**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D. C. 20549**

** **

**FORM 10-K/A**

** **

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

** **

**Forthe Fiscal Year Ended March 31, 2006**

**Commission File Number 0-146-02**

**CYANOTECH CORPORATION**

## (Exact name ofregistrant as specified in its charter)

 

| **Nevada**                                            |   | **91-1206026**       |
|-------------------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of                      |   | (I. R. S.  Employer  |
|  incorporation or organization)                  |   | Identification  No.) |
|                                                  |   |                 |
| **73-4460  Queen Kaahumanu Highway, Suite 102,** |   | ** **           |
| **Kailua-Kona,  Hawaii**                              |   | **96740**            |
| (Address of  principal executive offices)             |   | (Zip Code)           |

Registrant’s telephone number, including area code:  **(808) 326-1353**

| Securities registered  pursuant to Section 12(b) of the Act: |   | Name of each  exchange on which registered: |
|------------------------------------------------------------------------|--------|---------------------------------------------|
| **None**                                                               |   | **NASDAQ  Capital Market**                  |

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

|                  | **Common  Stock, $.005 par value** | ** ** |
|------------------|------------------------------------|------------|
| (Title of Class) |

 

 

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.    o Yes    x No

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.    o Yes    x No

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    x Yes    o No

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K/A or any amendment to thisForm 10-K/A.    o

Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer x |
|--------------------------------|--------|--------------------------|--------|------------------------------|

 

Indicated by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct). o Yes    x No

The aggregate market value ofthe Registrant’s Common Stock held by non-affiliates of the Registrant onJune 19, 2006 was approximately $11,425,700 based on the closing saleprice of the Common Stock on the NASDAQ Capital Market on that date.

Number of shares outstandingof Registrant’s Common Stock at June 19, 2006 was 20,928,265.

**DOCUMENTS INCORPORATED BYREFERENCE**

Portions of the Registrant’sDefinitive Proxy Statement for its 2006 Annual Meeting of Stockholders, to befiled with the Securities and Exchange Commission on or prior to July 18,2006 and to be used in connection with the Annual Meeting of Stockholdersexpected to be held on August 24, 2006, are incorporated by reference inPart III of this Form 10-K/A.

 

 

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** **

**TABLE OF CONTENTS**
| Item       | ** ** | ** **                                                                                       | ** ** |
|------------|------------|--------------------------------------------------------------------------------------------------|------------|
|       |       | Explanatory Note — Restatement of Financial Statements                                      |       |
|       |       |                                                                                             |       |
| ** ** | ** ** | **PART I**                                                                                       | ** ** |
| ** ** | ** ** | ** **                                                                                       | ** ** |
| 1.         |       | Business                                                                                         |       |
| 1A.        |       | Risk  Factors                                                                                    |       |
| 2.         |       | Properties                                                                                       |       |
| 3.         |       | Legal  Proceedings                                                                               |       |
| 4.         |       | Submission of  Matters to a Vote of Security Holders                                             |       |
|       |       |                                                                                             |       |
| ** ** | ** ** | **PART II**                                                                                 | ** ** |
| ** ** | ** ** | ** **                                                                                       | ** ** |
| 5.         |       | Market for  Registrant’s Common Equity and Related Stockholder Matters.                     |       |
| 6.         |       | Selected Financial  Data                                                                         |       |
| 7.         |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations      |       |
| 7A.        |       | Quantitative  and Qualitative Disclosures About Market Risk                                      |       |
| 8.         |       | Financial  Statements and Supplementary Data                                                     |       |
| 9.         |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure            |       |
| 9A.        |       | Controls and  Procedures.                                                                        |       |
| 9B.        |       | Other Information                                                                                |       |
|       |       |                                                                                             |       |
| ** ** | ** ** | **PART III**                                                                                | ** ** |
| ** ** | ** ** | ** **                                                                                       | ** ** |
| 10.        |       | Directors and  Executive Officers of the Registrant                                              |       |
| 11.        |       | Executive  Compensation                                                                          |       |
| 12.        |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |       |
| 13.        |       | Certain  Relationships and Related Transactions                                                  |       |
| 14.        |       | Principal  Accountant Fees and Services.                                                         |       |
|       |       |                                                                                             |       |
| ** ** | ** ** | **PART IV**                                                                                 | ** ** |
| ** ** | ** ** | ** **                                                                                       | ** ** |
| 15.        |       | Financial  Statement Schedules and Exhibits                                                      |       |
| 16.        |       | Signatures                                                                                       |       |

 

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**Cyanotech Corporation**

**Explanatory Note —Restatement of Financial Information**

On December 1, 2006,Cyanotech Corporation (the “Company”) filed a Current Report on Form 8-K withthe Securities and Exchange Commission (“SEC”) announcing that based on the currentfindings of its previously announced accounting review, it had determined torestate certain of its previously issued financial statements.  Since that time, we have completed ouraccounting review and have determined that certain of the errors resulted fromdeficiencies in our internal control over financial reporting.  See Item 9A Controls and Procedures in thisForm 10-K/A.

The Company is filingthis Form 10-K/A for the fiscal year ended March 31, 2006 to amend and restatethe following:

**(1) consolidated balance sheetsas of March 31, 2006 and 2005;**

**(2)consolidated statements of operations, stockholders’ equity and comprehensiveincome (loss), and cash flows for each of the years in the three year periodended March 31, 2006;**

**(3) accumulated deficit as ofMarch 31, 2003;**

**(4) selected financial data forthe years ended March 31, 2006, 2005, 2004, 2003 and 2002; and**

**(5)certain financial data for the quarterly periods ended March 31, 2006 andDecember 31, September 30, June 30,  andMarch 31, 2005 and December 31, September 30, and June 30, 2004.**

The Company has not filedForm 10-K/A for the fiscal years 2005 or 2004, or Form 10-Q/A for the interimperiods affected by the restatement prior to and including December 31, 2005,and the consolidated financial statements and related financial information, aspreviously filed, contain errors and should therefore no longer be relied upon.The related audit reports of KPMG LLP, the Company’s independent registeredpublic accounting firm, with respect to the financial statements referred to inthis paragraph should also no longer be relied upon.

The previously filedinformation reported for the periods referred to in the previous paragraph issuperseded by the information in this Form 10-K/A.  Certain significant events occurring throughthe date of filing of this Form 10-K/A are described in Item 1A, Risk Factors,Item 5 Market for Registrant’s Common Equity and Related Stockholder Matters,and Item 8 Financial Statements and Supplementary Data. This Form 10-K/A amendsand restates only the items listed below for the fiscal year ended March 31,2006 that was filed with the SEC on June 19, 2006 (“Original Filing”). In eachcase the changes are solely as a result of, and to reflect, the restatement,and no other information in the Original Filing is amended hereby as summarizedbelow:

**Part I**:

**  Item 1.**                   Business — Amended andrestated only to show our research and development expense for 2006, 2005 and2004 fiscal years which appears on page 10.

**  Item 1A.**         Risk Factors — Describesthe subsequent event documented in Item 1A which impacts the market price ofour Common Stock; as stated in this Form 10-K/A. See pages 12 and 13 herein andworking capital as of March 31, 2006 which appears on page 14.

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**Part II:**

**Item5.   **      Market for Registrant’sCommon Equity and Related Stockholder Matters

**Item6.   **      Selected Financial Data.

**Item7.   **      Management’s Discussionand Analysis of Financial Condition and Results of Operations.

**Item8.   **      Financial Statements,including the notes to consolidated financial statements.

**Item 9A.Controls and Procedures.**

Solely for theconvenience of the reader, this Form 10-K/A, includes, in their entirety, thoseitems in the Original Filing that are not being amended and restated.

This Form 10-K/A does notinclude events occurring after the Original Filing or modify or update anydisclosures in the Original Filing that may have been affected by subsequentevents or the passage of time except for certain significant events occurringthrough the date of filing of this Form 10-K/A which are included as follows:

**·**              the information in Item1A, Risk Factors under subheading *Market Price for OurCommon Stock...*, and

**·**              the information in Item 5.*Market for Registrant’s Common Equity and RelatedStockholder Matters*, and

**·**              the information and eventsdescribed in Note 13 to the financial statements included in this Form 10-K/A;and

For a description of suchsubsequent information and events, please read our Securities Exchange Act of1934 reports filed subsequent to the date of our Original Filing which updateand supersede certain information contained in the Original Filing. Forwardlooking statements made and risk factors identified in our Original Filing havenot been revised to reflect the passage of time, events, results ordevelopments that occurred or facts that became known to the Company after thedate of the Original Filing, and such forward looking statements and riskfactors should be read in their historical context.

Pursuant to the rules ofthe SEC, Item 15 of Part IV of the Form 10-K has been amended to containcurrently dated certifications of our Chief Executive Officer and ChiefFinancial Officer, as required by Sections 302 and 906 of the Sarbanes-OxleyAct of 2002. Such signatures are attached to this Form 10-K/A as Exhibits 31.1and 31.2 and 32.1 and 32.2.

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**PART I**

**Item 1. Business**

**General**

Cyanotech Corporation isa world leader in the production of high value natural products derived frommicroalgae.  Incorporated in 1983, theCompany is guided by the principle of providing beneficial, quality microalgalproducts for human and animal nutrition in a sustainable, reliable andenvironmentally sensitive operation. We are ISO 9001:2000 compliant,reinforcing our commitment to quality in our products, to quality in ourrelationships (with our customers, suppliers, co-workers and the communities welive in), and to quality of the environment we work in. The Company’s productsinclude:

·       *BioAstin®*natural astaxanthin is a powerful dietaryantioxidant with expanding applications as a human nutraceutical and functionalfood ingredient, shown to support and maintain the body’s natural inflammatoryresponse, to enhance skin, muscle and joint health.

·       *NatuRose*â naturalastaxanthin, is used as a feed ingredient for the aquaculture feed industry,specifically providing natural pigmentation to aquaculture-raised shrimp,salmon, yellowtail tuna and “tai” (red sea bream), and for the animal feedindustry such as in poultry feed formulations to naturally pigment the yolk ofchicken eggs;

·       *Spirulina**Pacifica*âis a nutrient-rich dietary supplement used for extra energy, a strengthenedimmune system and as a source of antioxidant carotenoids;

·       Natural phycobiliproteinsare highly fluorescent pigments used as tags or markers in many kinds ofbiological assays in the immunological diagnostics market.

Microalgae are a diversegroup of microscopic plants that have a wide range of physiological andbiochemical characteristics and contain, among other things, high levels of naturalprotein, amino acids, vitamins, pigments and enzymes. Microalgae have thefollowing properties that make commercial production attractive:(1) microalgae  grow much fasterthan land grown plants, often up to 100 times faster; (2) microalgae haveuniform cell structure with no bark, stems, branches or leaves, permittingeasier extraction of products and higher utilization of the microalgae cells;and (3) the cellular uniformity of microalgae makes it practical tomanipulate and control growing conditions in order to optimize a particularcell characteristic. Efficient cultivation of microalgae requires consistentlight, warm temperature, low rainfall and proper chemical balance in a verynutrient-rich environment. If the chemical composition of a pond changes fromits required balance, contamination can occur from the growth of unwantedorganisms.

Since 1983, we havedesigned, developed and implemented proprietary production and harvestingtechnologies, systems and processes, thereby eliminating many of the stabilityand contamination problems frequently encountered in the production ofmicroalgae. Our production of these products at the 90-acre facility onthe Kona Coast of Hawaii provides significant advantages. We selected theKeahole Point location in order to take advantage of the consistent warmtemperatures, abundant sunshine and low levels of rainfall needed for optimalcultivation of microalgae. This location also offers us access to cold deepocean water, drawn from an offshore depth of 2,000 feet, which we use in ourpatented *Ocean-Chill Drying*systemto eliminate the oxidative damage caused by standard drying techniques and as asource of trace nutrients for microalgal cultures. We believe that ourtechnology, systems, processes and favorable growing location permit year-roundharvest of our microalgal products in a cost-effective manner.

Unless otherwiseindicated, all references in this report to the “Company,” “we,” “us,” “our,”and “Cyanotech” refer to Cyanotech Corporation and its wholly ownedsubsidiaries, Nutrex Hawaii, Inc. (“Nutrex Hawaii” or “Nutrex”), a Hawaiicorporation, and Cyanotech Japan YK (“Cyanotech Japan” or “CJYK”), a Japancorporation.

**Cyanotech’s Business**

The Company operatesentirely in one operating segment, the cultivation and production of microalgaeinto high-value, high-quality natural products. The Company cultivates, on alarge-scale basis, two microalgal species from which our two major productlines, spirulina products and natural astaxanthin products, are derived. Cyanotechrecords revenue and cost of sales information by product category but does notrecord operating expenses by such product category. The following table 

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sets forth, for the threeyears ended March 31, 2006, the net sales contributed by each of theCompany’s product lines (in thousands):

|                                    | ** ** | **Net Sales** | ** ** |
|------------------------------------|------------|--------------------|------------|
| ** **                         | ** ** | **2006**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Spirulina  products:               |       |               |       |   |   |   |   |
| *Spirulina  Pacifica*              |       | $                  | 6,517      |   | $ | 6,626 |   | $ | 6,511 |   |
| Natural  astaxanthin products:     |       |               |       |   |   |   |   |
| *NatuRose*                         |       | 1,403              |       | 1,817 |   | 2,545 |   |
| *BioAstin*                         |       | 2,967              |       | 2,855 |   | 2,388 |   |
| Other including  phycobiliproteins |       | 244                |       | 147 |   | 138 |   |
| Total                              |       | $                  | 11,131     |   | $ | 11,445 |   | $ | 11,582 |   |

 

***Spirulina Products***

Since 1985, Cyanotech hasbeen producing a strain of spirulina microalgae marketed as *Spirulina Pacifica.*Accounting for 59%,58% and 56% of net sales for the years ended March 31, 2006, 2005, and2004, respectively, *Spirulina Pacifica*providesa vegetable-based, highly absorbable source of protein, natural beta-carotene,mixed carotenoids, B vitamins, gamma linolenic acid, essential amino acids andother phytonutrients.  *Spirulina Pacifica*is produced in threeforms:  powder, flake and tablets.  Powder is used as an ingredient innutritional supplements and health food drinks while flakes are used as aseasoning on various foods.  Tablets areconsumed as a daily dietary supplement. All three forms are sold as raw material in bulk quantities and aspackaged consumer products under the Nutrex Hawaii label.

