantsThe Company had commitments at October 31, 2001 to fund up
to $1 million of Phase II SBIR technology commercialization expenses, provided
the technology under existing Phase I SBIR grants yields commercial
opportunities favorable to the Company.

Costs under U.S. government contracts are subject to audit by the
appropriate U.S. government agency. Management believes that cost
disallowances, if any, arising from audits of costs charged to government
contracts through October 31, 2001, would not have a material effect on the
financial statements.

Purchase CommitmentsThe Company currently contracts with a third party
supplier, DSM, to produce its arachidonic acid oil. At October 31, 2001, the
Company had outstanding inventory purchase commitments to DSM totalling
approximately $3 million.

OtherThe Company is not a party to any material legal proceedings.

8. LICENSE AGREEMENTS
The Company has licensed certain technologies and recognized license fee
revenue under various agreements. Potentially refundable license fees are
recorded as unearned revenue and are not recognized as revenue until the
earnings process is complete and amounts are not subject to refund.
Non-refundable license fees are recorded as unearned revenue and amortized on a
straight-line basis over the term of the agreement. During 2000, the Company
received license fees and royalty pre-payments of approximately $4.6 million,
of which approximately $225,000 and $72,000 was recognized as revenue for the
years ended October 31, 2001 and 2000, respectively.

45



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The balance of these license fees and prepaid royalties remaining in unearned
revenue at October 31, 2001 was approximately $4.3 million and $4.6 million at
October 31, 2001 and 2000, respectively.

Certain license agreements include ongoing royalty payments, which are
based upon a percentage of product sales. The Companys total royalty revenues
were approximately $1,222,000, $948,000 and $394,000 for the years ended
October 31, 2001, 2000 and 1999, respectively.

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

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

On March 2, 2001, the Company sold 1,279,237 shares of its common stock
and issued warrants to purchase 319,811 shares of common stock resulting in net
proceeds of approximately $18,710,00. The purchase price for the common stock
was $15.875 per share, representing the closing market price on February 27,
2001. The warrants have a five-year term and are exercisable at $19.05 per
share, a 20% premium over the common stock purchase price.

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

46



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Details of shares under option were as follows:

|                            |  |           |           |             |  |             |              |  |  |          |       | 
|--------------------------- |  | --------- | --------- | ----------- |  | ----------- | ------------ |  |  | -------- | ----- | 
|                            |  |           |           |             |  |             |              |  |  | Weighted
|                            |  | Number of |           | Option      |  | Average    
|                            |  | Shares    |           | Price/Share |  | Price/Share
|                           
|Balance at October 31, 1998 |  |           | 1,772,870 |             |  | $           | 8.00-$34.25  |  |  | $        | 14.90 | 
|Granted                     |  |           | 859,450   |             |  | $           | 6.25-$9.63   |  |  | $        | 6.75  | 
|Exercised                   |  |           | (83,860   | )           |  | $           | 8.00-$9.88   |  |  | $        | 8.01  | 
|Forfeited                   |  |           | (380,400  | )           |  | $           | 6.25-$34.25  |  |  | $        | 9.60  | 
|                            |  |           |           |             |  |             |              |  |  |          |       | 
|Balance at October 31, 1999 |  |           | 2,168,060 |             |  | $           | 6.25-$34.25  |  |  | $        | 13.16 | 
|Granted                     |  |           | 939,550   |             |  | $           | 8.00-$23.25  |  |  | $        | 13.74 | 
|Exercised                   |  |           | (242,295  | )           |  | $           | 6.25-$18.00  |  |  | $        | 9.94  | 
|Forfeited                   |  |           | (52,455   | )           |  | $           | 6.25-$34.25  |  |  | $        | 15.27 | 
|                            |  |           |           |             |  |             |              |  |  |          |       | 
|Balance at October 31, 2000 |  |           | 2,812,860 |             |  | $           | 6.25-$34.25  |  |  | $        | 13.40 | 
|Granted                     |  |           | 862,800   |             |  | $           | 13.94-$24.85 |  |  | $        | 16.03 | 
|Exercised                   |  |           | (203,040  | )           |  | $           | 6.25-$20.25  |  |  | $        | 10.59 | 
|Forfeited                   |  |           | (37,060   | )           |  | $           | 8.00-$34.25  |  |  | $        | 16.81 | 
|                            |  |           |           |             |  |             |              |  |  |          |       | 
|Balance at October 31, 2001 |  |           | 3,435,560 |             |  | $           | 6.25-$34.25  |  |  | $        | 14.17 | 
|                            |  |           |           |             |  |             |              |  |  |          |       | 

Details of exercisable options were as follows:

|                 |  |             |                  |  |  |   |       | 
|---------------- |  | ----------- | ---------------- |  |  | - | ----- | 
|                 |  | Exercisable | Weighted Average
|                 |  | Options     | Exercise Price  
|                
|October 31, 1999 |  |             | 1,099,400        |  |  | $ | 14.99 | 
|October 31, 2000 |  |             | 1,388,970        |  |  | $ | 14.80 | 
|October 31, 2001 |  |             | 1,906,954        |  |  | $ | 14.63 | 

The Company issued 24,000 options to non-employees during the year ended
October 31, 2001. These options have vesting periods of between 0-24 months.
The fair value of these options has been recorded as deferred compensation and
is being amortized over the performance period, which is generally 12 months.
Under variable plan accounting, the value of the unvested options will be
re-measured and recognized in income at each reporting date until fully vested.

A total of 882,165 shares of common stock were available for future grants
under the Option Plan at October 31, 2001. The weighted average contractual
life for all options outstanding under the Option Plan at October 31, 2001 was
7.5 years.

Detailed information on the options outstanding on October 31, 2001 by
price range are set forth below:

|             |            |             |           |          |  |             |          |             |           |          |          |      |  |  |           |         |  |   |       |      | 
|------------ | ---------- | ----------- | --------- | -------- |  | ----------- | -------- | ----------- | --------- | -------- | -------- | ---- |  |  | --------- | ------- |  | - | ----- | ---- | 
|             |            |             |           |          |  |             |          |             |           |          | Weighted |      |  |  |           |         |  |   |      
|             |            |             |           |          |  |             | Weighted |             | Average   |          |          |      |  |  | Weighted 
|             |            |             |           |          |  |             | Average  |             | Remaining |          |          |      |  |  | Average  
|Price        |            | Options     |           | Exercise |  | Contractual |          | Shares      |           | Exercise
|Range        |            | Outstanding |           | Price    |  | Life        |          | Exercisable |           | Price   
|            
|             | $6.25-9.88 |             |           | 808,670  |  |             | $        | 7.12        |           |          |          | 6.90 |  |  |           | 447,520 |  |   | $     | 7.23 | 
|$10.25-14.56 |            |             | 1,679,480 |          |  | $           | 13.13    |             |           |          | 8.01     |      |  |  | 914,520   |         |  | $ | 12.89 |     
|$15.00-25.50 |            |             | 768,210   |          |  | $           | 19.46    |             |           |          | 7.60     |      |  |  | 365,714   |         |  | $ | 19.03 |     
|$32.88-34.25 |            |             | 179,200   |          |  | $           | 33.05    |             |           |          | 4.40     |      |  |  | 179,200   |         |  | $ | 33.05 |     
|             |            |             |           |          |  |             |          |             |           |          |          |      |  |  |           |         |  |   |       |     
|             |            |             | 3,435,560 |          |  |             |          |             |           |          |          |      |  |  | 1,906,954 |         |  |   |       |     
|             |            |             |           |          |  |             |          |             |           |          |          |      |  |  |           |         |  |   |       |     

