• expectations regarding product introductions and growth in nutritional product sales;

• expectations regarding potential collaborations and acquisitions;

• expectations regarding demand for products with our nutritional oils;

• expectations regarding sales to and by our infant formula licensees and supplemented infant formula market penetration levels;

• expectations regarding marketing of our oils by our infant formula licensees;

• expectations regarding future agreements with, and revenues from, companies in the food and beverage, pregnancy and nursing, nutritional supplement, and animal feed markets;

• expectations regarding future revenues from contract manufacturing customers;

• expectations regarding growing consumer recognition of the key health benefits of DHA and ARA;

• expectations regarding competitive products;

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

• expectations regarding future purchase volumes and costs of third-party manufactured oils;

• expectations regarding the amount of production capacity and our ability to meet future demands for our nutritional oils;

• expectations regarding the amount of inventory held by us or our customers;

• expectations regarding production capacity utilization and the effects of excess production capacity;

• expectations regarding future selling, general and administrative and research and development costs;

• expectations regarding future capital expenditures;

• expectations regarding levels of consumption through governmental programs of infant formula products containing our nutritional oils; and

• expectations regarding our ability to maintain and protect our intellectual property.

Forward-looking statements include those statements containing words such as the following:
• "will,"

• "should,"

• "could,"

• "anticipate,"

• "believe,"

• "plan,"

• "estimate,"

• "expect,"

• "intend," and other similar expressions.

All of these forward-looking statements involve risks and uncertainties. They and other forward-looking statements in this Form 10-Q are all made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We wish to caution you that our actual results may differ significantly from the results we discuss in our forward-looking statements. We discuss some of the risks that could cause such differences in Part II, Item 1A. "Risk Factors" in this report on Form 10-Q and in our various other filings with the Securities and Exchange Commission. Our forward-looking statements speak only as of the date of this document, and we do not intend to update these statements to reflect events or circumstances that occur after that date.

• the timing of our customers' ordering patterns;

• the timing and extent of stocking and destocking of inventory by our customers;

• the timing and extent of our customers' production campaigns and plant maintenance shutdowns;

• the timing and extent of introductions of DHA into various child and/or adult applications and the marketplace success of such applications;

• the levels of inclusion of our oils in infant formula;

• the continued acceptance, and extent thereof, of products containing our oils under WIC and other regulatory programs in the U.S.;

• the continued acceptance of these products by consumers and continued demand by our customers;

• the ability of our customers to incorporate our oils into various foods and beverages;

• our ability to protect against competitive products through our patents;

• competition from alternative sources of DHA and ARA; and

• agreements with other future third-party collaborators to market our products or develop new products.

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

• Multi-Year Sole-Source Infant Formula Supply Agreements - Martek entered into multi-year, sole-source infant formula supply agreements with Rice Field Corporation ("Rice Field") and Lactalis Nutrition Sante ("Lactalis"). Under the Rice Field agreement, Martek will supply its DHA and ARA blend for all infant formula products manufactured by Rice Field under the Prodigy brand. Rice Field will also be using Martek's life'sDHA™ and life'sARA™ in its growing-up milks and will be using life'sDHA™ in its products for pregnant and nursing women, all of which will be sold under the Prodigy brand in China. Under the Lactalis agreement, Martek will supply its life'sARA™ for use in infant formula and growing-up milks produced by Lactalis and sold in France and Algeria.

• Multi-Year Exclusive Food and Beverage Supply Agreement - Martek entered into a multi-year supply agreement with Ragasa, one of Mexico's largest providers of raw and refined oil products and maker of Mexico's leading consumer cooking oil brand, Nutrioli, under which Ragasa has agreed to purchase all of its DHA omega-3 needs from Martek. Ragasa plans to launch a product featuring life'sDHA™ in 2009 and will display the life'sDHA™ logo on the product packaging and in all related promotional materials.

• Arrangement for the Production of Influenza Drug Precursor - Consistent with the services provided by Martek in 2006, Martek has been re-engaged to manufacture shikimic acid, the starting material used to produce an anti-viral drug for the treatment of influenza. Sales for such services are expected to approximate $4.5 million, with one-half of this total anticipated to occur in Martek's fourth quarter of fiscal 2009 and the remainder anticipated to occur during the first half of fiscal 2010.

• New Scientific Data Published on DHA - A summary document for the International Society for the Study of Fatty Acids and Lipids published in Prostaglandins, Leukotrienes and Essential Fatty Acids (February 2009) discussed obtaining adequate DHA intake in light of current western diets. The authors concluded that with no other changes in diet, improvement of blood DHA status can be achieved with dietary supplements of preformed DHA (such as Martek's life'sDHA™), but not with supplementation of ALA, EPA, or other precursors.