Beginning in 1994, wehave produced two grades of *SpirulinaPacifica*:  an all-naturalgrade cultivated by using conventional agricultural fertilizers and an organicgrade that is cultivated using only organic fertilizers. Our organic *Spirulina Pacifica* was grown and processedin accordance with the National Organic Program of the United States Departmentof Agriculture (“USDA”) effective October 2002.  Prior to the establishment of the USDAorganic standard, our organic standard was the California Organic Food Act of1990. Our organic cultivation and processing methods were certified annually byQuality Assurance International of San Diego, California, a leading third-partyagency. In its 2002 decision, the USDA National Organics Standards Board (“NOSB”)allowed the use of certain fertilizers in organic Spirulina cultivation throughOctober 2005, after which all cultivators must find alternate sources ofkey nutrients in order to retain organic certification. The Company determinedthat although alternative fertilizers exist, their costs are prohibitive andtheir use would lead to lower quality Spirulina products. Other cultivators inthe United States have reached similar conclusions. The USDA-NOSB did notextend the use of certain fertilizers for organic Spirulina cultivation at itsOctober 2005 meeting and the Company discontinued cultivating organicSpirulina and has converted all Spirulina cultivation to “all natural”. TheCompany does not expect this decision to have a material effect on overallsales of our Spirulina Pacifica products. The Company’s all natural *Spirulina Pacifica*is certified Kosher byOrganized Kashrus Laboratories of Brooklyn, New York and is cultivated withoutthe use of herbicides or pesticides.

In March 2003,Cyanotech and Earthrise Nutritionals, Inc. of Petaluma, Californiasubmitted a joint notice to the United States Food and Drug Administration (“FDA”)reporting their determination, through scientific procedures, that thespirulina cultivated by both companies is GRAS (generally recognized as safe)for addition to a variety of foods. In November 2003, the FDA concludedthe notification procedure by written response that it had no questions aboutthe companies’ determination that spirulina is GRAS for addition to a varietyof foods.

Our *Spirulina Pacifica* is cultivated in acombination of fresh water and a metered amount of nutrient-rich deep oceanwater (containing essential trace elements), drawn from a depth of 2,000 feetbelow sea level. This water mixture is supplemented with the other majorrequired nutrients such as sodium bicarbonate (baking soda) and infused withcarbon dioxide.  With the exception ofdeep ocean water, the raw materials and nutrients required in our Spirulinaproduction are available from multiple sources; however, there can be noassurance that the pricing from a new source will be comparable to currentpricing.  In the case of deep oceanwater, although abundantly available at this location, the facility to pump anddeliver the water to the Company is owned by the State of Hawaii. The facilityis constructed of two separately located pump stations providing redundancyshould one station fail. The State of Hawaii sets the price for deep oceanwater annually based on its cost to deliver the water.  If the pricing for a critical raw material ornutrient significantly increases, this could have a 

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material adverse effecton our business, financial condition and results of operations. The ability ofthe Company’s suppliers to meet performance and quality specifications anddelivery schedules is also important to operations.

Continuingthe production process, the Spirulina crop in each pond is circulated bypaddlewheels to keep an even blend of nutrients in suspension and a uniformexposure of the algae to sunlight. Our ponds are engineered to maintain theright media depth for sunlight to permeate each crop completely, facilitatingrapid growth. The design of our cultivation ponds promotes efficient growingconditions, allowing the *Spirulina Pacifica*algae to reproduce rapidly. Each pond can be harvested, on average, in sixdays. As sunlight is a major component of cultivation, production can beimpacted from seasonality changes during the winter months, with shorteneddaylight hours and potential inclement weather.

Once ready for harvest, some 70% of theSpirulina algae is pumped from a pond through underground pipes to ourprocessing building where the crop is separated from the culture media bystainless steel screens. The remaining culture serves as an inoculum for thenext growth cycle. Harvested Spirulina is washed with fresh water and vacuumfiltered before moving to the drying stage. Culture media separated fromSpirulina algae during processing is conserved and recycled. Recycled media isrefortified with nutrients before being returned to the culture ponds foranother cycle of cultivation. Our *IntegratedCulture Biology Management*(“ICBM”) technology for microalgaecultivation has proven to be a reliable and stable operating environment,allowing us to grow and harvest Spirulina without significant contamination byunwanted microorganisms and without associated loss of productivity.

*Spirulina**Pacifica*powder is dried via our patented low-oxygen *Ocean-ChillDrying* process, thereby preserving high levels of antioxidantcarotenoids and other nutrients sensitive to heat and oxygen. This process alsoallows us to recover carbon dioxide from our drying system gas to be reused asa raw material back in our growing ponds. The drying process takes about sixseconds and results in a dark green powder. Spirulina powder is difficult toform into tablets. Most tablet manufacturers either add high amounts (from 10%to 30%) of inert substances to “glue” the tablet together or use a heatgranulation process that destroys nutrients. In contrast, our *Spirulina Pacifica*tablets contain amaximum of 2% of such substances and are produced in cold press compressiontablet-making machines. Our *SpirulinaPacifica* flakes are produced by combining freshly harvested *Spirulina Pacifica*with food-gradelecithin and drying this blend in a proprietary system.

Each production lot of *Spirulina Pacifica* is sampled andsubjected to thorough quality control analyses including testing for moisture,carotenoids, minerals, color and taste, among others. Further, each lot of our *Spirulina Pacifica* undergoes a prescribedset of microbiological food product tests, including total aerobic bacteria,coliform bacteria and E. coli. The *SpirulinaPacifica* powder, tablets and flakes are vacuum-sealed inoxygen-barrier foil laminate bags along with a packet of oxygen absorbent. Thispackaging ensures product freshness and extends the shelf life of bulk *Spirulina Pacifica*products. The Company’spackaged consumer products are bottled and labeled by two contractors inCalifornia. These contractors are Kosher certified and subject to regulargovernment inspections. Such packaging services are readily available frommultiple sources.

The majority of our bulkSpirulina sales are to health food manufacturers and formulators with their ownSpirulina product lines, many of whom identify and promote Cyanotech’s Hawaiian*Spirulina Pacifica*in theirproducts. Such customers purchase bulk powder or bulk tablets and package theseproducts under their brand label for sale to the health and natural foodmarkets. Many of the brands produced by these customers are marketed and solddomestically in direct competition with the packaged consumer products soldthrough our Nutrex Hawaii subsidiary. Nutrex Hawaii packaged consumer productsare sold through an established health food distribution network in the domesticmarket and shipped through one of our wholesale distributors. In selectedforeign markets, we have exclusive sales distributors for both our bulk andpackaged consumer products.

Our *Spirulina Pacifica* products compete with avariety of vitamins, dietary supplements, other algal products and similarnutritional products available to consumers. The nutritional products market ishighly competitive and includes international, national, regional and localproducers and distributors, many of whom have greater resources than Cyanotechand many of whom offer a greater variety of products. Our direct competition inthe Spirulina market is currently from Dainippon Ink and Chemical Company’sEarthrise facility in California and several farms in China. Other competitorsinclude numerous smaller farms in China, India, Thailand, Taiwan, Cuba, SouthAfrica and South America. The market for Spirulina is mature with slow growthexpected in future periods. In this mature market, the Company has experiencedincreased price competition due to more Spirulina suppliers as well as a largerportion of sales coming from bulk product orders whose customers generallytreat these products as commodities with price being the major determiningfactor driving 

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their purchasing decision.As one of the largest producers of Spirulina, our challenge is to increase ourmarket share among customers who seek the high-quality products we producewhile concurrently adjusting our product mix to meet our revenue targets.

As of March 31, 2006,the backlog of orders for all Spirulina products totaled approximately $448,000and such orders are expected to be filled in the first quarter of fiscal 2007.Such backlogs at the end of fiscal 2005 and 2004 were $661,000 and $334,000respectively.

***Natural Astaxanthin******Products***

The Company commencedcommercial production of natural astaxanthin in early 1997 with theintroduction of *NatuRose* to theaquaculture market.  Astaxanthin is a redpigment used in the aquaculture market primarily to impart a pink to red colorto the flesh of commercially raised fish and shrimp but also has been found tobe essential for their proper growth and survival. Since its introduction,several feeding trials have been performed by our customers and potentialcustomers that prove the efficacy of *NatuRose*as an alternative to the petrochemical-based synthetic astaxanthinpresently used by most aquaculture companies. The appeal of our product is thatit is derived from a natural source and produces results that are comparable,or in some cases superior, to synthetic astaxanthin. Sold in bulk quantities asa powder, *NatuRose*salesaccounted for 13%, 16% and 22% of net sales for the years ended March 31,2006, 2005 and 2004, respectively.

In 1999, our naturalastaxanthin product for the human nutrition market, *BioAstin,*was introduced. *BioAstin*sales accounted for 27%, 25% and 21% of net sales for the yearsended March 31, 2006, 2005 and 2004, respectively. *BioAstin*is produced in three forms: aliquid lipid extract, gelcaps and microencapsulated “beadlets” with all threeforms sold in bulk quantities.  *BioAstin*gelcaps are also sold in packagedconsumer form under the Nutrex Hawaii label. A growing body of scientificliterature is suggesting that the beneficial antioxidant properties of naturalastaxanthin may surpass many of the antioxidant properties of vitamin C,vitamin E, beta-carotene and other carotenoids. Independent scientific studiesindicate that in certain models, natural astaxanthin has up to 550 times theantioxidant activity of vitamin E and 10 times the antioxidant activity ofbeta-carotene.

The Company producesnatural astaxanthin from *Haematococcuspluvialis* microalgae grown in fresh water supplemented withnutrients. As these algae are extremely susceptible to contamination byunwanted algae, protozoa and amoebae, the Company developed a proprietarysystem known as the *PhytoDome Closed CultureSystem*or *PhytoDome CCS*toovercome this problem*.*Usingthese large-scale photobioreactors, we are able to grow consistently largevolumes of contaminant-free *Haematococcus*culture. Raw materials and nutrients for our natural astaxanthin productionshare the same sourcing constraints and pricing risks as those existing in ourSpirulina production. Fresh water is critical to the production of our naturalastaxanthin and is supplied by the County of Hawaii.  While the Company has not experienced anyconstraint on fresh water availability to date, availability could be impactedby a significant population growth in the region as well as throughputconstraints on the water delivery infrastructure.  The Company has met with officials of theCounty of Hawaii to assess the fresh water situation and evaluate theprobability of future risks. The Company recycles fresh water in its productionprocess where possible and continues to explore further recyclingopportunities. However, there is no guarantee that these efforts will result insignificant changes to our fresh water utilization.

For the final stage ofcultivation, the *Haematococcus*algaeis transferred to open ponds where an environmental stress is applied causingthe algae to form spores which accumulate high levels of astaxanthin. Onceready for harvest, the media containing these spores is transported throughunderground pipes to our astaxanthin processing building where the culturemedia and algal spores are separated. Fresh water recovered from this stage ofprocessing may be recycled for further use in cultivation. The harvested algalspores are dried to a fine powder. During processing, the spores are cracked ina proprietary system to assure high bioavailability of astaxanthin. Eachproduction lot of astaxanthin is sampled and tested for astaxanthinconcentration. Finally the bulk powder is vacuum-sealed in oxygen-barrier foil laminatebags along with a packet of oxygen absorbent.

Unlike Spirulina,astaxanthin is produced in a batch-mode and each cultivation pond must becompletely drained and thoroughly cleaned between cycles. While the entireastaxanthin production cycle takes a total of four weeks, each stage of thefour-step process is staggered and continuously feeds the next stage ofcultivation. As a result, we are currently able to produce a new crop ofastaxanthin from each of our 500,000 liter culture ponds approximately once perweek.  Pond cultivation can be negativelyimpacted seasonally with shortened daylight hours and potential inclementweather in winter months.

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Natural astaxanthin forhuman consumption is processed further utilizing a high-pressure extractionprocess. The resulting product is a lipid extract insoluble in water used forthe production of gelcaps. This product can also be micro-encapsulated into “beadlets”which our customers use in other formulations. All natural astaxanthin productsdestined for human consumption undergo a prescribed set of microbiological foodproduct tests to ensure safety and quality. The Company uses third partycontractors for the extraction services, the production of gelcaps and theproduction of beadlets. Although these services are available only from alimited number of sources, we have the ability to use other parties if any ofthe current contractors become unavailable; however, there is no assurance thatthe pricing from a new contractor will be comparable to current negotiatedpricing. In addition, a new contractor would have to pass the Company’squalification process ensuring quality standards can be met or exceeded. If thepricing, for any of these services, significantly increases, this could have amaterial adverse effect on our business, financial condition and results ofoperations.

*NatuRose*issold through a network of agents and distributors primarily to feedmanufacturers and farmers in the aquaculture industry. Japan is one of ourprimary markets for the application of *NatuRose*in aquaculture and was a major factor in our decision to establishCJYK as a channel of distribution. In addition, *NatuRose*is sold to poultry feed formulators as a naturalpigment for the yolk of chicken eggs and also to formulators of feeds forcommercial breeding of high-value tropical fish. As our product is a naturalastaxanthin, many of these formulators identify *NatuRose* by name as a component of their feed.