In addition, at October 31, 2001 the Company had warrants outstanding to
purchase up to 664,072 shares of common stock. These warrants had a weighted
average exercise price of $14.67 per share and a weighted average contractual
life of 26 months at October 31, 2001.

47



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##### 



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, 2001, 140,800
options were outstanding and no additional options were available for future
grant under the Directors Plan. The weighted average contractual life for all
options outstanding under the Directors Plan at October 31, 2001 was 4.8
years. No awards were made under the Directors Plan after 1998. During 2001,
Directors of the Company received option grants under the Companys Option
Plan.

Pro Forma DisclosureThe Company applies APB 25 in accounting for its stock
option incentive plan and, accordingly, recognizes compensation expense for the
difference between the fair value of the underlying common stock and the grant
price of the option at the date of the grant. The Company generally does not
issue options at values less than fair market value. The effects of applying
SFAS No. 123 on 2001 and 2000 pro forma net loss and per share calculations as
stated below are not necessarily representative of effects on reported net
income and earnings per share for future years due to such things as the
vesting period of the stock options and the potential for issuance of
additional stock options in future years. Had compensation expense for the
Companys stock option incentive plan been determined based on the estimated
fair value at the grant dates for awards under the plan consistent with the
methodology prescribed under SFAS No. 123, the Companys net loss in fiscal
years 2001, 2000 and 1999 would have been approximately $20.8 million, $21.4
million and $18.9 million, or $1.10, $1.24 and $1.22 per share, respectively.
The weighted average fair market value of the options granted during fiscal
year 2001 is estimated at $10.44 per share for options whose exercise price
equals fair market value on the date of the grant, using the Black-Scholes
option-pricing model with the following assumptions: dividend yield 0%,
volatility of 66.3%, risk-free interest rate of 3% and average expected life of
approximately 7 years.

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 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.

48



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##### 



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

10.     INCOME TAXES
The Company provides for income taxes using the liability method. The
difference between 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:

|                                    |  |                        |            |      |  |      |            |   |  |   |            |  
|----------------------------------- |  | ---------------------- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                    |  | Year Ended October 31,
|                                    |  | 2001                   |            | 2000 |  | 1999
|                                   
|Federal income tax provision
at 34% |  |                        | (4,659,000 | )    |  |      | (5,347,000 | ) |  |   | (5,048,000 | )
|Permanent Items                     |  |                        | 22,000     |      |  |      | 18,000     |   |  |   | 14,000     |  
|State Taxes                         |  |                        | (630,000   | )    |  |      | (724,000   | ) |  |   | (684,000   | )
|Change in Valuation Allowance       |  |                        | 5,267,000  |      |  |      | 6,053,000  |   |  |   | 5,718,000  |  
|                                    |  |                        |            |      |  |      |            |   |  |   |            |  
|Total Expense                       |  | $                      |           |      |  | $    |           |   |  | $ |           |  
|                                    |  |                        |            |      |  |      |            |   |  |   |            |  

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:

|                                   |                   |              |             |             |            |      |             |          |            | 
|---------------------------------- | ----------------- | ------------ | ----------- | ----------- | ---------- | ---- | ----------- | -------- | ---------- | 
|                                   |                   |              |             | October 31,
|                                   |                   |              |             | 2001        |            | 2000
|                                  
|Deferred Tax Assets:               |                   |              |             |             |            |      |             |         
|Patent expenses                    |                   | $            | 517,000     |             |            | $    | 517,000     |         
|Net operating loss carryforwards   |                   |              | 37,571,000  |             |            |      | 32,160,000  |         
|Deferred revenue                   |                   |              | 1,677,000   |             |            |      | 1,772,000   |         
|Other                              |                   |              | 426,000     |             |            |      | 374,000     |         
|                                   |                   |              |             |             |            |      |             |         
|                                   |                   | Total Assets |             | $           | 40,191,000 |      |             | $        | 34,823,000 | 
|Deferred Tax Liabilities:          |                   |              |             |             |            |      |             |         
|Depreciation                       |                   | $            | (482,000    | )           |            | $    | (364,000    | )       
|Non-qualified stock options        |                   |              |            |             |            |      | (17,000     | )       
|                                   |                   |              |             |             |            |      |             |         
|                                   | Total Liabilities |              |             | (482,000    | )          |      |             | (381,000 | )         
|                                   |                   |              |             |             |            |      |             |         
|Net Deferred Tax Asset             |                   |              | 39,709,000  |             |            |      | 34,442,000  |         
|Valuation Allowance                |                   |              | (39,709,000 | )           |            |      | (34,442,000 | )       
|                                   |                   |              |             |             |            |      |             |         
|Net Deferred Tax Asset/(Liability) |                   | $            |            |             |            | $    |            |         
|                                   |                   |              |             |             |            |      |             |         

The Company recognized a
valuation allowance to the full extent of its
deferred tax assets since the likelihood of realization of the benefit cannot
be determined. At October 31, 2001, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $97,283,000, which will expire, if unused,
in the year 2002 through the year 2021. A tax benefit of approximately
$21.2 million of net operating losses related to stock options will be credited
to equity when the benefit is realized through utilization of the net operating
loss carryforwards.

Section 382 of the Internal Revenue Code limits the utilization of net
operating losses when ownership changes, as defined by that section, are
greater than 50%. The effects of any potential ownership changes, if any, have
not been analyzed by the Company.

49



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##### 



11.     EMPLOYEE 401(K) PLAN
The Company maintains an employee 401(k) plan. The plan, which covers all
employees 21 years of age or older, stipulates that participating employees may
elect an amount between 1% and 15% of their total compensation to contribute to
the plan, not to exceed the maximum allowable by Internal Revenue Service
regulations. As of October 31, 2001, the Company had not contributed to the
plan.