Under our agreement with DSM, annual ARA unit pricing is calculated utilizing a cost-plus approach that is based on the prior year's actual costs incurred adjusted primarily for current year volume and cost expectations and, to a limited extent, adjusted for certain current year actual expenses. In February 2006, we and DSM entered into an amendment to the original agreement ("the 2006 Amendment"). The 2006 Amendment established the overall economics associated with DSM's expansion at both its Belvidere, New Jersey and Capua, Italy production facilities. In July 2007, we and DSM entered into a second amendment to the original agreement ("the 2007 Amendment"). Among other things, the 2007 Amendment established the parameters and methodologies for the calculation of ARA pricing for calendar years 2008, 2009 and, if certain criteria are met, 2010. As part of the 2006 Amendment, we guaranteed the recovery of certain costs incurred by DSM in connection with these expansions of up to $40 million. In May 2008, we and DSM entered into an amendment to the payment terms of the guarantee. In connection with this amendment, it was agreed that in full satisfaction of the guarantee, we would commit to purchasing certain minimum quantities of ARA during the period January 1, 2009 through September 30, 2009. As of April 30, 2009, the value of the remaining calendar 2009 minimum purchase quantities is approximately $26.7 million with such minimum volumes approximating the amounts expected to be purchased by Martek in the normal course of business. The agreement with DSM includes provisions that allow DSM to recover from Martek certain continuing costs related to the ARA production assets should Martek, during the term of the agreement, cease to procure ARA from DSM for any reason other than a breach by DSM of the agreement. We have attempted to reduce the risk inherent in having a single supplier, such as DSM, through certain elements of our supply agreement with DSM. In connection with this agreement, we have the ability to produce, either directly or through a third party, an unlimited amount of ARA. The sale of such self-produced ARA is limited annually, however, to the greater of (i) 100 tons of ARA oil or (ii) any amounts ordered by us that DSM is unable to fulfill. We have demonstrated the ability to produce ARA in our plants; however, our current manufacturing capacity would not permit us to produce ARA quantities sufficient to meet current demand without impacting our production of DHA. To further improve our overall ARA supply chain, we have directly engaged a U.S.-based provider of certain post-fermentation ARA manufacturing services. Along with our ARA downstream processing capabilities at Kingstree and Winchester, this third-party facility provides us with multiple U.S. sites for the full downstream processing of ARA.
When combining our current DHA and ARA production capabilities in Winchester and Kingstree with DSM's current ARA production capabilities in Italy and the U.S., we have production capacity for DHA and ARA products in excess of $500 million in annualized sales, collectively, to the infant formula, pregnancy and nursing, food and beverage, dietary supplement and animal feed markets. As such, our production capabilities exceed current demand; however, we have the ability to manage production levels and, to a certain extent, control our manufacturing costs. Nonetheless, when experiencing excess capacity, we may be unable to produce the required quantities of oil cost-effectively due to the existence of significant levels of fixed production costs at our plants and the plants of our suppliers.
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 on a routine basis and at a commercially acceptable cost. Our success will also be somewhat dependent on our ability to align our production with customer demand, which is inherently uncertain. There can also be no assurance that we will be able to continue to comply with applicable regulatory requirements, including the Food and Drug Administration's "good manufacturing practice" ("GMP") requirements. Under the terms of several of our infant formula licenses, those 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 a minimum of one year to implement a process for making our oils.
CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and judgments, which are based on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. By their nature, estimates are subject to an inherent degree of uncertainty and, as such, actual results may differ from our estimates. We discuss accounting policies and assumptions that involve a higher degree of judgment and complexity than others in our Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report to shareholders on Form 10-K for the year ended October 31, 2008. Other than the adoption of SFAS No. 157, "Fair Value Measurements" ("SFAS 157") as discussed below (see also Note 4 to the consolidated financial statements), there have been no significant changes in the Company's critical accounting policies since October 31, 2008. Fair Value Measurements As of November 1, 2008, the Company adopted the provisions of SFAS 157 for financial instruments. SFAS 157 defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value and requires expanded disclosures about fair value measurements. The SFAS 157 hierarchy ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value and requires assets and liabilities carried at fair value to be classified and disclosed as either a Level 1, 2 or 3 fair value instrument. Different from Levels 1 and 2, Level 3 instruments are valued using unobservable inputs that are not corroborated by market data. At April 30, 2009, we had Level 3 assets of $11.6 million which include both auction rate securities and an auction rate securities rights agreement (the "Put Agreement"). Of this amount, fair value changes in assets totaling $7.5 million would be recorded through earnings and changes in the remainder would be recorded through other comprehensive income. Some of the unobservable inputs into the discounted cash flow models from which we base our Level 3 valuations include, but are not limited to, periodic coupon rates, market required rates of return and the expected term of each security. Changes to the inputs used as of April 30, 2009 would cause fluctuations to the fair value of the affected instruments and such fair value changes could be material.