The animal nutritionastaxanthin market is currently dominated by Royal DSM of the Netherlands (“RoyalDSM”). Royal DSM purchased F. Hoffmann-LaRoche’s division of vitamins and finechemicals, including their synthetic astaxanthin operation, in 2003. *NatuRose*competes with the syntheticastaxanthin products derived from petrochemicals as well as other naturalastaxanthin products derived from other natural sources such as *Phaffia*yeast and Paracoccus bacteria.Although synthetic astaxanthin has widespread use as a pigmentation source incommercial aquaculture, independent scientific analysis and feeding trials haveshown that the molecular structure of the astaxanthin derived from the *Haematococcus* microalga more closelyresembles the astaxanthin obtained naturally by fish in the wild. With thecontinued growth in the world aquaculture industry and the growing propensitytowards “natural” alternatives, we believe *NatuRose*can compete against other products on the basis of its naturalstate, performance and price.

While the positiveeffects of astaxanthin in aquaculture have been recognized for years, thepotential benefits of astaxanthin to human health are still emerging. Asnatural astaxanthin is one of the most potent and bioactive biologicalantioxidants found in nature, the number of potential roles of naturalastaxanthin for human health is growing. Much research has been published inrecent years on the beneficial roles of antioxidants in our health, in theaging process and on specific health conditions.  The full efficacy of *BioAstin*as a human nutraceuticalsupplement requires further significant clinical study. The Company, to containcosts, did not spend significant amounts on clinical trials over the past twofiscal years. Independent antioxidant research and prior clinical trials showpromising human applications. The Company holds three United States patentsrelating to the usage of *BioAstin*inthe treatment of Carpal Tunnel Syndrome, the treatment of canker/cold sores andfor its use as a topical and oral sunscreen.

*BioAstin*issold in liquid lipid form as a raw ingredient to dietary supplementmanufacturers, health food formulators and cosmetic manufacturers and *BioAstin*gelcaps and beadlets are sold inbulk quantities to distributors. *BioAstin*gelcapsare also sold as a packaged consumer product through Nutrex Hawaii directly tonatural product distributors, retailers and consumers. *BioAstin*competes directly with similarproducts marketed by other manufacturers including Fuji Chemical of Japan,Algatechnologies of Israel, and Valensa (formally U.S. Nutraceuticals), and MeraPharmaceuticals in the United States. In the general category of nutritionalsupplements, *BioAstin*alsocompetes with a variety of vitamins, dietary supplements and other antioxidantproducts available to consumers. The nutritional products market is highlycompetitive and includes international, national, regional and local producersand distributors, many of whom have greater resources than Cyanotech and manyof whom offer a greater variety of products.

As of March 31,2006, the backlog of orders for all Natural Astaxanthin products totaledapproximately $257,000 and such orders are expected to be filled in the firstquarter of fiscal 2007. Such backlogs at the end of fiscal 2005 and 2004 were$74,000 and $389,000, respectively.

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***Phycobiliprotein******Products***

The Company also producesphycobiliproteins for sale to the medical and biotechnology researchindustries. Phycobiliproteins are highly fluorescent pigments derived frommicroalgae. Their spectral properties make them useful as tags or markers inmany kinds of biological assays, such as flow cytometry, fluorescenceimmunoassays and fluorescence microscopy. We do not anticipate thatphycobiliproteins will represent a significant component of total sales infuture periods.

**Major Customers**

Approximately $1,285,000or 12% of net sales for the year ended March 31, 2006 were to SpirulinaInternational B. V., a Spirulina marketing and distribution company based inthe Netherlands.  Sales to this customeramounted to $1,130,000 or 10% of net sales for the fiscal year 2005 and$1,560,000 or 13% of net sales for the fiscal year 2004.  We believe that sales to this customer willcontinue to represent a significant portion of total net sales in futureperiods and any significant reduction in demand from this customer could have amaterial adverse effect on our business, financial condition and results ofoperations.

**Research and Development**

Cyanotech’s expertise isin the development of efficient, stable and cost-effective production systemsfor microalgal products. Our researchers investigate each specific microalgaidentified in the scientific literature for potentially marketable products andthen strive to develop the technology to grow such microalgae on a commercialscale. Successful microalgal product development is highly uncertain and isdependent on numerous factors, many beyond the Company’s control. Products thatappear promising in early phases of development may be found to be ineffective,may be uneconomical because of manufacturing costs or other factors, may beprecluded from commercialization due to the proprietary rights of othercompanies, or may fail to receive necessary regulatory approvals.

The Company had researchand development expenditures of $187,000, $251,000 and $138,000 in fiscal years2006, 2005 and fiscal 2004, respectively. The Company reduced investment inscientific clinical trials during the first two quarters of fiscal 2006 as partof our effort to contain costs, but plans to increase investment in such trialsin future periods.  Fiscal 2006 expensesincluded those for the initiation of clinical trials aimed at increasingproduction yields and improving the quality and stability of such products. TheCompany continues to explore customer sponsored research and development as apotential opportunity in the future. Amounts spent on customer-sponsoredresearch were not material in each of the three years ended March 31,2006.

**Patents, Trademarks and Licenses**

Cyanotech has receivedfive United States patents:  two onaspects of our production methods and three relating to usage of our BioAstin**products. The Company views its proprietary rights as important, but believes thata loss of such rights is not likely to have a material adverse effect on theCompany’s present business as a whole. The Company’s operations are notdependent upon any single trademark, although some trademarks are identifiedwith a number of the Company’s products and are of importance in the sale andmarketing of such products.

**Regulations and Environmental Matters**

In 2002, the Company wasissued under the Endangered Species Act (“ESA”) an Incidental Take Permit (“ITP”)by the United States Department of Interior Fish and Wildlife Service (“FWS”).  The ESA defines “incidental take” as “incidentalto, and not the purpose of, the carrying out of an otherwise lawful activity.”  This permit authorizes incidental take of theendangered Hawaiian stilt (*Himantopusmexicanus knudseni)* that is anticipated to occur as a result ofongoing operations and maintenance at the Company’s Kona facility.  As a mandatory component for the issuance ofsuch permit, the Company submitted and maintains a Habitat Conservation Plan (“HCP”)to ensure that the effects of the permitted action on listed species areadequately minimized and mitigated.

The HCP called for thecreation of a nesting and breeding ground for the Hawaiian stilt to offset anytake activity.  The Company has compliedwith these requirements since 2002.  Thebreeding program was so successful that the increase in the 

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Hawaiian stilt populationin the area became a potential hazard for the adjacent State airportfacility.  The Company disassembled thestilt habitat and is mitigating “take” by using standard non-lethal hazingdevices to discourage nesting and breeding.

A requirement of the ITPis to provide insurance coverage for funding the project for the term of theITP.  The Company’s insurance broker wasunable to locate an underwriter who would provide such a bond. As permitted bylaw, the FWS waived this requirement recognizing that this HCP did not involvea significant capital expenditure. However, under Hawaii state law, no waiverprovision is available.  In lieu ofinsurance, the Company provided a refundable deposit of approximately $89,000to the State of Hawaii. In May 2006, this deposit was refunded to theCompany.  The ITP, which expired onMarch 17, 2005, was renewed by the Company for an additional year. InOctober, 2005 the Company submitted a new ten-year HCP to the FWS and the Stateof Hawaii Division of Forestry and Wildlife (DOFAW). Because of high work loadsat these government agencies, we have not received a new ITP but continue tooperate under the conditions of the old ITP and HCP with concurrence from FWSand DOFAW. We expect a new ITP to be issued during fiscal 2007.

**Employees**

As of March 31,2006, the Company employed 62 people on a full-time basis.  Of the total, 44 are involved in harvestingand production, 2 in research and development, and the remainder in sales,administration and support. Management believes that its relations withemployees are good. We currently are experiencing some difficulty in attractingentry-level operations personnel due to increased wage competition for workersstemming from the growth in the State’s construction industry.  None of our employees are subject tocollective bargaining agreements.

**Internet Information**

Our Internet address iswww.cyanotech.com. There we make available, free of charge, copies of Cyanotechdocuments, news releases and financial statements issued in the last 12 months.Included there are updated copies of the Company’s Code of Conduct and Ethics,the Nominating and Corporate Governance Committee Charter, and the Charter andPowers of the Audit Committee. The information found on our Web site, unless otherwiseindicated, is not part of this or any other report we file with or furnish tothe Securities and Exchange Commission. *SpirulinaPacifica*and *BioAstin*are sold directly online through the Company’s website, www.nutrex-hawaii.com,as well as through resellers in over 40 countries worldwide. Technicalinformation for the Company’s phycobiliproteins products is available atwww.phycobiliprotein.com. Corporate data, product information and charters ofour Board committees are also available at www.cyanotech.com.

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**Item 1A.Risk Factors**

Except for thesection headed *Market Price for Our Common Stock Has BeenUnpredictable*; *Potential Delisting*and the amount of working capital as disclosed on page 14 of this document,which have been amended, the Company’s risk factors included in the OriginalFiling have not been updated for information or events occurring after the dateof the Original Filing and have not been updated to reflect the passage of timesince the date of the of the Original Filing.

You shouldcarefully consider the risks described below which we believe are significantbut not the only ones we face. Any of the following risks could have a materialadverse effect on our business, financial condition and operating results. Youshould also refer to the other information contained in this report, includingour financial statements and the related notes.

**A Significant or ProlongedEconomic Downturn Could Have a Material Adverse Effect on Our Results ofOperations**

Our results ofoperations are affected by the business activity of our customers who in turnare affected by the level of economic activity in the industries and marketsthat they serve. A decline in the level of business activity of our clientscould have a material adverse effect on our revenues and profit margin.

**Our Quarterly Operating ResultsMay Vary From Quarter to Quarter, Which May Result in IncreasedVolatility of Our Share Price**

We haveexperienced, and may in the future continue to experience, fluctuations in ourquarterly operating results. These fluctuations could reduce the market priceof our Common Stock. Factors that may cause our quarterly operating results tovary include, but are not limited to:

·       the business decisions ofour customers regarding orders for our products;

·       increased energy costs;

·       increased raw materialcosts;

·       production difficulties;

·       weather-related cultivationdifficulties;

·       contamination of ourcultivation and production facilities;

·       the effect of weather oncustomer demand patterns;

·       the introduction of new productsby us or our competitors;

·       changes in our pricingpolicies or those of our competitors;

·       seasonal trends in ourcustomers’ buying patterns

·       changes in governmentregulation, both domestic and foreign;

·       fluctuation in foreigncurrency exchange rates;

·       global economic andpolitical conditions and related risks, including acts of terrorism; and

·       other factors beyond ourcontrol.

A significant portion of our expense levels are relatively fixed andthe timing of increases in expense levels is based in large part on ourforecasts of future sales. If net sales are below expectations in any givenperiod, the adverse impact on results of operations may be magnified by ourinability to adjust expenses quickly enough to compensate for the sales shortfall.

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**Market Price for Our Common StockHas Been Unpredictable; Potential Delisting.**

OnDecember 1, 2005 the Company received notice from Nasdaq that the bidprice of the Company’s stock closed below the minimum $1.00 per sharerequirement for the last 30 consecutive business days as required by NASDAQMarketplace Rule 4310(c)(4). However, the Company was provided 180calendar days, or until May 30, 2006, to regain compliance by virtue ofthe bid price closing at $1.00 per share or more for a minimum of 10 days.Compliance was not demonstrated by May 30, 2006, but the Nasdaq staffdetermined and communicated to the Company in a letter dated May 31, 2006that the Company:

“... met all initial inclusion criteria for The Nasdaq Capital Market setforth in Marketplace Rule 4310(c) (except for the bid price). As aresult, the Company has been provided an additional 180 calendar day complianceperiod or until November 27, 2006 to regain compliance with respect to thebid price deficiency. Marketplace rule 4310(c)(8)(E) states that:Nasdaq may, in its discretion, require an issuer to maintain a bid price of atleast $1.00 per share for a period in excess of ten consecutive business days,but generally no more than 20 consecutive business days, before determiningthat the issuer has demonstrated an ability to maintain long-term compliance.In determining whether to monitor bid price beyond ten business days, Nasdaqwill consider the following four factors: (i) margin of compliance (theamount by which the price is above the $1.00 minimum standard);(ii) trading volume (a lack of trading volume may indicate a lack of bonafide market interest in the security at the posted bid price); (iii) themarket maker montage (the number of market makers quoting at or above $1.00 andthe size of their quotes); and, (iv) the trend of the stock price (is itup or down).”

On November 3,2006, the Company implemented a one for four stock split at which time theshare price closed at $0.43 with 20,934,565 common shares outstanding.  On November 6, 2006, the share price openedat $1.72 with 5,233,641 common shares outstanding resulting from the reversestock split with the expectation that most stockholders of common stock willnot exchange their shares as such exchange is not mandatory and stockholdersmay keep the originally issued shares for exchanged value.  Fractional shares were paid with cashtotaling less than $1,000.  The long termfuture impact of the reverse split on the Company’s stock price is uncertain. *The effect of this stock split has not been reflected in theaccompanying consolidated financial statements herein.*

On November 20,2006, the Company received a letter from Nasdaq indicating the closing bidprice of its common stock has been at $1.00 per share or greater for at least 10consecutive business days.  Accordingly,the Company has regained compliance with Marketplace Rule 4310(c)(4) and thismatter is now closed.  For othersubsequent events, please read our current reports on Form 8-K filed subsequentto the date of the Original Filing. As of the date of this filing the Companyhas been granted an extension until February 20, 2007 by Nasdaq to file itsForms 10-Q for the first and second quarters of fiscal 2007. Due to therestatement process and filing of this Form 10-K/A, the foregoing Forms 10-Qhave not yet been filed with the SEC and are delinquent as of the date of thisfiling.

**Our Global Operations Expose Usto Complex Management, Foreign Currency, Legal, Tax and Economic Risks, WhichWe May Not Be Able to Address Adequately**

We conductbusiness in a number of countries around the world. For the year endedMarch 31, 2006, approximately 52% of our net sales were from sales toforeign customers. As a result, we are subject to a number of risks whichinclude, but are not limited to:

·       the burden of complyingwith a wide variety of national and local laws;

·       potentially longer paymentcycles for foreign sales;

·       multiple and possiblyoverlapping and conflicting tax laws;

·       coordinating geographicallyseparated locations;

·       restrictions (governmentand otherwise) on the movement of cash;

·       the absence in somejurisdictions of effective laws protecting our intellectual property rights;

·       changes in governmentregulations, both domestic and foreign;

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·       global economic and politicalconditions and related risks, including acts of terrorism; and

·       fluctuations in foreigncurrency exchange rates.