12.     SUBSEQUENT EVENTS
On November 1, 2001 the Company sold the assets, consisting primarily of
inventory, and technology surrounding the former stable isotope product line to
Spectra Gases, Inc., a privately held New Jersey company. As part of the
agreement, Martek received approximately $800,000 for the assets of the stable
isotope business. The Company 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 high-end protein labeling technology.

On December 7, 2001 the Company signed a non-binding letter of intent to
acquire certain assets and assume certain liabilities of FermPro. FermPros
production facility consists of a 150 acre site in Kingstree, South Carolina
with fermentation, recovery, laboratory and warehousing components. The
facility will provide the Company with extensive production expansion
capabilities for manufacturing its nutritional oils, as well as a highly
trained workforce. As part of the proposed transaction, the Company will assume
a debt instrument of $10 million and will issue stock with a value of
approximately $6 million.

On December 17, 2001, 1,177,000 shares of the Companys common stock were
issued in a private placement resulting in net proceeds to the Company of
approximately $21 million. The stock was issued at a price of $19.25 per
share.

13.     QUARTERLY FINANCIAL INFORMATION (unaudited)
Quarterly financial information for fiscal 2001 and 2000 is presented in the
following table:

|                                      |  |         |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ | - |  | - | ------ | -
|(In thousands, except per share data) |  |         |        |         |  |         |        |         |  |   |        |  
|                                      |  | 1st     |        | 2nd     |  | 3rd     |        | 4th    
|                                      |  | Quarter |        | Quarter |  | Quarter |        | Quarter
|                                     
|2001                                  |  |         |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|Total revenues                        |  | $       | 3,496  |         |  | $       | 4,013  |         |  | $ | 5,565  |   |  | $ | 5,750  |  
|Loss from operations                  |  |         | (3,857 | )       |  |         | (3,606 | )       |  |   | (3,657 | ) |  |   | (3,849 | )
|Net loss                              |  |         | (3,576 | )       |  |         | (3,240 | )       |  |   | (3,311 | ) |  |   | (3,575 | )
|Net loss per share,
basic and diluted |  |         | (0.20  | )       |  |         | (0.17  | )       |  |   | (0.17  | ) |  |   | (0.18  | )
|                                     
|2000                                 
|Total revenues                        |  | $       | 1,791  |         |  | $       | 2,368  |         |  | $ | 2,449  |   |  | $ | 3,070  |  
|Loss from operations                  |  |         | (3,887 | )       |  |         | (4,422 | )       |  |   | (4,149 | ) |  |   | (4,416 | )
|Net loss                              |  |         | (3,783 | )       |  |         | (4,101 | )       |  |   | (3,789 | ) |  |   | (4,055 | )
|Net loss per share,
basic and diluted |  |         | (0.23  | )       |  |         | (0.24  | )       |  |   | (0.21  | ) |  |   | (0.23  | )

50



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##### 



Report of Independent Auditors

Board of Directors
Martek Biosciences Corporation

We have audited the accompanying balance sheets of Martek Biosciences
Corporation as of October 31, 2001 and 2000, and the related statements of
operations, stockholders equity, and cash flows for each of the three years in
the period ended October 31, 2001. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Martek Biosciences Corporation
at October 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 2001, in
conformity with accounting principles generally accepted in the United States.



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

McLean, Virginia
December 17, 2001

51



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##### 



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

None.

52



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##### 



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 I  Business Directors and
Executive Officers of the Registrant.

ITEM 11. EXECUTIVE COMPENSATION.

Executive Compensation

The table below sets forth the annual and long-term compensation for services
in all capacities to the Corporation for the fiscal years ended October 31,
2001, 2000 and 1999 of (i) the Chief Executive Officer and (ii) the five other
most highly compensated executive officers of the Corporation whose salary and
bonus exceeded $100,000 (the Named Executive Officers).

SUMMARY COMPENSATION TABLE

|                    |  |      |      |            |  |                     |         |                     |  |  |        |  |  |                       |         | 
|------------------- |  | ---- | ---- | ---------- |  | ------------------- | ------- | ------------------- |  |  | ------ |  |  | --------------------- | ------- | 
|                    |  |      |      |            |  |                     |         |                     |  |  |        |  |  | Long-Term            
|                    |  |      |      |            |  | Annual Compensation |         | Compensation Awards
|                    |  |      |      |            |  |                     |         |                    
|Name and            |  |      |      |            |  |                     |         |                     |  |  |        |  |  |                       |         | 
|Principal           |  |      |      |            |  |                     |         |                     |  |  |        |  |  | Securities Underlying
|Position            |  | Year |      | Salary ($) |  | Bonus($) (1)        |         | Options (#)        
|                    |  |      |      |            |  |                     |         |                    
|Henry Linsert, Jr., |  |      | 2001 |            |  |                     | 286,167 |                     |  |  | 82,700 |  |  |                       | 75,000  | 
|Chief Executive     |  |      | 2000 |            |  |                     | 250,667 |                     |  |  | 51,700 |  |  |                       | 60,000  | 
|Officer             |  |      | 1999 |            |  |                     | 235,000 |                     |  |  | 32,900 |  |  |                       | 210,000 | 
|                   
|Thomas C. Fisher,   |  |      | 2001 |            |  |                     | 179,067 |                     |  |  | 44,050 |  |  |                       | 50,000  | 
|Sr. Vice President, |  |      | 2000 |            |  |                     | 162,133 |                     |  |  | 33,440 |  |  |                       | 40,000  | 
|Operations          |  |      | 1999 |            |  |                     | 152,000 |                     |  |  | 21,280 |  |  |                       | 90,000  | 
|                   
|Richard Radmer      |  |      | 2001 |            |  |                     | 167,393 |                     |  |  | 39,771 |  |  |                       | 50,000  | 
|President           |  |      | 2000 |            |  |                     | 132,907 |                     |  |  | 26,700 |  |  |                       | 40,000  | 
|                    |  |      | 1999 |            |  |                     | 117,749 |                     |  |  | 15,978 |  |  |                       | 40,000  | 
|                   
|Jerome C. Keller,   |  |      | 2001 |            |  |                     | 179,067 |                     |  |  | 50,980 |  |  |                       | 50,000  | 
|Sr. Vice President, |  |      | 2000 |            |  |                     | 162,133 |                     |  |  | 33,440 |  |  |                       | 40,000  | 
|Sales and Marketing |  |      | 1999 |            |  |                     | 152,000 |                     |  |  | 21,280 |  |  |                       | 40,000  | 
|                   
|Peter L. Buzy,      |  |      | 2001 |            |  |                     | 182,400 |                     |  |  | 52,360 |  |  |                       | 50,000  | 
|Chief Financial     |  |      | 2000 |            |  |                     | 162,133 |                     |  |  | 33,440 |  |  |                       | 40,000  | 
|Officer             |  |      | 1999 |            |  |                     | 147,500 |                     |  |  | 21,280 |  |  |                       | 40,000  | 
|                   
|George P. Barker,   |  |      | 2001 |            |  |                     | 178,333 |                     |  |  | 43,790 |  |  |                       | 50,000  | 
|Sr. Vice President, |  |      | 2000 |            |  |                     | 65,792  |                     |  |  | 13,933 |  |  |                       | 50,000  | 
|General Counsel and |  |      | 1999 |            |  |                     | - - -   |                     |  |  | - - -  |  |  |                       | - - -   | 
|Secretary (2)       |  |      |      |            |  |                     |         |                     |  |  |        |  |  |                       |         | 