                             RESULTS OF OPERATIONS
Revenues

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

                                          Three months ended April 30,            Six months ended April 30,
                                            2009                 2008                2009               2008

Product sales                          $       88,152       $       87,875      $      172,174       $  166,484
Contract manufacturing sales                    4,259                2,851               7,600            7,123

Total revenues                         $       92,411       $       90,726      $      179,774       $  173,607

Product sales increased $300,000 or 0.3% in the three months ended April 30, 2009 as compared to the three months ended April 30, 2008 and increased $5.7 million or 3.4% in the six months ended April 30, 2009 as compared to the six months ended April 30, 2008. Product sales were comprised of the following (in thousands):

                                          Three months ended April 30,            Six months ended April 30,
                                            2009                 2008                2009               2008

Infant formula market                  $       77,383       $       78,390      $      151,974       $  148,668
Food and beverage market                        2,979                3,172               5,597            5,267
Pregnancy and nursing, nutritional
supplements and animal feeds                    6,801                5,113              12,465           10,405
Non-nutritional products                          989                1,200               2,138            2,144

Total product sales                    $       88,152       $       87,875      $      172,174       $  166,484

Sales into the pregnancy and nursing, nutritional supplement and animal feed markets increased in both the three and six months ended April 30, 2009 due to a continued expansion of Martek's customer base in these markets. Sales to the infant formula market during the six months ended April 30, 2009 increased as compared to the six months ended April 30, 2008 due primarily to growth in international infant formula markets. Launches of new products and increased market penetration of existing products containing life'sDHA™ also resulted in higher sales to the food and beverage market in the six months ended April 30, 2009 compared to the same period of the prior fiscal year. Revenue declines during the three months ended April 30, 2009 in both the infant formula and food and beverage markets were caused by normal fluctuations between years in the timing of our customers' production campaigns and related product ordering patterns.
Approximately 80% of our product sales in the three and six months ended April 30, 2009 was generated by sales to Mead Johnson Nutritionals, Abbott Laboratories, Nestle, Wyeth and Danone (formerly Numico). Although we are not given precise information by our customers as to the countries in which infant formula containing our oils is ultimately sold, we estimate that approximately 55% of our sales to infant formula licensees for the three and six months ended April 30, 2009 and 2008 relate to sales in the U.S. As of April 30, 2009, we estimate that formula supplemented with our oils had penetrated almost all of the U.S. infant formula market.
Although we anticipate that annual product sales will continue to grow, our future sales growth is subject to quarter-to-quarter fluctuations and is dependent to a significant degree upon the following factors: (i) the expansions of current products containing our nutritional oils by our customers in new and existing markets; (ii) the launches of new products containing our nutritional oils by current or future customers and the success in the marketplace of such launches; (iii) the timing and extent of stocking and destocking of inventory by our customers; (iv) the levels of inclusion of our oils in infant formula;
(v) the timing and extent of our customers' production campaigns and plant maintenance shutdowns; and (vi) the availability and use by our customers and others of competitive products. Contract manufacturing sales revenues, totaling approximately $4.3 million and $7.6 million in the three and six months ended April 30, 2009, respectively, and $2.9 million and $7.1 million in the three and six months ended April 30, 2008, respectively, relate mainly to fermentation work performed for various third parties at our Kingstree, South Carolina facility. The increase in contract manufacturing revenues in the three and six months ended April 30, 2009 as compared to the three and six months ended April 30, 2008 was primarily due to a change in the timing of orders from one existing customer. While we expect to continue reducing the scope of our contract manufacturing activities, we will, at times, provide such services to both existing and new customers if reasonable profit margins are expected and there is no impact to our higher margin nutritional oils business. As a result of the above, total revenues increased $1.7 million or 1.9% in the three months ended April 30, 2009 as compared to the three months ended April 30, 2008 and increased $6.2 million or 3.6% in the six months ended . . .