**Competition in Our Industry isIntense**

The nutritionalproducts market is highly competitive. It includes international, national,regional and local producers and distributors, many of whom have greaterresources than Cyanotech and many of whom offer a greater variety of products.Increased competition in our industry could result in price reductions, reducedgross profit margin or loss of market share, any of which could have a materialeffect on our business, results of operations and financial condition.

**Our Revenues Could Be AdverselyAffected By the Loss of a Significant Customer or the Failure to Collect aLarge Accounts Receivable**

We have in thepast derived, and may continue in the future to derive, a significant portionof our revenues from a relatively limited number of major customers. Fromquarter to quarter, revenues from one or more individual customers may exceed10% of our revenues for the quarter. During the year ended March 31, 2006,sales to one customer, a European distributor of natural products, wereapproximately 12% of net sales. If sales to this customer or other such majorcustomer decrease significantly, this may materially affect our results ofoperations. In addition, if we fail to collect large accounts receivable fromsuch major customers, we could be subject to significant financial exposure.

**If We Are Unable to Protect OurIntellectual Property Rights or if We Infringe Upon the Intellectual PropertyRights of Others Our Business May Be Harmed**

Cyanotech hasreceived five United States patents:  twoon aspects of our production methods and three for use of our *BioAstin*âproducts. Although we regard our proprietary technology, trade secrets,trademarks and similar intellectual property as important, we rely on acombination of trade secret, contract, patent, copyright and trademark law toestablish and protect our rights in our products and technology. There can be noassurance that we will be able to protect our technology adequately or thatcompetitors will not be able to develop similar technology independently. Inaddition, the laws of certain foreign countries may not protect the Company’sintellectual property rights to the same extent as the laws of the UnitedStates. Litigation in the United States or abroad may be necessary to enforceour patent or other intellectual property rights, to protect our trade secrets,to determine the validity and scope of the proprietary rights of others or todefend against claims of infringement. Such litigation, even if successful,could result in substantial costs and diversion of resources and could have amaterial adverse effect on our business, results of operations and financialcondition. Additionally, if any such claims are asserted against us, we mayseek to obtain a license under the third party’s intellectual property rights.There can be no assurance, however, that a license would be available on termsacceptable or favorable to us, if at all.

**We May Need to RaiseAdditional Capital in the Future Which May Not Be Available**

At March 31,2006, the Company’s working capital was $5,647,000. Cash equivalents andshort-term investments at March 31, 2006 totaled $2,535,000. Our cashrequirements will depend on numerous factors, including: demand for products;normal requirements to maintain and upgrade facilities and equipment; whetheropportunities emerge in either new markets or in research and developmentactivities; or, in the event we need to expand or contract our production ordistribution infrastructure. We believe our current cash, cash equivalents andshort-term investments, and cash provided from operations will be sufficient tomeet our capital requirements for at least the next 12 months.  If we need to raise additional funds, we maynot be able to secure funding on acceptable terms, or not at all. If we raiseadditional funds through the issuance of equity or convertible debt securities,the percentage ownership of our then current stockholders may be reduced. If weraise additional funds through the issuance of convertible debt securities, orthrough additional debt or similar instruments, such securities, debt, orsimilar instruments could have rights senior to those of our commonstockholders and such instruments could contain provisions restricting ouroperations. If adequate funds are not available to satisfy either short-term orlong-term capital requirements, we may be required to limit operations withadverse results.

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**Our Insurance Liability Coverageis Limited**

In the ordinarycourse of business, the Company purchases insurance coverages (e.g., propertyand liability coverages) to protect itself against loss of or damage to itsproperties and claims made by third parties and employees for property damageor personal injuries. However, the protection provided by such insurance islimited in significant respects and, in some instances, the Company has nocoverage and certain of the Company’s insurance has substantial “deductibles”or has limits on the maximum amounts that may be recovered. For example, if ahurricane or other uninsured catastrophic natural disaster should occur, theCompany may not be able to recover all facility restoration costs and revenueslost from business interruption. In addition, the Company maintains productliability insurance in limited amounts for all of its products involving humanconsumption; however, broader product liability coverage is prohibitivelyexpensive. Insurers have also introduced new exclusions or limitations ofcoverage for claims related to certain perils including, but not limited to,mold and terrorism. If a series of losses occurred, such as from a series oflawsuits in the ordinary course of business each of which were subject to thedeductible amount, or if the maximum limit of the available insurance weresubstantially exceeded, the Company could incur losses in amounts that wouldhave a material adverse effect on its result of operations and financialcondition.

**Our Ability to Develop and MarketNew Products or Modify Existing Products and Production Methods May beAdversely Affected If we Lose the Services of or Cannot Replace CertainEmployees Knowledgeable in Advanced Scientific and Other Fields**

The Company’s productsare derived from and depend on proprietary and non-proprietary processes andmethods founded on advanced scientific knowledge, skills, and expertise. If theservices of employees knowledgeable in these fields are lost and cannot bereplaced in a reasonable time frame at reasonable costs, the Company’s abilityto develop and market new products or modify existing products and productionmethods would be adversely impacted. At the same time, regulatory compliancesurrounding the Company’s products and financial matters generally requiresminimum levels of knowledge and expertise related to production, qualityassurance, and financial control. If the Company loses the services or cannotreasonably replace employees who have the necessary knowledge and expertise theCompany’s ability to remain in regulatory compliance could be adverselyaffected.

**Item 2.Properties**

The Company’sprincipal facility and corporate headquarters is located at the Natural EnergyLaboratory of Hawaii Authority (“NELHA”) at Keahole Point in Kailua-Kona,Hawaii. It encompasses approximately 90 fully developed acres containingmicroalgal cultivation ponds, processing facilities, research and qualitycontrol laboratories, and sales and administrative offices. The property isleased from the State of Hawaii under a 30-year commercial lease expiringin 2025. We believe that there is sufficient available land at NELHA to meetanticipated needs if a revised NELHA lease can be negotiated with acceptableterms. Under the terms of the existing NELHA lease, the Company could berequired to remove improvements at the end of the lease term. Based uponanalysis pursuant to Statement of Financial Accounting Standards No. 143and FASB Interpretation No. 47, we do not believe the projected cost forsuch removal to be material to the consolidated financial statements, orlikely, given historical experience. However, conditions could change in thefuture. It is not possible to predict such changes or estimate any impactthereof.

The Company alsorents warehouse space near NELHA and also in San Dimas, California and officespace in Tokyo, Japan.

**Item 3.Legal Proceedings**

From time to timethe Company may become party to lawsuits and claims that arise in the ordinarycourse of business relating to employment, intellectual property, and othermatters. There were no significant legal matters outstanding at March 31,2006.

**Item 4.Submission of Matters to a Vote of Security Holders**

No matters weresubmitted to a vote of stockholders during the fourth quarter of fiscal 2006.

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**PART II**

**Item 5.Market for Registrant’s Common Equity and Related Stockholder Matters**

The Company’scommon stock is traded on the NASDAQ SmallCap Market under the symbol “CYAN”.The closing price of our common stock on such market at June 19, 2006 was$0.68. As of June 19, 2006, there were 1,272 registered holders of recordof our common stock. The high and low selling prices as reported by the NASDAQStock Market were as follows, not adjusted for the reverse stock split discussedbelow:

| Quarter Ended:            | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** | **March 31** | ** ** |
|--------------------------------|------------|------------------|------------|-----------------------|------------|----------------------|------------|-------------------|------------|
| Fiscal 2006                    |       |             |       |                  |       |                 |       |              |       |
| Common stock  price per share: |       |             |       |                  |       |                 |       |              |       |
| High                           |       | $                | 1.24       |                  | $          | 1.21                 |       | $                 | 1.06       |   | $ | 0.88 |   |
| Low                            |       | $                | 0.80       |                  | $          | 0.73                 |       | $                 | 0.51       |   | $ | 0.55 |   |
|                           |       |             |       |                  |       |                 |       |              |       |
| Fiscal 2005                    |       |             |       |                  |       |                 |       |              |       |
| Common stock  price per share: |       |             |       |                  |       |                 |       |              |       |
| High                           |       | $                | 1.65       |                  | $          | 1.85                 |       | $                 | 1.70       |   | $ | 1.53 |   |
| Low                            |       | $                | 1.10       |                  | $          | 1.00                 |       | $                 | 1.10       |   | $ | 1.20 |   |

 

OnDecember 1, 2005 the Company received notice from Nasdaq that the bidprice of the Company’s stock closed below the minimum $1.00 per sharerequirement for the last 30 consecutive business days as required by NASDAQMarketplace Rule 4310(c)(4). However, the Company was provided 180calendar days, or until May 30, 2006, to regain compliance by virtue ofthe bid price closing at $1.00 per share or more for a minimum of 10 days.Compliance was not demonstrated by May 30, 2006, but the Nasdaq staffdetermined and communicated to the Company in a letter dated May 31, 2006that the Company:

“... met all initial inclusion criteria for The Nasdaq Capital Market setforth in Marketplace Rule 4310(c) (except for the bid price). As aresult, the Company has been provided an additional 180 calendar day complianceperiod or until November 27, 2006 to regain compliance with respect to thebid price deficiency. Marketplace rule 4310(c)(8)(E) states that:Nasdaq may, in its discretion, require an issuer to maintain a bid price of atleast $1.00 per share for a period in excess of ten consecutive business days,but generally no more than 20 consecutive business days, before determiningthat the issuer has demonstrated an ability to maintain long-term compliance.In determining whether to monitor bid price beyond ten business days, Nasdaqwill consider the following four factors: (i) margin of compliance (theamount by which the price is above the $1.00 minimum standard);(ii) trading volume (a lack of trading volume may indicate a lack of bonafide market interest in the security at the posted bid price); (iii) themarket maker montage (the number of market makers quoting at or above $1.00 andthe size of their quotes); and, (iv) the trend of the stock price (is itup or down).”

The Company isprohibited from declaring any common stock dividends without the prior writtenconsent of a lender per the conditions of an existing term loan agreement withsuch lender. The Company has never declared or paid cash dividends on itscommon stock. We currently intend to retain all of our earnings for use in thebusiness and do not anticipate paying any cash dividends on common stock in theforeseeable future.

On November 3,2006, the Company implemented a one for four stock split at which time theshare price closed at $0.43 with 20,934,565 common shares outstanding.  On November 6, 2006, the share price openedat $1.72 with 5,233,641 common shares outstanding resulting from the reversestock split with the expectation that most stockholders of common stock willnot exchange their shares as such exchange is not mandatory and stockholdersmay keep the originally issued shares for exchanged value.  Fractional shares were paid with cashtotaling less than $1,000.  The long termfuture impact of the reverse split on the Company’s stock price is uncertain. *The effect of this stock split has not been reflected in theaccompanying consolidated financial statements herein.*

On November 20,2006, the Company received a letter from Nasdaq indicating the closing bidprice of it’s common stock has been at $1.00 per share or greater for at least10 consecutive business days. Accordingly, the Company has regained compliance with Marketplace Rule4310(c)(4) and this matter is now closed. For other subsequent events, please

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read our current reportson Form 8-K filed subsequent to the date of the Original Filing. As of the dateof this filing the Company has been granted an extension until February 20,2007 by Nasdaq to file its Forms 10-Q for the first and second quarters offiscal 2007. Due to the restatement process and filing of this Form 10-K/A theforegoing Forms 10-Q have not yet been filed with the SEC and are delinquent asof the date of this filing.

**Item 6.Selected Financial Data**
| ** **                                                         | ** ** | **Years ended March 31,**      | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                         | ** ** | **2006 (1)**                             | ** ** | **2005 (1)** | ** ** | **2004 (1)(3)** | ** ** | **2003 (2)(3)** | ** ** | **2002 (2)(3)** | ** ** |
| **(In thousands, except per share data)** | ** ** | **(As restated, all periods)** | ** ** |
| **Results  of Operations**                                         | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                          |       | $                                             | 11,131     |   | $ | 11,445 |   | $ | 11,582 |   | $ | 8,951 |   | $ | 8,235 |   |
| Gross profit                                                       |       | 3,060                                         |       | 3,892 |   | 3,744 |   | 2,776 |   | 1,207 |   |
| Income (loss)  from operations                                     |       | (253                                          | )          | 724 |   | 634 |   | (1,229 | ) | (2,417 | ) |
| Net income  (loss)                                                 |       | (391                                          | )          | 601 |   | 318 |   | (1,783 | ) | (2,821 | ) |
| Net income  (loss) per common share—diluted                   |       | (0.02                                         | )          | 0.03 |   | 0.02 |   | (0.10 | ) | (0.17 | ) |
| **Selected  Balance Sheet Data**                                   |       |                                          |       |   |   |   |   |   |   |   |   |
| Cash and  investment securities                                    |       | 2,535                                         |       | 3,005 |   | 2,531 |   | 579 |   | 1,051 |   |
| Working capital                                                    |       | 5,647                                         |       | 5,347 |   | 4,213 |   | 2,563 |   | 1,227 |   |
| Total assets                                                       |       | 17,595                                        |       | 18,787 |   | 18,487 |   | 17,693 |   | 18,619 |   |
| Long-term debt,  excluding current maturities                      |       | 1,387                                         |       | 1,743 |   | 2,093 |   | 3,694 |   | 2,765 |   |
| Stockholders’ equity                                          |       | 14,939                                        |       | 15,325 |   | 14,570 |   | 12,484 |   | 13,410 |   |
|                                                                    |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)      See discussion regarding “Restatementof Consolidated Financial Statements” at Note 13 of the Consolidated FinancialStatements.