---

|(1) |  | All Named Executive Officers received bonuses based on performance in
fiscal 2001 pursuant to the Companys Management Cash Bonus Incentive Plan
(the Bonus Plan).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Mr. Barker joined the Company in June 2000.                                                                                                                         

53



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##### 



Options Granted in Last Fiscal Year

Shown below is information on grants to the Companys Chief Executive Officer
and the Named Executive Officers of stock options pursuant to the Option Plan
during the year ended October 31, 2001.

|                   |                       |                  |        |               |  |                   |     |            |  |         |         |                     |  |  |         |  |  |                             |         |  |  |  |           | 
|------------------ | --------------------- | ---------------- | ------ | ------------- |  | ----------------- | --- | ---------- |  | ------- | ------- | ------------------- |  |  | ------- |  |  | --------------------------- | ------- |  |  |  | --------- | 
|                   |                       |                  |        |               |  |                   |     |            |  |         |         |                     |  |  |         |  |  | Potential Realizable Value 
|                   |                       |                  |        |               |  |                   |     |            |  |         |         |                     |  |  |         |  |  | At Assumed Annual Rates    
|                   |                       |                  |        |               |  |                   |     |            |  |         |         |                     |  |  |         |  |  | Of Stock Price Appreciation
|                   |                       |                  |        |               |  | Individual Grants |     |            |  |         |         | for Option Term (3)
|                   |                       |                  |       
|                   |                       |                  |        |               |  | Percentage of     |     |            |  |         |         |                     |  |  |         |  |  |                             |         |  |  | 
|                   |                       | Number of        |        | Total Options |  |                   |     |            |  |         |         |                     |  |  |         |  |  |                             |         | 
|                   |                       | Securities       |        | Granted to    |  | Exercise or       |     |            |  |         |         |                     |  |  |         |  |  |                            
|                   |                       | Underlying       |        | Employees in  |  | Base Price        |     | Expiration |  |         |         |                     |  |  |         | 
|Name               | Options Granted(#)(1) | Fiscal Year 2001 |        | ($/Sh)(2)     |  | Date              |     | 5% ($)     |  | 10% ($)
|                   |                       |                  |        |               |  |                   |     |            |  |        
|Henry Linsert, Jr. |                       |                  | 75,000 |               |  |                   | 8.7 |            |  |         | 14.5625 |                     |  |  | 3/16/11 |  |  |                             | 686,871 |  |  |  | 1,740,666 | 
|Thomas C. Fisher   |                       |                  | 50,000 |               |  |                   | 5.8 |            |  |         | 14.5625 |                     |  |  | 3/16/11 |  |  |                             | 457,914 |  |  |  | 1,160,444 | 
|Richard Radmer     |                       |                  | 50,000 |               |  |                   | 5.8 |            |  |         | 14.5625 |                     |  |  | 3/16/11 |  |  |                             | 457,914 |  |  |  | 1,160,444 | 
|Jerome C. Keller   |                       |                  | 50,000 |               |  |                   | 5.8 |            |  |         | 14.5625 |                     |  |  | 3/16/11 |  |  |                             | 457,914 |  |  |  | 1,160,444 | 
|Peter L. Buzy      |                       |                  | 50,000 |               |  |                   | 5.8 |            |  |         | 14.5625 |                     |  |  | 3/16/11 |  |  |                             | 457,914 |  |  |  | 1,160,444 | 
|George P. Barker   |                       |                  | 50,000 |               |  |                   | 5.8 |            |  |         | 14.5625 |                     |  |  | 3/16/11 |  |  |                             | 457,914 |  |  |  | 1,160,444 | 



---

|(1) |  | Options become exercisable ratably beginning six months from the date of
grant through four years from the date of grant.                                                                                                                                                                                                                                                                                                                                               
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Options were granted at the closing price for the Companys Common Stock
as reported on the NASDAQ stock market on the day prior to the date of the
grant.                                                                                                                                                                                                                                                                                                              
|   
|(3) |  | The dollar amounts set forth under these columns are the result of
calculations of assumed annual rates of stock price increases from the
respective dates of grant in fiscal 2001 to the respective dates of
expiration of such options in 2011 of 5% and 10%. These assumptions are
not intended to forecast future price appreciation of the Companys stock
price. The Companys stock price may increase or decrease in value over
the time period set forth above.

Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

Shown below is information with respect to the exercise of options to purchase
the Companys Common Stock during fiscal 2001 under the Option Plan and
unexercised options held under the Option Plan on October 31, 2001.

|                   |                |             |             |               |             |               |         |  |  |                             |         |                            |  |  |         |  |  |  |           |  |  |  |           | 
|------------------ | -------------- | ----------- | ----------- | ------------- | ----------- | ------------- | ------- |  |  | --------------------------- | ------- | -------------------------- |  |  | ------- |  |  |  | --------- |  |  |  | --------- | 
|                   |                |             |             |               |             |               |         |  |  | Number of                   |         |                            |  |  |         |  |  | 
|                   |                |             |             |               |             |               |         |  |  | Securities Underlying       |         | Value of Unexercised      
|                   |                |             |             |               |             |               |         |  |  | Unexercised Options         |         | In-the-Money Options      
|                   |                |             |             |               |             |               |         |  |  | Held at October 31, 2001(#) |         | At October 31, 2001 ($)(1)
|                   |                |             |             |               |             |               |         |  |  |                             |         |                           
|                   |                | Shares      |             |               |             |               |         |  |  |                             |         |                            |  |  |         |  |  |  |           |  |  | 
|                   |                | Acquired    |             | Value         |             |               |         |  |  |                             |         |                            |  |  |         |  |  |  |           | 
|Name               | on Exercise(#) | Realized($) | Exercisable | Unexercisable | Exercisable | Unexercisable
|                   |                |             |             |               |             |              
|Henry Linsert, Jr. |                |             |            |               |             |               |        |  |  |                             | 366,000 |                            |  |  | 159,000 |  |  |  | 3,103,077 |  |  |  | 1,695,026 | 
|Thomas C. Fisher   |                |             | 10,000      |               |             |               | 188,606 |  |  |                             | 179,000 |                            |  |  | 86,000  |  |  |  | 1,170,018 |  |  |  | 846,217   | 
|Richard Radmer     |                |             |            |               |             |               |        |  |  |                             | 184,000 |                            |  |  | 66,000  |  |  |  | 1,226,918 |  |  |  | 562,417   | 
|Jerome C. Keller   |                |             | 20,000      |               |             |               | 364,610 |  |  |                             | 214,000 |                            |  |  | 66,000  |  |  |  | 1,607,668 |  |  |  | 562,417   | 
|Peter L. Buzy      |                |             | 14,000      |               |             |               | 258,860 |  |  |                             | 84,000  |                            |  |  | 72,000  |  |  |  | 517,710   |  |  |  | 587,805   | 
|George P. Barker   |                |             |            |               |             |               |        |  |  |                             | 40,000  |                            |  |  | 60,000  |  |  |  | 151,350   |  |  |  | 227,025   | 



---

|(1) |  | Total value of unexercised options is based on the closing price of the
Companys Common Stock of $20.44 per share on October 31, 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------

54



---



##### 



Employment Agreements

The Company entered into employment agreements with Mr. Linsert and Dr.
Radmer in May 1990. The agreement with Mr. Linsert provides for an annual
salary of $120,000, which is subject to normal periodic review. In 2001, the
Board of Directors voted to increase Mr. Linserts base annual salary to
$300,000. This agreement does not have a fixed term but can be terminated with
six months written notice by either Mr. Linsert or the Company. This agreement
also prohibits Mr. Linsert from engaging in activities competitive with those
of the Company during the period of Mr. Linserts employment and for one year
after leaving the employ of the Company. The agreement with Dr. Radmer
initially provided for an annual salary of $86,000 subject to normal yearly
adjustments. This agreement is extended automatically for successive one year
periods and can be terminated upon six months written notice given prior to the
end of such successive one year periods by either the Company or Dr. Radmer.
In 2001, the Board voted to increase Dr. Radmers base annual salary to
$190,000.

In June 2000, the Company entered into an employment agreement with Mr.
Barker that provides for an annual salary of $167,000. The agreement has a
three-year term and provides for a severance fee of up to twelve months
salary. The agreement provides that the severance fee shall be reduced by
one-twelfth for each month that Mr. Barkers length of employment exceeds
twelve months. The agreement further provides that the severance pay shall be
paid, without any reduction, if the agreement is terminated under certain
circumstances following a change of control of the Company. In 2001, the Board
voted to increase Mr. Barkers base annual salary to $184,000.



|Directors Fees
|---------------

Each director who is not an employee of the Company receives an annual
retainer of $10,000, plus expenses. These directors are also eligible to
receive options under the Companys Option Plan. Currently, each eligible
director receives each year options to purchase 15,000 shares of stock on the
day of the Companys Annual Meeting of Stockholders, provided he or she has
served as a Director of the Company for at least one year as of such Annual
Meeting of Stockholders or otherwise has received Board approval for the grant.
In addition, each newly elected director receives options to purchase 15,000
shares of the Companys Common Stock upon joining the Board. Directors may also
be compensated for special assignments delegated by the Board. In the year
ended October 31, 2001, each non-employee director received options resulting
from their service as a Director to purchase 15,000 shares at $14.5625 per
share under the Option Plan. All option grants to Directors are granted at the
closing price for the Companys Common Stock as reported on the NASDAQ Stock
Market on the day prior to the date of grant.

Compensation Committee Interlock
and Insider Participation in Compensation Decisions

During Fiscal Year 2001, Dr. Johnson, Mr. MacMaster, Mr. Mahar and Mr.
Smart served as members of the Compensation Committee. No director or executive
officer of the Company is a director or executive officer of any other
corporation that has a director or executive officer who is also a director or
a board committee member of the Company.

55



---



##### 



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth certain information as of December 31, 2001
(unless otherwise specified) with respect to the beneficial ownership of the
Corporations Common Stock of each person who is known by the Corporation to
own beneficially more than 5% of the outstanding shares of Common Stock, each
director and nominee, each Named Executive Officer and all directors and
executive officers as a group:

|                                                                                               |  |                     |           |                     |  |  |     |   |  |  |       |  
|---------------------------------------------------------------------------------------------- |  | ------------------- | --------- | ------------------- |  |  | --- | - |  |  | ----- | -
|Name and Address of                                                                            |  | Shares Beneficially |           |                     |  | 
|Beneficial Owners                                                                              |  | Owned (1)           |           | Percentage of Class
|                                                                                               |  |                     |           |                    
|Eastbourne Capital Management, L.L.C
1101 Fifth Avenue, Suite 160
San Rafael, California
94901 |  |                     | 2,284,693 |                     |  |  | (2  | ) |  |  | 10.93 | %
|State of Wisconsin Investment Board
121 East Wilson Street
Madison, WI
53707                   |  |                     | 2,138,625 |                     |  |  |     |   |  |  | 10.33 | %
|The College Retirement Equities Fund
730 Third Avenue
New York, NY
10017                       |  |                     | 1,283,694 |                     |  |  |     |   |  |  | 6.18  | %
|George W. Haywood
642 Second Street
Brooklyn, New York
11215                                   |  |                     | 1,192,773 |                     |  |  | (3  | ) |  |  | 5.71  | %
|Henry Linsert, Jr.                                                                             |  |                     | 591,290   |                     |  |  | (4  | ) |  |  | 2.80  | %
|Richard J. Radmer, Ph.D.                                                                       |  |                     | 584,000   |                     |  |  | (5  | ) |  |  | 2.79  | %
|Thomas C. Fisher                                                                               |  |                     | 237,505   |                     |  |  | (6  | ) |  |  | 1.13  | %
|Jerome C. Keller                                                                               |  |                     | 217,000   |                     |  |  | (7  | ) |  |  | 1.03  | %
|Peter L. Buzy                                                                                  |  |                     | 84,000    |                     |  |  | (8  | ) |  |  | *     |  
|George P. Barker                                                                               |  |                     | 40,885    |                     |  |  | (9  | ) |  |  | *     |  
|Jules Blake, Ph.D.                                                                             |  |                     | 70,455    |                     |  |  | (10 | ) |  |  | *     |  
|Ann L. Johnson, M.D.                                                                           |  |                     | 59,500    |                     |  |  | (11 | ) |  |  | *     |  
|Gordon S. Macklin                                                                              |  |                     | 151,143   |                     |  |  | (12 | ) |  |  | *     |  
|Douglas J. MacMaster                                                                           |  |                     | 68,500    |                     |  |  | (13 | ) |  |  | *     |  
|John H. Mahar                                                                                  |  |                     | 59,350    |                     |  |  | (14 | ) |  |  | *     |  
|Sandra Panem, Ph.D.                                                                            |  |                     | 592,136   |                     |  |  | (15 | ) |  |  | 2.83  | %
|Eugene H. Rotberg                                                                              |  |                     | 100,250   |                     |  |  | (16 | ) |  |  | *     |  
|William D. Smart                                                                               |  |                     | 97,000    |                     |  |  | (17 | ) |  |  | *     |  
|All Executive Officers and Directors
as a group (14 persons)                                   |  |                     | 2,953,014 |                     |  |  |     |   |  |  | 13.20 | %