(2)      Results of Operations forthe years ended March 31, 2003 and 2002 have been restated to reflect (a) theinclusion of certain fixed production costs such as depreciation, general insuranceand minor compensation costs into inventory, impacting both cost of sales andoperating expenses, and (b) the recording of interest income and income taxadjustments. The impact of recording these amounts is detailed as follows:

|                                                                    | ** ** | **Years ended March 31,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                         | ** ** | **2003**                                 | ** ** | **2002** | ** ** |
| ** **                                                         | ** ** | **As  originally  reported**             | ** ** | **As  restated** | ** ** | **As  originally  reported** | ** ** | **As  restated** | ** ** |
| **(In thousands, except per share data)** | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Results  of Operations**                                         | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                          |       | $                                        | 8,951      |   | $ | 8,951 |   | $ | 8,235 |   | $ | 8,235 |   |
| Gross profit                                                       |       | 2,895                                    |       | 2,776 |   | 1,562 |   | 1,207 |   |
| Net loss from  operations                                          |       | (1,210                                   | )          | (1,229 | ) | (2,185 | ) | (2,417 | ) |
| Net loss                                                           |       | (1,775                                   | )          | (1,783 | ) | (2,589 | ) | (2,821 | ) |
| Net loss per common  share — diluted                          |       | (0.10                                    | )          | (0.10 | ) | (0.15 | ) | (0.17 | ) |
|                                                                    |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

 

(3)      Selected Balance Sheet data for the years ended March 31, 2004, 2003 and2002 have been restated to reflect (a) the inclusion of certain fixedproduction costs such as depreciation, general insurance and minor compensationcosts into inventory, and (b) the recording of interest income and income taxadjustments. The impact of recording these amounts is detailed as follows:

17

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|                                                                    | ** ** | **Years ended March 31,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                         | ** ** | **As  originally  reported**             | ** ** | **As  restated** | ** ** | **As  originally  reported** | ** ** | **As  restated** | ** ** | **As  originally  reported** | ** ** | **As  restated** | ** ** |
| **(In thousands, except per share data)** | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Selected  Balance Sheet Data**                                   | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and  investment securities                                    |       | $                                        | 2,531      |   | $ | 2,531 |   | $ | 579 |   | $ | 579 |   | $ | 1,051 |   | $ | 1,051 |   |
| Working Capital                                                    |       | 4,083                                    |       | 4,213 |   | 2,352 |   | 2,563 |   | 1,008 |   | 1,227 |   |
| Total assets                                                       |       | 18,357                                   |       | 18,487 |   | 17,482 |   | 17,693 |   | 18,400 |   | 18,619 |   |
| Long-term debt,  excluding current maturities                      |       | 2,093                                    |       | 2,093 |   | 3,694 |   | 3,694 |   | 2,765 |   | 2,765 |   |
| Stockholder’s equity                                          |       | 14,440                                   |       | 14,570 |   | 12,273 |   | 12,484 |   | 13,191 |   | 13,410 |   |
|                                                                    |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

*Thefollowing discussion should be read in conjunction with the consolidatedfinancial statements and notes thereto appearing elsewhere in this Form 10-K/A.The information below has been adjusted solely to reflect the impact of therestatement on the Company’s financial results which is more fully described inNote 13 to the consolidated financial statements contained in this report andunder the paragraph “Restatement of Previously Issued Consolidated FinancialStatements” below and does not reflect any subsequent information or eventsoccurring after the date of the Original Filing or update any disclosure hereinto reflect the passage of time since the date of the Original Filing. For a morecomprehensive description of the Company’s products and markets for suchproducts, see Part I. Item 1. Business.*

**Restatement of Previously IssuedConsolidated Financial Statements**

On December 1,2006, the Company filed a Current Report on Form 8-K with the SEC in which itannounced that based on current findings of its previously announced accountingreview, it had determined to restate certain of its previously issued financialstatements.  Since that time, we havecompleted our accounting review and have determined that certain of the errorsresulted from deficiencies in our internal control over financial reporting.See Item 9A. Controls and Procedures in this Form 10-K/A. We have not filedForm 10-K/A, for the fiscal years 2005 or 2004, or Form 10-Q/A, for the interimperiods affected by the restatement prior to and including December 31, 2005,and such consolidated financial statements and related financial information,as previously filed, contain errors and should therefore no longer be reliedupon. The related audit reports of KPMG LLP, the Company’s independentregistered public accounting firm, with respect to those financial statementsshould also no longer be relied upon.

The errors oradjustments, which we have identified in our previously issued consolidatedfinancial statements are described below. For more information on the impact oferrors and adjustments which we have identified see Note 13 to the consolidatedfinancial statements and Item 9A. Controls and Procedures in this Form 10-K/A.

(A) We failed to properly include as a component ofinventory certain fixed production costs such as depreciation, generalinsurance and minor compensation costs for all periods presented.

(B)          Wehave recorded certain Hawaii State Tax Credit adjustments which were consideredimmaterial to reports filed in prior years. These impacted the years endedMarch 31 2006, 2005, 2004 and 2003.

(C)          Wehave recorded certain interest income adjustments which were consideredimmaterial to reports filed in prior years. These impacted the years ended 2004and 2003.

(D)         Wehave reclassified certain certificates of deposit from cash to short-terminvestments in fiscal years 2005 and 2004. This reclassification had no effect on reported net income (loss) orcash flow from operations.

(E)           Wehave recorded certain tax adjustments which were considered immaterial in prioryears. These impacted the years ended March 31, 2006, 2005, 2004, and 2003.

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**Results of Operations for the2006, 2005 and 2004 Fiscal Years**
| ** **                         | ** **   | ** **             | ** **   | ** **                              | ** **   | ** **   | ** **   | **Fiscal Year 2006** | *** *** | **Fiscal year 2005** | ** **   |
|------------------------------------|--------------|------------------------|--------------|-----------------------------------------|--------------|--------------|--------------|--------------------------------|--------------|--------------------------------|--------------|
| ** **                         | ** **   | ** **             | ** **   | ** **                              | ** **   | ** **   | ** **   | **vs. 2005**              | ** **   | **vs. 2004**              | ** **   |
| ** **                         | ** **   | ** **             | ** **   | ** **                              | ** **   |
| ** **                         | ** **   | **Fiscal Year**   | ** **   | **Favorable / (Unfavorable)** | ** **   |
| ** **                         | ** **   | ** **             | ** **   | ** **                              | ** **   | ** **   | ** **   | ** **                     | ** **   | ** **                     | ** **   | ** ** | ** ** | ** ** | ** ** |
| **(In thousands)**            | ** **   | **2006**               | ** **   | **2005**                                | ** **   | **2004**     | ** **   | **$**                          | ** **   | **%**                          | ** **   | **$** | ** ** | **%** | ** ** |
| ** **                         | ** **   | ** **             | ** **   | ** **                              | ** **   | ** **   | ** **   | ** **                     | ** **   | ** **                     | ** **   |
| ** **                         | ** **   | **(As restated)** | ** **   | ** **                              | ** **   | ** **   | ** **   | ** **                     | ** **   | ** **                     | ** **   |
|                               |         |                   |         |                                    |         |         |         |                           |         |                           |         |   |   |   |   |
| Net sales                          |         | $                      | 11,131       |                                    | $            | 11,445       |         | $                              | 11,582       |                           | $            | (314 | ) | (2.7 | )% | $ | (137 | ) | (1.2 | )% |
|                               |         |                   |         |                                    |         |         |         |                           |         |                           |         |   |   |   | *** *** |
| Cost of sales                      |         | 8,071                  |         | 7,553                                   |         | 7,838        |         | (518                           | )            | (6.9                           | )            | 285 |   | 3.6 | *** *** |
|                               |         |                   |         |                                    |         |         |         |                           |         |                           |         |   |   |   | *** *** |
| Gross profit                       |         | 3,060                  |         | 3,892                                   |         | 3,744        |         | (832                           | )            | (21.4                          | )            | 148 |   | 4.0 | *** *** |
|                               | *** *** | *** ***           | *** *** | *** ***                            | *** *** | *** *** | *** *** | *** ***                   | *** *** | *** ***                   | *** *** | *** *** | *** *** | *** *** | *** *** |
| Operating  expenses                | *** *** | *** ***           | *** *** | *** ***                            | *** *** | *** *** | *** *** | *** ***                   | *** *** | *** ***                   | *** *** | *** *** | *** *** | *** *** | *** *** |
|                               |         |                   |         |                                    |         |         |         |                           |         |                           |         |   |   |   |   |
| Research & development         |         | 187                    |         | 251                                     |         | 138          |         | 64                             |         | 25.5                           |         | (113 | ) | (81.9 | ) |
|                               |         |                   |         |                                    |         |         |         |                           |         |                           |         |   |   |   | *** *** |
| Sales and marketing                |         | 1,312                  |         | 1,189                                   |         | 1,225        |         | (123                           | )            | (10.3                          | )            | 36 |   | 2.9 | *** *** |
|                               |         |                   |         |                                    |         |         |         |                           |         |                           |         |   |   |   | *** *** |
| General & administrative       |         | 1,814                  |         | 1,728                                   |         | 1,747        |         | (86                            | )            | (5.0                           | )            | 19 |   | 1.1 | *** *** |
|                               |         |                   |         |                                    |         |         |         |                           |         |                           |         |   |   |   |   |
| Total operating expense            |         | 3,313                  |         | 3,168                                   |         | 3,110        |         | (145                           | )            | (4.6                           | )            | (58 | ) | (1.9 | ) |
|                               |         |                   |         |                                    |         |         |         |                           |         |                           |         |   |   |   | *** *** |
| Income (loss) from operations      |         | (253                   | )            | 724                                     |         | 634          |         | (977                           | )            | (134.9                         | )            | 90 |   | 14.2 | *** *** |
|                               | *** *** | *** ***           | *** *** | *** ***                            | *** *** | *** *** | *** *** | *** ***                   | *** *** | *** ***                   | *** *** | *** *** | *** *** | *** *** | *** *** |
| Other income  (expense)            | *** *** | *** ***           | *** *** | *** ***                            | *** *** | *** *** | *** *** | *** ***                   | *** *** | *** ***                   | *** *** | *** *** | *** *** | *** *** | *** *** |
|                               |         |                   |         |                                    |         |         |         |                           |         |                           |         |   |   |   | *** *** |
| Interest income                    |         | 46                     |         | 31                                      |         | 16           |         | 15                             |         | 48.4                           |         | 15 |   | 93.8 | *** *** |
|                               |         |                   |         |                                    |         |         |         |                           |         |                           |         |   |   |   | *** *** |
| Interest expense                   |         | (180                   | )            | (163                                    | )            | (286         | )            | (17                            | )            | (10.4                          | )            | 123 |   | 43.0 | *** *** |
|                               |         |                   |         |                                    |         |         |         |                           |         |                           |         |   |   |   |   |
| Other income (expense), net        |         | (10                    | )            | 15                                      |         | 25           |         | (25                            | )            | (166.7                         | )            | (10 | ) | (40.0 | ) |
|                               |         |                   |         |                                    |         |         |         |                           |         |                           |         |   |   |   |   |
| Total other expense                |         | (144                   | )            | (117                                    | )            | (245         | )            | (27                            | )            | (23.1                          | )            | 128 |   | 52.2 |   |
|                               | *** *** |                   |         |                                    | *** *** |         | *** *** |                           |         |                           |         |   | *** *** |   | *** *** |
| Income (loss)  before income taxes | *** *** | (397                   | )            | 607                                     | *** *** | 389          | *** *** | (1,004                         | )            | (165.4                         | )            | 218 | *** *** | 56.0 | *** *** |
|                               |         |                   |         |                                    |         |         |         |                           |         |                           |         |   |   |   | *** *** |
| Income tax  expense (benefit)      |         | (6                     | )            | 6                                       |         | 71           |         | 12                             |         | 200.0                          |         | 65 |   | 91.5 | *** *** |
|                               |         |                   |         |                                    |         |         |         |                           |         |                           |         |   |   |   |   |
| Net income  (loss)                 |         | $                      | (391         | )                                       | $            | 601          |         | $                              | 318          |                           | $            | (992 | ) | (165.1 | )% | $ | 283 |   | 89.0 | % |

 

**Overview**

CyanotechCorporation’s core competency is cultivating and processing microalgae intohigh-value, high-quality natural products for the human and animal nutritionmarkets. Our products are sold in bulk quantities to manufacturers, formulatorsand distributors in the health foods, nutritional supplements and animalnutrition markets and as packaged consumer products to distributors, retailers,and direct consumer sales. The Company manufactures its products in Hawaii butmarkets them worldwide, generating 52%, 49% and 58% of its revenues outside ofthe United States for each of the years ended March 31, 2006, 2005 and2004, respectively. Competing in a global marketplace, the Company isinfluenced by the general economic

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conditions of thecountries in which its customers operate, including adherence to its customers’local governmental regulations and requirements. The Company currently has nomaterial foreign exchange exposure.

The Companyreported a net loss of $391,000, or ($0.02) per diluted share for fiscal 2006compared to net income of $601,000, or $0.03 per diluted share for fiscal 2005.Cash, cash equivalents and short-term investment balances at March 31,2006 were $2,535,000, down $470,000 from a year ago. Working capital improved6% to $5,647,000 at March 31, 2006 from working capital of $5,347,000 ayear ago, primarily due to increased inventory balances and decreased accountspayable balances.