---

|(1) |  | Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options or warrants currently exercisable or exercisable within
60 days of December 31, 2001 are deemed outstanding for purposes of
computing the percentage ownership of the person holding such option or
warrant but are not deemed outstanding for purposes of computing the
percentage ownership of any other person. Except where indicated
otherwise, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by
them.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes currently exercisable warrants to purchase 147,784 shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(3) |  | Includes currently exercisable warrants to purchase 131,173 shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(4) |  | Includes currently exercisable options to purchase 366,000 shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(5) |  | Includes 175,000 shares owned by Dr. Radmers wife, 225,000 shares owned
by the Radmer Family L.P., and currently exercisable options to purchase
184,000 shares. Excludes 59,300                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

56



---



##### 



|     |  | shares owned by other members of Dr. Radmers family as Dr. Radmer disclaims
beneficial ownership of those shares.                                                                                                                                                                                                                                                                                                                                                
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(6)  |  | Includes currently exercisable options to purchase 179,000 shares.                                                                                                                                                                                                                                                                                                                                                                                                
|    
|(7)  |  | Includes currently exercisable options to purchase 214,000 shares.                                                                                                                                                                                                                                                                                                                                                                                                
|    
|(8)  |  | Consists of currently exercisable options to purchase 84,000 shares.                                                                                                                                                                                                                                                                                                                                                                                              
|    
|(9)  |  | Includes currently exercisable options to purchase 40,000 shares.                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(10) |  | Includes currently exercisable options to purchase 58,500 shares.                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(11) |  | Includes currently exercisable options to purchase 57,500 shares.                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(12) |  | Includes 40,000 shares owned by The Gordon S. Macklin Family Trust,
31,143 shares owned by The Macklin Family Limited Partnership, 30,000
shares owned by The Macklin Family Limited Partnership  MD and currently
exercisable options to purchase 50,000 shares. Excludes 2,000 shares owned
by other members of Mr. Macklins family and 20,000 shares owned by The
Marilyn Macklin Family Trust as Mr. Macklin disclaims beneficial ownership
of those shares.
|    
|(13) |  | Includes currently exercisable options to purchase 58,500 shares.                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(14) |  | Consists of currently exercisable options to purchase 59,350 shares.                                                                                                                                                                                                                                                                                                                                                                                              
|    
|(15) |  | Includes 440,946 shares owned and currently exercisable warrants to
purchase 88,190 shares held by Cross Atlantic Partners. Dr. Panem, a
director of the Company, is a partner in Cross Atlantic Partners and thus
may be deemed to have beneficial ownership of the shares owned by them.
Dr. Panem currently owns 5,500 shares of common stock and holds currently exercisable options to
purchase 57,500 shares.                                               
|    
|(16) |  | Includes currently exercisable options to purchase 58,500 shares.                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(17) |  | Includes currently exercisable options to purchase 58,500 shares.                                                                                                                                                                                                                                                                                                                                                                                                 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The Gordon S. Macklin Family Trust purchased 20,000 shares of the
Companys common stock pursuant to a Stock Purchase Agreement in a private
equity placement that closed in December 2001. Gordon Macklin, a director of
the Company, is the sole trustee and beneficiary of The Gordon Macklin Family
Trust. The Company sold the common stock to The Gordon S. Macklin Family Trust
and to 17 other accredited investors on substantially the same terms in a
private placement in reliance on the exemption set forth in Section 4 (2) of
the Securities Act of 1933 and the rules and regulations thereunder.

Cross Atlantic Partners purchased 440,946 shares and received warrants to
purchase 88,190 shares of the Companys common stock pursuant to a Common Stock
and Warrant Purchase Agreement in a private equity placement that closed in
February 2001. Sandra Panem, a director of the Company, is a partner of Cross
Atlantic Partners. The Company sold the common stock to Cross Atlantic Partners
and 11 other accredited investors on substantially the same terms in a private
placement in reliance on the exemption set forth in Section 4 (2) of the
Securities Act of 1933 and the rules and regulations thereunder.

57



---



##### 



PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

|       |  |                                                                                                                                                                          
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)(1) |  | Financial Statements                                                                                                                                                     
|       |  | The Companys 2001 Financial Statements are set forth in Part II of this
report under the caption Item 8  Financial Statements and Supplementary
Data                 
|(a)(2) |  | Financial Statement Schedules                                                                                                                                            
|       |  | Financial statement schedules have been omitted since they are either not
required, not applicable, or the information is otherwise included in the
financial statements.
|(a)(3) |  | Exhibits                                                                                                                                                                 

|      |  |                                                                                                                                                                                                                                                                                                             
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 By-Laws, effective March 14, 1995 (filed as Exhibit
3.2 to the Companys Registration Statement on Form S-3, File No.
33-89760, filed March 15, 1995, and incorporated by reference herein)                                                                                                    
|3.06  |  | Amendment to Bylaws effective March 2, 2001. **                                                                                                                                                                                                                                                             
|4.01  |  | Specimen Stock Certificate for Common Stock.                                                                                                                                                                                                                                                                
|4.02  |  | Common Stock and Warrant Purchase Agreements, dated May 19, June
1, June 6, and June 8, 1995, by and among the Company and the Selling
Stockholders (filed as Exhibit 4.2 to the Companys Registration
Statement on Form S-3, File No. 33-93580, filed June 16, 1995, and
incorporated by reference herein)
|4.03  |  | Warrant No. 1 issued pursuant to Common Stock and Warrant
Purchase Agreements and Schedule of Warrants (filed as Exhibit 4.3 to
the Companys Registration Statement on Form S-3, File No. 33-93580,
filed June 16, 1995, and incorporated by reference herein)                                             
|4.04  |  | 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)                                                
|4.05  |  | 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.                                                                                                                                                                                                                                                                         

58



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##### 



|       |  |                                                                                                                                                                                                                                                                                         
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.03  |  | 1992 Registration Rights Agreement between the Company and
Preferred Stockholders.                                                                                                                                                                                                      
|10.04  |  | Employment Agreement, dated May 4, 1990, between the Company and
Henry Linsert, Jr.                                                                                                                                                                                                     
|10.05  |  | Employment Agreement, dated May 7, 1990, between the Company and
Richard J. Radmer.                                                                                                                                                                                                     
|10.06  |  | Employment Agreement, dated May 7, 1990, between the Company and
David J. Kyle.                                                                                                                                                                                                         
|10.07  |  | Employment Agreement, dated May 7, 1990, between the Company and
Paul W. Behrens.                                                                                                                                                                                                       
|10.08  |  | Form of Proprietary Information, Inventions and Non-Solicitation
Agreement.                                                                                                                                                                                                             
|10.12  |  | Collaborative Research and License Agreement, dated April 30,
1993, as amended June 11, 1993, between the Company the Trustees of
Columbia University.                                                                                                                                  
|10.13  |  | Lease, commencement date October 15, 1992, between the Company
and Aetna Life Insurance Company, as modified on August 5, 1993.                                                                                                                                                         
|10.14  |  | License Agreement, dated September 10, 1992, between the Company
and Bestuurcentrum Der Verenigde Bedrijven Nutricia B.V.*                                                                                                                                                              
|10.14A |  | Exhibits to September 10, 1992 License Agreement between the Company
and Bestuurcentrum Der Verenigde Bedrijven Nutricia B.V.*                                                                                                                                                          
|10.15  |  | License Agreement, dated October 28, 1992, between the Company
and Mead Johnson & Company.*                                                                                                                                                                                             
|10.15A |  | Exhibits to October 28, 1992 License Agreement between the Company
and Mead Johnson & Company.*                                                                                                                                                                                         
|10.16  |  | 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).*   
|10.16A |  | Exhibits to January 28, 1993 License Agreements between the Company
and American Home Products Corporation represented the Wyeth-Ayerst
Division (Domestic Version) and American Home Products Corporation
represented by its agent Wyeth-Ayerst International (International
Version).*
|10.17  |  | Management Cash Bonus Incentive Plan, dated June 10, 1993.                                                                                                                                                                                                                              
|10.18  |  | Lease Modification Agreement, dated October 14, 1993 between the
Company and Aetna Life Insurance Company.                                                                                                                                                                              
|10.19  |  | Letter of Intent, dated January 13, 1995, between the Company
and Golden Technologies Corporation (filed as Exhibit 10.19 to the
Companys 1994 Form 10-K, File No. 0-22354, and incorporated by
reference herein)                                                                      
|10.20  |  | 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 1994 Form 10-K, File No. 0-22354, and
incorporated by reference herein)                                                    
|10.21  |  | Purchase and Sale Agreement, dated February 16, 1995, between
the Company and Zeagan, Inc. (filed as Exhibit 4.3 to the Companys
Registration Statement on Form S-3, File No. 33-89760, filed March 15,
1995, and incorporated by reference herein)                                    
|10.22  |  | 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)                                                                                                 

59



---



##### 



|      |  |                                                                                                                                                                                                                                                       
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.23 |  | Manufacturing Agreement, dated December 31, 1996, between
Company and DSM Food Specialties (formerly Royal Gist-brocades B.V.)*
(filed as Exhibit 10.23 to the Companys Annual Report on Form 10-K
for the fiscal year ended October 31, 1996)       
|10.24 |  | 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)                                     
|10.25 |  | 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 10-K, File No. 22354, and incorporated by
reference herein)                                   
|10.26 |  | 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)                             
|10.27 |  | Employment Agreement, dated January 16, 1998, between the
Company and Peter L. Buzy (filed as exhibit 10.27 to the Companys
1998 Form 10-K, File No. 22354, and Incorporated by reference herein)                                                    
|10.28 |  | Common Stock and Warrant Purchase Agreement, dated April 27,
1998, 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 April
27, 1998 and incorporated by reference)        
|10.29 |  | Common Stock and Warrant Purchase Agreement, dated May 28, 1999,
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 June 9, 1999 and
incorporated by reference herein)      
|10.30 |  | 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)              
|10.31 |  | Employment Agreement, dated June 1, 2000 between the Company and
George P. Barker. (filed as exhibit 10.31 to the Companys 2000 Form
10-K, File No. 22354, and Incorporated by reference herein)                                                     
|10.32 |  | 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)                                                  
|10.33 |  | 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)
|10.34 |  | Common Stock Purchase Agreement, dated December 17, 2001 by and
among the Company and The Gordon S. Macklin Family Trust.**                                                                                                                           
|10.35 |  | Form of Common Stock Purchase Agreement, dated December 17, 2001
by and among the Company and the Selling Stockholders. **                                                                                                                            
|23.01 |  | Consent of Ernst & Young LLP, Independent Auditors.**                                                                                                                                                                                                 
|24.01 |  | Power of Attorney of the Board of Directors (included on
signature page of this report).**                                                                                                                                                            

* 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.

60



---



##### 



|** |  | 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).
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

b) Reports on Form 8-K

Form 8-K filed on December 19, 2001 (announcing a $22 Million Common Stock
Financing via a private placement of Martek common stock).

61



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##### 



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized on January 15, 2002.

| |                                                                                  
| | ---------------------------------------------------------------------------------
| | 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 by the following persons 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 15, 2002
|                                                       
|/s/ Peter L. Buzy

Peter L. Buzy                        |  | Principal Financial and
Accounting Officer                         |  | January 15, 2002
|                                                       
|/s/ Jules Blake

Jules Blake                            |  | Director                                                           |  | January 15, 2002
|                                                       
|/s/ Ann L. Johnson

Ann L. Johnson                      |  | Director                                                           |  | January 15, 2002
|                                                       
|/s/ Gordon S. Macklin

Gordon S. Macklin                |  | Director                                                           |  | January 15, 2002
|                                                       
|/s/ Douglas J. MacMaster, Jr.