The following tabledetails selected financial data highlighting three key areas (dollars inthousands):

|                                                            | ** ** | **Year Ended March 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales:                                                 |       |                                    |       |   |   |   |   |
| Spirulina products                                         |       | $                                       | 6,517      |   | $ | 6,626 |   | $ | 6,511 |   |
| Natural astaxanthin products                               |       | 4,370                                   |       | 4,672 |   | 4,933 |   |
| Other products                                             |       | 244                                     |       | 147 |   | 138 |   |
|                                                       |       | $                                       | 11,131     |   | $ | 11,445 |   | $ | 11,582 |   |
| *** ***                                               |       |                                    |       |   |   |   |   |
| Gross profit as  a percentage of sales,*as restated*       |       | 27                                      | %          | 34 | % | 32 | % |
| Operating expenses as a  percentage of sales,*as restated* |       | 30                                      | %          | 28 | % | 27 | % |

 

Net sales for fiscal2006 were $11,131,000, or 3% lower than the $11,445,000 reported for the priorfiscal year. During fiscal 2006, the Company continued to experience areduction of *NatuRose* sales to the worldwideaquaculture market due to reduced Sea Bream sales, growers using less naturalastaxanthin in their feed, and heightened competition in other markets. We nowfeel that this condition is likely to persist. The Company has taken action todiversify its market for *NatuRose* inselected markets in Europe and new aquaculture markets in Japan. While weexpect to experience the results of these efforts in the next fiscal year,there can be no guarantee that our efforts will expand the market for *NatuRose*. The Company’s emphasis is on first growing themarket for its BioAstin products followed by market growth for NatuRose. TheCompany will continue to contain discretionary operating spending but mayinvest in focused expenditures particularly in advertising and clinical trialsin the human nutrition and cosmetics markets. Externally, the Company is alsoworking with industry-leading manufacturers in these markets to integrate *BioAstin*into their products. The Companyintends to emphasize market acceptance of its natural astaxanthin products asincreased competition from other producers of natural and synthetic astaxanthinmay result in the decline of margins generated by its natural astaxanthinproducts.  Management cannot predictwhether the outcomes of any of these strategies will be successful.

As depicted in thepreceding table, the Company’s gross profit margin as a percentage of net salesdecreased to 27% for the fiscal year ended March 31, 2006, down from 34%for fiscal 2005 and 32% for fiscal 2004. The decrease in gross margin betweenfiscal 2006 and 2005 was in part the result of production variances associatedwith decreased astaxanthin production in response to lower orders for NatuRose.In addition, the company experienced increased chemical (primarily nutrient)and electrical costs, with the latter also serving to increase the cost ofwater. The increase in chemical (primarily nutrient) costs is due to severalfactors including increased consumption due to weather and production variablesas well as increased raw material prices. The increase in gross profit marginpercentage between fiscal 2005 and 2004 was primarily due to a change in salesmix. As noted in the preceding paragraph, the Company will continue to containdiscretionary spending, and will take advantage of opportunities to minimizethe use of raw materials, including chemicals and utilities.

*Managementexpects the Company’s gross profit margin percentages to decrease compared tothe results reported for fiscal 2006*. There are many factorswhich could materially diminish gross profit. These include, but are notlimited to, sales volume and mix, increases in the cost of raw materials andraw material freight costs, production volumes above and below normal capacityin response to customary production variables (such as weather) and significantchanges in demand for the Company’s products. This includes the allocation ofproduction resources, principally the factors impacting Astaxanthin andSpirulina biomass production levels and production rates based on the variablesjust mentioned.

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To offsetincreased costs the Company continues to strive to increase productionefficiencies in volume yield, potency, and quality consistent with the Company’scommitment to produce high-value, high-quality products. However, these effortscannot be guaranteed to achieve the desired results.

**Results of Operations**

***Revenues***   Netsales for fiscal 2006 was $11,131,000, a 3% decrease from net sales of$11,445,000 in fiscal 2005 and a decrease of 4% from net sales of $11,582,000reported in fiscal 2004. The following is a discussion of revenues by majorproduct category.

***Spirulina***   TheCompany has been producing Spirulina Pacifica, a strain of Spirulina microalga,since 1985. Revenues generated from the Company’s Spirulina products are asignificant portion of total revenues, amounting to $6,517,000, $6,626,000 and$6,511,000 for the years ended March 31, 2006, 2005 and 2004 respectively.Although the Company believes that Spirulina is a mature product in a highlycompetitive market, the dollar amount of revenues has remained relativelyconsistent over the three year period. As a percentage of total revenues,spirulina product sales represented 59% in 2006, 58% in 2005 and 56% in 2004reflecting product mix changes. Approximately $1,285,000 or 12% of net salesfor the year ended March 31, 2006 were to Spirulina International B. V., aSpirulina marketing and distribution company based in the Netherlands.  Sales to this customer amounted to $1,130,000or 10% of net sales for the fiscal year 2005 and $1,560,000 or 13% of net salesfor the fiscal year 2004.  We believethat sales to this customer will continue to represent a significant portion oftotal net sales in future periods and any significant reduction in demand fromthis customer could have a material adverse effect on our business, financialcondition and results of operations.

The Company hasexperienced increased competition for its Spirulina products resulting from anincreasing number of suppliers of Spirulina as well as from a larger portion ofour sales coming from bulk product orders whose customers generally treat theseproducts as commodities with price being the major determining factor drivingtheir purchasing decision. We expect this competitive pricing pressure tocontinue in future periods and in response have focused on improving thequality of our Spirulina products in support of customers who demand higherquality raw materials for their formulations. However, fiscal 2006 Spirulinasales saw average unit prices decrease approximately 3% as compared to theprior year, with a slight increase in the number of units sold during the 2006fiscal year. At March 31, 2006 our backlog of Spirulina orders decreasedfrom the previous year by $213,000, due primarily to the timing of orders fromour customers. In fiscal 2005, we had experienced an increase in average unitprice of approximately 5% as compared to the prior year with a slight increasein the number of units sold.

***NaturalAstaxanthin***   In fiscal 2006, the Company’s sales ofits natural astaxanthin products were $4,370,000 a decrease of 6% from$4,672,000 in fiscal 2005, and a decrease of 11% from $4,933,000 in fiscal2004. The decrease in natural astaxanthin sales were primarily due to decreasedmarket demand for NatuRose in the Japan aquaculture market during fiscal 2006,which was partially offset by increased unit sales of higher-priced BioAstininto the human nutritional market. At March 31, 2006 our backlog of ordersfor all natural astaxanthin products was $257,000, an increase of $183,000 fromthat of a year ago. The Company believes that the findings of clinical trialsundertaken in prior years and in this fiscal year by the Company, its customersand other unaffiliated parties, taken individually and on a cumulative basis,is generating  growing consumer awarenessof the beneficial antioxidant and anti-inflammatory properties of astaxanthin.Validation of natural astaxanthin benefits identified in such scientificstudies has helped to spur demand for our natural astaxanthin products in thehuman nutrition market and could provide the basis for proprietary intellectualproperty. The Company completed and issued reports on two positive scientificclinical trials on natural astaxanthin during fiscal 2006. One studydemonstrated that natural astaxanthin could lower levels of C-Reactive Protein,an indicator of systemic inflammation and the second study showed that gripstrength could be increased in those suffering from tennis elbow by consumptionof natural astaxanthin.  The Companyplans to continue expenditures on targeted scientific trials in the future inaccordance with its strategy to increase sales of natural astaxanthin products.

***Costof Sales  ***Ourcost of sales, as a percentage of net sales, was at 73%, 66% and 68% for fiscalyears 2006, 2005, and 2004, respectively. Cost of sales includes the cost ofnutrients and materials, direct labor and manufacturing overhead costs, anddepreciation and amortization of production equipment, buildings and leaseholdimprovements associated with the production of inventory units sold and otherproduction related period costs.

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*The Company’s historic method of capitalizingproduction costs did not include all appropriate amounts of fixed costs.*  In particular, portions of certain fixedcosts recorded in cost of sales such as depreciation, general insurance, andminor benefit costs which are attributable to the inventory production processwere not included in the valuation of such inventories.  This historical error in the application ofGenerally Accepted Accounting Principles (GAAP), and its assessment inaccordance with the guidelines of SEC Staff Accounting Bulletin No. 99 asrelated to materiality, is the basis for the issuance of this Form 10-K/A withits restatements of previously reported inventory values and cost of salesamounts.  Accordingly, the values ofinventories as restated now include appropriate amounts of production relateddepreciation, general insurance, and minor benefit costs, and the Company’srestated figures for cost of sales now reflect better matching of productionrelated expenses with the related product sales in accordance with AccountingResearch Bulletin No. 43.

The cost of sales percentage increased between fiscal2006 and 2005 in part due to the result of production variances associated withdecreased astaxanthin production in response to lower orders for NatuRose. Inaddition, the company experienced increased chemical (primarily nutrient) andelectrical costs, with the latter also serving to increase the cost of water.The increase in chemical (primarily nutrient) costs is due to several factors includingincreased usage due to weather and production variables as well as increasedraw material prices.

For fiscal 2007, with the rising cost of fuel oil, theCompany could incur higher electrical utility costs dependent upon theregulated public utility’s ability to obtain approval for rate increases. Ifelectrical utility costs were to double from fiscal 2006 costs, the Companyestimates that the cost to manufacture its products could increase by as muchas 15% above prior year costs.

Fresh water is critical for our natural astaxanthinproduction and while the Company has not experienced any constraint on freshwater availability, future availability could be negatively impacted bysignificant growth in the local population as well as by throughput constraintson the water delivery infrastructure owned by the County of Hawaii. Given thecriticality of fresh water to our operations and the community, the Companyrecycles fresh water where possible and has developed additional waterrecycling systems during fiscal 2006 in its efforts to utilize fresh waterefficiently.

For the production of *BioAstin,*the Company’s natural astaxanthin product for the human nutritionmarket, two third party contractors are utilized for the processes ofextraction, and a sole third party contractor is utilized for each of theencapsulation (for gelcaps) and micro-encapsulation (for beadlets), Althoughthese services are available only from a limited number of sources, we have theability to use other parties if any of the current contractors becomeunavailable. If pricing for any of these services significantly increases,there could be a material adverse effect on our business, financial conditionand results of operations. There have not been any significant changes in the costof extraction or encapsulation services and none are now anticipated.

To offset increased costs, the Company seeks ways toincrease production efficiencies in volume yield, potency, and qualityconsistent with the Company’s commitment to produce high-value, high-qualityproducts. However, these efforts cannot be guaranteed to achieve the desiredresults.

The Company will adopt SFAS No. 151 effectiveApril 1, 2006. The provisions of SFAS No. 151 “Inventory Costs—anamendment of Accounting Research Bulletin No. 43, Chapter 4” require thatabnormal amounts of freight, handling costs and wasted material (spoilage) berecognized as current-period charges and fixed production overhead costs beallocated to inventory based on the normal capacity of production facilities.Normal capacity is defined as “the production expected to be achieved over anumber of periods or seasons under normal circumstances, taking into accountthe loss of capacity resulting from planned maintenance.”  Companies will no longer be permitted tocapitalize inventory costs on the balance sheet when the production defect ratevaries significantly from the expected defect rate. SFAS No. 151 iseffective for inventory costs incurred during fiscal years beginning afterJune 15, 2005.

Adoption of the provisions of SFAS No. 151 is notexpected to have a material impact on the Company’s future financial condition,results of operations, or liquidity. However, unforeseen changes in any of thefactors surrounding the estimates imbedded in the determination of inventoryvalues and cost of sales could have a material impact on cost of sales underSFAS No. 151. Such changes in factors and estimates include but are notlimited to: production levels and capacity, changes in the prices paid for rawmaterials, supplies, and labor, changes in yield, potency, and quality ofbiomass, and changes in processing or production methods.

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***Gross ProfitMargin******  ***The Company’s gross profit margin as apercentage of net sales decreased to 27% for the fiscal year ended March 31,2006, down from 34% for fiscal 2005 and 32% for fiscal 2004 as previouslydescribed.

Management expects the Company’s gross profit marginpercentages to decrease from the results reported for fiscal 2006. There aremany factors which could materially diminish gross profit. These include, butare not limited to, sales volume and mix, increases in the cost of rawmaterials and raw material freight costs, and production volumes below normalcapacity in response to customary production variables (such as weather) andsignificant changes in demand for the Company’s products, and the allocation ofproduction resources, principally the factors impacting Astaxanthin andSpirulina biomass production levels and rates based on the variabilities justmentioned.

***Operating Expenses***   Operatingexpenses as a percentage of net sales were 30% for fiscal 2006 and 28% forfiscal 2005 and 27% for fiscal 2004. During fiscal 2006, sales and marketingexpenses and general and administrative expenses increased. These increaseswere partially offset by decreased research and development expenses. TheCompany is committed to ongoing cost containment aimed at controlling its levelof operating expenses but may increase some discretionary spending in futureperiods as dictated by the needs of the business. Operating expenses of$93,000, $88,000, and $101,000 for fiscal 2006, 2005, and 2004, respectively,have been reclassified to inventory and cost of sales as part of therestatement process. The reclassifications, primarily of depreciation, insurance,and benefit costs, are reflected in the following three paragraphs discussingspending by functional area.

Our research and development costs decreased to$187,000, down 26% from $251,000 in fiscal 2005 and up 36% from $138,000 infiscal 2004.  The major expenditures inresearch and development were for initiation of new scientific clinical trials,costs related to product registration and work aimed at increasing productionyields and continually improving the quality and stability of such products. Researchand development costs of $5,000, $6,000, and $11,000 for fiscal 2006, 2005, and2004, respectively, primarily depreciation, insurance, and benefit costs, havebeen reclassified to inventory and cost of sales and the reclassifications arereflected in research and development costs.

Our sales and marketing costs were $1,312,000,$1,189,000 and $1,225,000 in fiscal 2006, 2005 and 2004, respectively.  Fiscal 2006 expenses were 10% higher than infiscal 2005 primarily due to increased advertising expenditures for bulkBioAstin and NatuRose products. Sales and marketing costs of $19,000, $13,000,and $14,000 for fiscal 2006, 2005, and 2004, respectively, primarilydepreciation, insurance, and benefit costs, have been reclassified betweeninventory and cost of sales and the reclassifications are reflected in salesand marketing costs.

Our general and administrative costs were $1,814,000,$1,728,000 and $1,747,000 in fiscal 2006, 2005 and 2004, respectively. Comparedto fiscal 2005, fiscal 2006 expenses increased by 5% due to increased personnelcosts and increased regulatory compliance reporting costs. Fiscal 2005 expensesdecreased from fiscal 2004 primarily due to elimination of a royalty paymentobligation which ended in fiscal 2004, reduced contract services expenses and areduction in bad debt expense, offset in part by increased personnel expenses.General and administrative costs of $69,000, $69,000, and $76,000 for fiscal2006, 2005, and 2004, respectively, primarily depreciation, insurance, and benefitcosts, have been reclassified to inventory and cost of sales and the reclassifications are reflected  in general and administrative costs.

The Company expects operating expense spending toremain consistent with or moderately increased from fiscal 2006 levels.Increases may be necessary in research and development as new opportunitiesarise. However, the Company will continue to seek additional leverage fromcustomer supported research where and as practicable. Increases in sales andmarketing expenses may become necessary as the Company seeks new and increasedmarkets and market share. Whether sales and marketing expenses increase overfiscal year 2006 levels will be based on customer demand levels, customerresponse, and customer and market opportunities that may arise. Finally, asnoted under general and administrative costs, the cost of regulatory complianceactivities—including financial, international standards (ISO), US food and drugmanufacturing practice (GMP), and other regulatory compliance areas—continue toincrease. In addition, the Company must remain competitive in the labor market,and this may lead to further increases in general and administrative costs.

23

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***Other Expense******  ***The followingdetails the amounts included in other expense (dollars in thousands):

|                                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest expense  on Term Loan Agreement(1)    |       | $        | 175        |     | $          | 158      |       | $ | 160 |   |
| Interest expense  on convertible debentures(2) |       | —   |       | —   |       | 119      |       |
| Other interest  expense                        |       | 5        |       | 5        |       | 7        |       |
| Other income,  net(3)                          |       | (36      | )          | (46      | )          | (41      | )          |
| Total other  expense                           |       | $        | 144        |     | $          | 117      |       | $ | 245 |   |

----

(1)             The principal balanceon the Term Loan was $1,751,000, $2,098,000 and $2,439,000 as of March 31,2006, 2005 and 2004 respectively. The interest rate under the Term Loan is 1%above the prime rate.  The prime rate asof March 31, 2006, 2005 and 2004 was 7.25%, 5.25% and 4.0%, respectively.Interest expense includes amortization of debt issue costs.

(2)             InDecember 2003, the convertible debentures were voluntarily converted intocommon stock (see Note 5 of Notes to Consolidated Financial StatementsPart II. Item 8.).

(3)             Otherincome, net includes interest earned on certain cash and cash equivalentsbalances and gains arising from exchange rate fluctuations on transactions ofthe Company’s Japan subsidiary.

***Income Taxes***   Forfiscal 2006, the Company recorded income tax benefit of $6,000 primarilyrelated to Hawaii State tax credits. For fiscal 2005, a Federal and HawaiiState income tax expense of $6,000 was recorded. For fiscal 2004, a provisionfor income taxes of $71,000 was recorded for taxes relating to our operationsin Japan partially offset by a state tax refund. At March 31, 2006 theCompany had Federal and Hawaii state net operating loss carryforwards ofapproximately $14,106,000 and $9,379,000, respectively. These net operatingloss benefits have been fully reserved as their utilization is not assured.

**Liquidity andCapital Resources**

***FinancialCondition******  ***At March 31, 2006, the Company’sworking capital was $5,647,000 an increase of $300,000 compared to $5,347,000at March 31, 2005. Cash equivalents and short-term investments atMarch 31, 2006 totaled $2,535,000 a decrease of $470,000 from $3,005,000at March 31, 2005. The increase in working capital and decrease in cashand cash equivalents and short term investments are primarily due to increasedinventory balances and decreased accounts payable balances. Working capital atMarch 31, 2004 was $4,213,000.

The Company has a Term Loan Agreement (“Term Loan”)with a lender providing up to $3.5 million in credit facilities, secured bysubstantially all the assets of the Company. The outstanding balance under theTerm Loan as of March 31, 2006 is approximately $1,751,000. The Term Loanhas a maturity date of May 1, 2010 and is payable in 120 equal monthlyprincipal and interest payments of approximately $40,000. The interest rateunder the Term Loan, in absence of a default under the agreement, is the primerate, as defined, in effect as of the close of business on the first day ofeach calendar quarter, plus 1% (the prime rate was 7.25% at March 31,2006). The Company is in compliance with all restrictive covenants of the TermLoan. The Company is prohibited by the Term Loan from declaring any cashdividends without the lender’s prior written consent. A $250,000 restrictedcash deposit is held in an interest-bearing restricted cash account per theterms of the Term Loan and is included in Other Assets in the consolidatedbalance sheets at March 31, 2006 and 2005.

The following table presents the Company’s debt andlease obligations at March 31, 2006 (in thousands):

|                  | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After  Years** | ** ** | **Total** | ** ** |
|------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|------------------|------------|-----------|------------|
| Term Loan        |       | $                               | 364        |               | $          | 830                |       | $                | 557        |      | $          | — |   | $ | 1,751 |   |
| Operating leases |       | 234                             |       | 417                |       | 299                |       | 2,183            |       | 3,133     |       |
| Total            |       | $                               | 598        |               | $          | 1,247              |       | $                | 856        |      | $          | 2,183 |   | $ | 4,884 |   |

 

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***Cash Flows******  ***Our cash, cashequivalents and short-term investments were $2,535,000, $3,005,000 and$2,531,000 at March 31, 2006, 2005 and 2004, respectively. AtMarch 31, 2006, $700,000 of this amount represents short-term investmentsin certificates of deposit.

During fiscal years 2006, 2005 and 2004, the Companygenerated cash from operating activities of $179,000, $1,328,000 and$1,966,000, respectively. Reduced cash from operations in fiscal year 2006compared to fiscal year 2005 is primarily due to the net loss reported infiscal 2006 of $391,000 compared to net income of $601,000 in fiscal year 2005and $318,000 in fiscal year 2004. Additionally, in fiscal 2006 cash was used toreduce payables, both in the ordinary course of business and to take advantageof available supplier discounts, and to increase inventories. Cash generatedfrom operations in 2005 reflected the Company’s profitability and improvedcollection of trade accounts receivable.

Net cash of $11,000used in investing activities during fiscal 2006 was due to $311,000 ofinvestment in equipment and leasehold improvements net of $300,000 generatedfrom the maturity of short-term investments. In 2005, net cash of $1,549,000was used in investing activities. This included $900,000 invested in short-terminvestments and investments in equipment and leasehold improvements of $649,000in fiscal years 2005.  In 2004, net cashof $513,000 was used in investing activities including $413,000 invested inequipment and leasehold improvements and $100,000 invested in short-terminvestments..  The capital expendituresfor all periods presented pertained primarily to improvements in cultivationand processing facilities. For fiscal 2006, such expenditures continued to beaimed toward capital projects enhancing or maintaining our ability to respondto market demand. Depreciation and amortization expense was $1,321,000,$1,319,000 and $1,346,000 for the years ended March 31, 2006, 2005 and2004, respectively. For fiscal 2007 management expects to continue to invest inequipment upgrades and leasehold improvements tied to market requirements andproduction efficiency. These amounts are expected to aggregate up to $500,000in fiscal 2007.

During fiscal 2006, cash used in financing activitiesamounted to $338,000 representing principal payments on long-term debt of$347,000 offset, in part, by proceeds from the exercise of stock optionstotaling $9,000. For fiscal 2005, financing activities used cash of $205,000representing principal payments on long-term debt of $341,000 offset byproceeds from the issuance of common stock and the exercise of stock optionsand warrants totaling $136,000.  Fiscal2004 financing activities provided cash of $399,000 which consisted primarilyof the following:  net proceeds receivedfrom the exercise of warrants and stock options totaling $477,000 and thepartial release of a restricted deposit held in connection with the Term Loanof $250,000 partly offset by principal payments on long-term debt of $328,000.

Management expects liquidity in fiscal 2007 to begenerated primarily from operating cash flows, but funds may also be generatedthrough capital lease or debt sources if and when the use of such fundingsources becomes beneficial. Management anticipates sufficient liquidity infiscal 2007 to fund normal operations, capital expenditures, and debt service.

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**Variability ofResults**

The following selected quarterly financial data(unaudited) as of and for the periods presented highlights the significantfluctuations in operating results and financial condition that the Company hasexperienced in the past  three fiscal years(dollars in thousands): 

| Ended              | ** ** | **4**th Quarter  March 31, | ** ** | **3**rd Quarter  December 31, | ** ** | **2**nd Quarter  September 30, | ** ** | **1**st Quarter  June 30, | ** ** |
|--------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|------------------------------------------|------------|-------------------------------------|------------|
| ** **         | ** ** | ** **                           | ** ** | **(As Restated)**                  | ** ** | ** **                               | ** ** |
| ** **         | ** ** | ** **                           | ** ** | ** **                              | ** ** | ** **                               | ** ** | ** **                          | ** ** |
| Fiscal 2006:       |       |                                 |       |                                    |       |                                     |       |                                |       |
| Net sales          |       | $                                    | 3,252      |                                    | $          | 2,333                                    |       | $                                   | 2,517      |   | $ | 3,029 |   |
| Cost of sales      |       | 2,438                                |       | 1,674                                   |       | 1,935                                    |       | 2,024                               |       |
| Operating expenses |       | 831                                  |       | 835                                     |       | 856                                      |       | 791                                 |       |
| Net income (loss)  |       | (43                                  | )          | (210                                    | )          | (297                                     | )          | 159                                 |       |
| Working capital    |       | 5,647                                |       | 5,555                                   |       | 5,587                                    |       | 5,772                               |       |
| Fiscal 2005:       |       |                                 |       |                                    |       |                                     |       |                                |       |
| Net sales          |       | $                                    | 2,560      |                                    | $          | 3,180                                    |       | $                                   | 2,998      |   | $ | 2,707 |   |
| Cost of sales      |       | 1,833                                |       | 2,013                                   |       | 1,882                                    |       | 1,825                               |       |
| Operating expenses |       | 790                                  |       | 821                                     |       | 858                                      |       | 699                                 |       |
| Net income (loss)  |       | (94                                  | )          | 354                                     |       | 206                                      |       | 135                                 |       |
| Working capital    |       | 5,347                                |       | 5,256                                   |       | 4,711                                    |       | 4,426                               |       |
| Fiscal 2004:       |       |                                 |       |                                    |       |                                     |       |                                |       |
| Net sales          |       | $                                    | 3,290      |                                    | $          | 3,024                                    |       | $                                   | 2,840      |   | $ | 2,428 |   |
| Cost of sales      |       | 2,215                                |       | 1,876                                   |       | 2,033                                    |       | 1,714                               |       |
| Operating expenses |       | 716                                  |       | 864                                     |       | 808                                      |       | 722                                 |       |
| Net income (loss)  |       | 370                                  |       | 101                                     |       | (43                                      | )          | (110                                | )          |
| Working capital    |       | 4,213                                |       | 3,342                                   |       | 3,130                                    |       | 2,678                               |       |

 

The Company’s results of operations and financialcondition can be affected by numerous factors, many of which are beyond itscontrol and could cause future results of operations to fluctuate materially asit has in the past. Future operating results may fluctuate as a result ofchanges in sales volumes to our largest customers, weather patterns, increasedcompetition, increased materials, nutrient and energy costs, foreign currencyexchange fluctuations, governmental regulations and other factors beyond ourcontrol. In addition, the Company maintains product liability insurance only inlimited amounts for products involving human consumption because broaderproduct liability coverage is cost prohibitive.

A significant portion of our expense levels arerelatively fixed, so the timing of increases in expense levels is based inlarge part on forecasts of future sales. If net sales are below expectations inany given period, the adverse impact on results of operations may be magnifiedby our inability to adjust spending quickly enough to compensate for the salesshortfall. We may also choose to reduce prices or increase spending in responseto market conditions, which may have a material adverse effect on financialcondition and results of operations.

**Effect of RecentlyIssued Accounting Standards and Estimates**

In December 2005, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123 (Revised 2004) (SFASNo. 123R), “Share-Based Payment”, which is a revision of FASB StatementNo. 123 “Accounting for Stock-Based Compensation.”  SFAS No. 123R requires an entity tomeasure the cost of employee services received in exchange for an award. If anaward vests or becomes exercisable based on the achievement of a conditionother than service, performance or market condition, the award isliability-classified. Liability-classified awards are remeasured to fair valueat each balance sheet date until the award is settled. Equity-classifiedawards, including grants of employee stock options, are measured at thegrant-date fair value of the award and are not subsequently remeasured. Thecost of equity-classified awards is recognized in the income statement over theperiod during which an employee is required to provide the service in exchangefor the award. Currently the company accounts for its employee and non-employeedirector stock options under the intrinsic value provision of APB Opinion No. 25.  The Company is required to adopt theprovisions for SFAS No. 123R as of the beginning of the first annualreporting period that begins after June 15, 2005, although earlieradoption is permitted.  Management haselected to adopt the provisions of SFAS No. 123R, “Share-Based Payment,”for its share-based compensation plans effective April 1, 2006 using theModified Prospective method of accounting.

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In November 2004, the FASB issued SFASNo. 151 “Inventory Costs—an amendment of Accounting Research BulletinNo. 43, Chapter 4”. SFAS No. 151 requires that abnormal amounts offreight, handling costs and wasted material (spoilage) be recognized ascurrent-period charges and fixed production overhead costs be allocated toinventory based on the normal capacity of production facilities. Normalcapacity is defined as “the production expected to be achieved over a number ofperiods or seasons under normal circumstances, taking into account the loss ofcapacity resulting from planned maintenance.” Companies will no longer be permitted to capitalize inventory costs onthe balance sheet when the production defect rate varies significantly from theexpected defect rate. SFAS No. 151 is effective for inventory costsincurred during fiscal years beginning after June 15, 2005.  The Company will adopt SFAS No. 151effective April 1, 2006. Adoption of the provisions of SFAS No. 151is not expected to have a material impact on the Company’s financial condition,results of operations, or liquidity. However, unforeseen changes in any of thefactors surrounding the estimates imbedded in the determination of inventoryvalues and cost of sales could have a material impact on cost of sales underSFAS No. 151. Such changes in factors and estimates include but are notlimited to: production levels and capacity, changes in the prices paid for rawmaterials, supplies, and labor, changes in yield, potency, and quality ofbiomass, and changes in processing or production methods.