Douglas J. MacMaster, Jr |  | Director                                                           |  | January 15, 2002

62



---



##### 



|                                         |  |                        |  |                 
|---------------------------------------- |  | ---------------------- |  | ----------------
|/s/ John H. Mahar

John H. Mahar         |  | Director               |  | January 15, 2002
|                                        
|/s/ Sandra Panem

Sandra Panem           |  | Director               |  | January 15, 2002
|                                        
|/s/ Richard J. Radmer

Richard J. Radmer |  | President and Director |  | January 15, 2002
|                                        
|/s/ Eugene J. Rotberg

Eugene H. Rotberg |  | Director               |  | January 15, 2002
|                                        
|/s/ William D. Smart

William D. Smart   |  | Director               |  | January 15, 2002

63



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##### 



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 By-Laws, effective March 14, 1995 (filed as Exhibit 3.2 to
the Companys Registration Statement on Form S-3, File No. 33-89760, filed
March 15, 1995, and incorporated by reference herein).                                                                                                   
|3.06    |  | Amendment to Bylaws effective March 2, 2001. **                                                                                                                                                                                                                                                             
|4.01    |  | Specimen Stock Certificate for Common Stock.                                                                                                                                                                                                                                                                
|4.02    |  | Common Stock and Warrant Purchase Agreements, dated May 19, June 1,
June 6, and June 8, 1995, by and among the Company and the Selling
Stockholders (filed as Exhibit 4.2 to the Companys Registration
Statement on Form S-3, File No. 33-93580, filed June 16, 1995, and
incorporated by reference herein)
|4.03    |  | Warrant No. 1 issued pursuant to Common Stock and Warrant Purchase
Agreements and Schedule of Warrants (filed as Exhibit 4.3 to the
Companys Registration Statement on Form S-3, File No. 33-93580, filed
June 16, 1995, and incorporated by reference herein)                                             
|4.04    |  | 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)                                                
|4.05    |  | 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   |  | 1992 Registration Rights Agreement between the Company and Preferred
Stockholders.                                                                                                                                                                                                                          
|10.04   |  | Employment Agreement, dated May 4, 1990, between the Company and Henry
Linsert, Jr.                                                                                                                                                                                                                         
|10.05   |  | Employment Agreement, dated May 7, 1990, between the Company and Richard
J. Radmer.                                                                                                                                                                                                                         
|10.06   |  | Employment Agreement, dated May 7, 1990, between the Company and David
J. Kyle.                                                                                                                                                                                                                             
|10.07   |  | Employment Agreement, dated May 7, 1990, between the Company and Paul W.
Behrens.                                                                                                                                                                                                                           
|10.08   |  | Form of Proprietary Information, Inventions and Non-Solicitation
Agreement.                                                                                                                                                                                                                                 
|10.12   |  | Collaborative Research and License Agreement, dated April 30, 1993, as
amended June 11, 1993, between the Company and the Trustees of Columbia
University.                                                                                                                                                  
|10.13   |  | Lease, commencement date October 15, 1992, between the Company and Aetna
Life Insurance Company, as modified on August 5, 1993.                                                                                                                                                                             
|10.14   |  | License Agreement, dated September 10, 1992, between the Company and
Bestuurcentrum Der Verenigde Bedrijven Nutricia B.V.*                                                                                                                                                                                  

64



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##### 



|       |  |                                                                                                                                                                                                                                                                                            
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.14A |  | Exhibits to September 10, 1992 License Agreement between the Company and
Bestuurcentrum Der Verenigde Bedrijven Nutricia B.V.*                                                                                                                                                             
|10.15  |  | License Agreement, dated October 28, 1992, between the Company and Mead
Johnson & Company.*                                                                                                                                                                                                
|10.15A |  | Exhibits to October 28, 1992 License Agreement between the Company and
Mead Johnson & Company.*                                                                                                                                                                                            
|10.16  |  | 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).*      
|10.16A |  | Exhibits to January 28, 1993 License Agreements between the Company and
American Home Products Corporation represented by the Wyeth-Ayerst
Division (Domestic Version) and American Home Products Corporation
represented by its agent Wyeth-Ayerst International (International
Version).*
|10.17  |  | Management Cash Bonus Incentive Plan, dated June 10, 1993.                                                                                                                                                                                                                                 
|10.18  |  | Lease Modification Agreement, dated October 14, 1993 between the Company
and Aetna Life Insurance Company.                                                                                                                                                                                 
|10.19  |  | Letter of Intent, dated January 13, 1995, between the Company and Golden
Technologies Corporation (filed as Exhibit 10.19 to the Companys 1994
Form 10-K, File No. 0-22354, and incorporated by reference herein)                                                                         
|10.20  |  | 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)                                                       
|10.21  |  | Purchase and Sale Agreement, dated February 16, 1995, between the
Company and Zeagan, Inc. filed as Exhibit 4.3 to the Companys
Registration Statement on Form S-3, File No. 33-89760, filed March 15,
1995, and incorporated by reference herein)                                        
|10.22  |  | 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)                                                                                                    
|10.23  |  | Manufacturing Agreement, dated December 31, 1996, between the Company
and DSM Food Specialties (formerly Royal Gist-Brocades B.V.)* (filed as
exhibit 10.23 to the Companys Annual Report on Form 10-K for the fiscal
year ended October 31, 1996)                                        
|10.24  |  | 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)                                                                          
|10.25  |  | 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 10-K, File No. 000-22354, and incorporated by reference
herein)                                                                    
|10.26  |  | Fourth Amendment of Lease, dated August 5, 1998 between the 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)                                                                          
|10.27  |  | Employment Agreement, dated January 16, 1998, between the Company and
Peter L. Buzy (filed as exhibit 10.27 to the Companys 1998 Form 10-K,
File No. 22354, and Incorporated by reference herein)                                                                                         
|10.28  |  | Common Stock and Warrant Purchase Agreement, dated April 27, 1998, 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 April 27, 1998 and
incorporated by reference herein)                                      
|10.29  |  | Common Stock and Warrant Purchase Agreement, dated May 28, 1999, 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 June 9, 1999 and
incorporated by reference herein)                                          

65



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##### 



|      |  |                                                                                                                                                                                                                                                       
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.30 |  | 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)              
|10.31 |  | Employment Agreement, dated June 1, 2000 between the Company and George
P. Barker. (filed as exhibit 10.31 to the Companys 2000 Form 10-K, File
No. 22354, and Incorporated by reference herein)                                                     
|10.32 |  | 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)                                                  
|10.33 |  | 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)
|10.34 |  | Common Stock Purchase Agreement, dated December 17, 2001 by and among
the Company and The Gordon S. Macklin Family Trust. **                                                                                                                          
|10.35 |  | Form of Common Stock Purchase Agreement, dated December 17, 2001 by and
among the Company and the Selling Stockholders. **                                                                                                                            
|23.01 |  | Consent of Ernst & Young LLP, Independent Auditors.**                                                                                                                                                                                                 
|24.01 |  | Power of Attorney of the Board of Directors (included on signature page
of this report).**                                                                                                                                                            



---

|*  |  | 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).              

66