In December 2004, the FASB issued SFASNo. 153, “Exchange of Nonmonetary Assets, an amendment of APB OpinionNo. 29, ‘Accounting for Nonmonetary Transactions.’”  SFASNo. 153 is based on the principle that exchange of nonmonetary assetsshould be measured based on the fair market value of the assets exchanged. SFASNo. 153 eliminates the exception of nonmonetary exchanges of similarproductive assets and replaces it with a general exception for exchanges ofnonmonetary assets that do not have commercial substance. SFAS No. 153 iseffective for nonmonetary asset exchanges in fiscal periods beginning afterJune 15, 2005. The Company will adopt SFAS No. 153 effectiveApril 1, 2006. Adoption of the provisions of SFAS No. 153 is notexpected to have a material impact on the Company’s financial condition,results of operations, or liquidity.

 InMarch 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accountingfor Conditional Asset Retirement Obligations—an interpretation of FASBStatement No. 143.”  FIN 47 clarifies that the term “conditionalasset retirement obligation” as used in FASB Statement No. 143, “Accountingfor Asset Retirement Obligations,” refers to a legal obligation to perform anasset retirement activity in which the timing and (or) method of settlement areconditional on a future event that may or may not be within the control of theentity. Accordingly, an entity is required to recognize a liability for thefair value of a conditional asset retirement obligation if the fair value ofthe liability can be reasonably estimated. FIN 47 is effective for fiscal yearsending after December 15, 2005. The Company adopted the provisions of FIN47 effective April 2005. Adoption of the provisions of FIN 47 had nomaterial impact on the Company’s financial condition, results of operations orliquidity.

On March 29, 2005, the Securities and ExchangeCommission (SEC) staff issued Staff Accounting Bulletin No. 107, “Share-BasedPayment” (SAB No. 107), which expressed the SEC staff’s views on SFASNo. 123R, but did not modify any of SFAS No. 123R’s provisions. The viewsexpressed by the SEC in SAB No. 107 in conjunction with its assessment ofSFAS No. 123R are, for this Company’s purposes, consistent with therequirements of SFAS No. 123R which the Company will, as explained above,adopt effective April 1, 2006.

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections, a replacement of APB Opinion No. 20 andFASB Statement No. 3.”  SFASNo. 154 requires retrospective application for voluntary changes inaccounting principle unless it is impracticable to do so. In addition, indirecteffects of a change in accounting principle should be recognized in the periodof the accounting change. SFAS No. 154 is effective for accounting changesand corrections of errors made in fiscal years beginning afterDecember 15, 2005. The Company adopted SFAS No. 154 effective April1, 2006, also including prior period restated financial statements and notesthereto included in this document. The impact of adopting SFAS No. 154 isdocumented throughout this amended Form 10-K/A.

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**Application ofCritical Accounting Policies and Estimates**

The Company’s discussion and analysis of its financialcondition and results of operations are based upon the Company’s consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation offinancial statements in conformity with those accounting principles requiresmanagement to make judgments and estimates that affect the amounts reported inthe consolidated financial statements and accompanying notes. Actual resultscould differ from those estimates. The Company regularly re-evaluates itsjudgments and estimates which are based upon historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances. The Company believes that of its significant accountingpolicies, policies that may involve a higher degree of judgment and complexityare inventory valuations, valuation of equipment and leasehold improvements andlong-lived assets, and income taxes.

The Company recognizes revenues when goods are shipped(FOB shipping point) and when significant risks and benefits of ownership aretransferred.

The Company is required to state inventories at thelower of cost or market. Cost is defined as the sum of the applicableexpenditures and charges directly or indirectly incurred in bringinginventories to their existing condition and location. Cost for inventorypurposes may be determined under any one of several assumptions as to the flowof cost factors, such as first-in, first-out; average cost; and last-in,first-out. Our inventories are stated at the lower of cost, which approximatesfirst-in, first-out, or market. Inventory values are subject to many criticalestimates, and unforeseen changes in any of the factors surrounding theestimates imbedded in the determination of inventory values and cost of salescould have a material impact on the Company’s results. Such changes in factorsand estimates include but are not limited to: production levels and capacity,changes in the prices paid for raw materials, supplies, and labor, changes inyield, potency, and quality of biomass, changes in processing or productionmethods, and changes in the carrying value of our inventories resulting fromthe prices our customers are willing to pay for our products.

Equipment and leasehold improvements are reported atcost. Self-constructed leasehold improvements include design, construction andsupervision costs. These costs are recorded in construction in progress and aretransferred to equipment and leasehold improvements when construction iscompleted and the facilities are placed in service. If the Company experiencesimpairment to its equipment or leasehold improvement, we would account for theimpairment in accordance with SFAS No. 144. Pursuant to SFAS No. 144,long-lived assets, such as property, plant and equipment and purchasedintangibles subject to amortization shall be reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to the estimatedundiscounted future cash flows expected to be generated by the asset. If thecarrying amount of an asset exceeds its estimated future cash flows, animpairment charge is recognized to the extent that the carrying amount exceedsthe asset’s fair value. The development of estimated future cash flows includesmany significant assumptions which are subject to change.

Income taxes are accounted for under the asset andliability method. The asset and liability method requires the recognition ofdeferred tax assets and liabilities for the expected future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their tax bases and operating loss and taxcredit carryforwards. Deferred tax assets and liabilities are measured using enactedincome tax rates applicable to the period in which the deferred tax assets orliabilities are expected to be recovered or settled. The Company records avaluation allowance to reduce its deferred tax assets to the amount that itbelieves is more likely than not to be realized. Judgment is required inassessing the need for the valuation allowance. The ultimate realization ofdeferred tax assets is dependent upon the generation of future taxable incomeduring the periods in which those temporary differences become deductible.Should the Company generate sustained taxable income in the future, managementmay conclude that a portion or all of the existing valuation allowance is nolonger required.

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**Item7A. Quantitative and Qualitative Disclosures About Market Risk**

*The information in Item 7A included in the OriginalFiling has not been updated for information or events occurring after the dateof the Original Filing and has not been updated to reflect the passage of timesince the date of the Original Filing.*

We have neverentered into any transactions using derivative financial instruments orderivative commodity instruments and believe that our exposure to market riskassociated with other financial instruments is not material.

We have a term loan agreement which adjusts quarterlybased on the prime rate. As such we are exposed to the interest rate riskwhereby a 1% increase in the prime rate would lead to an increase ofapproximately $16,000 in interest expense for the year ending March 31,2007 (based on March 31, 2006 amounts outstanding).

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**Item8. Financial Statements and Supplementary Data**

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board ofDirectors and Stockholders

CyanotechCorporation:

We have audited theaccompanying consolidated balance sheets of Cyanotech Corporation andsubsidiaries (the Company) as of March 31, 2006 and 2005, and the relatedconsolidated statements of operations, stockholders’ equity and comprehensiveincome (loss), and cash flows for each of the years in the three-year periodended March 31, 2006. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Cyanotech Corporation andsubsidiaries as of March 31, 2006 and 2005, and the results of their operationsand their cash flows for each of the years in the three-year period ended March31, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 13 tothe consolidated financial statements, the Company has restated itsconsolidated financial statements as of March 31, 2006 and 2005 and for each ofthe years in the three-year period ended March 31, 2006.

/s/  KPMG LLP

Honolulu,Hawaii

June16, 2006, except as to Note 13, which

is as of February 13, 2007

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CYANOTECHCORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31,2006 and 2005

 
| ** **                                                                                                                                        | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------|------------|
| **(in thousands, except share data)**                                                                                         | ** ** | **(As restated, all periods)** | ** ** |
| ASSETS                                                                                                                                            |       |                                          |       |     |       |
| ** **                                                                                                                                        |       |                                          |       |     |       |
| Current assets:                                                                                                                                   |       |                                          |       |     |       |
| Cash and cash equivalents                                                                                                                         |       | $                                             | 1,835      |     | $          | 2,005 |   |
| Short-term investments                                                                                                                            |       | 700                                           |       | 1,000    |       |
| Accounts receivable, net of allowance for doubtful  accounts of $25 in 2006 and $46 in 2005                                                       |       | 2,209                                         |       | 2,069    |       |
| Refundable income taxes                                                                                                                           |       | 17                                            |       | 75       |       |
| Inventories                                                                                                                                       |       | 2,056                                         |       | 1,832    |       |
| Prepaid expenses and other current assets                                                                                                         |       | 99                                            |       | 85       |       |
| Total current assets                                                                                                                              |       | 6,916                                         |       | 7,066    |       |
|                                                                                                                                              |       |                                          |       |     |       |
| Equipment and  leasehold improvements, net                                                                                                        |       | 10,164                                        |       | 11,174   |       |
| Other assets                                                                                                                                      |       | 515                                           |       | 547      |       |
| Total assets                                                                                                                                      |       | $                                             | 17,595     |     | $          | 18,787 |   |
|                                                                                                                                              |       |                                          |       |     |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                        |       |                                          |       |     |       |
|                                                                                                                                              |       |                                          |       |     |       |
| Current  liabilities:                                                                                                                             |       |                                          |       |     |       |
| Current maturities of long-term debt                                                                                                              |       | $                                             | 364        |     | $          | 355 |   |
| Accounts payable                                                                                                                                  |       | 485                                           |       | 977      |       |
| Accrued expenses                                                                                                                                  |       | 420                                           |       | 387      |       |
| Total current liabilities                                                                                                                         |       | 1,269                                         |       | 1,719    |       |
|                                                                                                                                              |       |                                          |       |     |       |
| Long-term debt,  excluding current maturities                                                                                                     |       | 1,387                                         |       | 1,743    |       |
| Total liabilities                                                                                                                                 |       | 2,656                                         |       | 3,462    |       |
| Stockholders’  equity:                                                                                                                       |       |                                          |       |     |       |
| Common stock of $.005 par value, authorized  30,000,000 shares; issued and outstanding 20,928,265 shares for 2006 and  20,896,265 shares for 2005 |       | 105                                           |       | 104      |       |
| Additional paid-in capital                                                                                                                        |       | 27,330                                        |       | 27,298   |       |
| Accumulated other comprehensive income  (loss)—foreign currency translation adjustments                                                      |       | (1                                            | )          | 27       |       |
| Accumulated deficit                                                                                                                               |       | (12,495                                       | )          | (12,104  | )          |
| Total stockholders’ equity                                                                                                                   |       | 14,939                                        |       | 15,325   |       |
| Total  liabilities and stockholders’ equity                                                                                                  |       | $                                             | 17,595     |     | $          | 18,787 |   |

 

***See accompanying notes toconsolidated financial statements***

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**CYANOTECHCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**Years ended March 31, 2006, 2005 and 2004**

** **
| ** **                                                         | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------|------------|----------|------------|
| **(in thousands, except per share data)** | ** ** | **(As restated, all periods)** | ** ** |
|  Net sales                                                    |       | $                                             | 11,131     |     | $          | 11,445   |       | $ | 11,582 |   |
| Cost of sales                                                      |       | 8,071                                         |       | 7,553    |       | 7,838    |       |
| Gross profit                                                       |       | 3,060                                         |       | 3,892    |       | 3,744    |       |
| Operating  expenses:                                               |       |                                          |       |     |       |     |       |
| Research and development                                           |       | 187                                           |       | 251      |       | 138      |       |
| Sales and marketing                                                |       | 1,312                                         |       | 1,189    |       | 1,225    |       |
| General and administrative                                         |       | 1,814                                         |       | 1,728    |       | 1,747    |       |
| Total operating expense                                            |       | 3,313                                         |       | 3,168    |       | 3,110    |       |
| Income (loss) from operations                                      |       | (253                                          | )          | 724      |       | 634      |       |
| Other income  (expense):                                           |       |                                          |       |     |       |     |       |
| Interest income                                                    |       | 46                                            |       | 31       |       | 16       |       |
| Interest expense                                                   |       | (180                                          | )          | (163     | )          | (286     | )          |
| Other income (expense), net                                        |       | (10                                           | )          | 15       |       | 25       |       |
| Total other expense, net                                           |       | (144                                          | )          | (117     | )          | (245     | )          |
| Income (loss) before income taxes                                  |       | (397                                          | )          | 607      |       | 389      |       |
| Income tax expense (benefit)                                       |       | (6                                            | )          | 6        |       | 71       |       |
| Net income (loss)                                                  |       | $                                             | (391       | )        | $          | 601      |       | $ | 318 |   |
| Net income  (loss) per share:                                      |       |                                          |       |     |       |     |       |
| Basic                                                              |       | $                                             | (0.02      | )        | $          | 0.03     |       | $ | 0.02 |   |
| Diluted                                                            |       | $                                             | (0.02      | )        | $          | 0.03     |       | $ | 0.02 |   |
| Shares used in  calculation of net income (loss) per share:        |       |                                          |       |     |       |     |       |
| Basic                                                              |       | 20,904                                        |       | 20,784   |       | 18,971   |       |
| Diluted                                                            |       | 20,904                                        |       | 20,979   |       | 19,111   |       |

 

***Seeaccompanying notes to consolidated financial statements***

32

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**CYANOTECHCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYANDCOMPREHENSIVE INCOME (LOSS)**

**Yearsended March 31, 2006, 2005 and 2004**
| **(in thousands, except share data)**                 | ** ** | **Common  Stock  Shares** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Comprehensive  Income  (Loss)** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|-----------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                | ** ** | ** **                | ** ** | ** **        | ** ** | ** **                       | ** ** | **(As restated)**   | ** ** | **(As restated)**            | ** ** | ** **                                                | ** ** | **(As restated)**                | ** ** |
| Balances at  March 31, 2003  (As reported)                           |       | 18,316,701                |       | $                 | 92         |                             | $          | 25,418                   |       | $                                 | (13,234    | )                                                         | $          | —                                |       | $ | (3 | ) | $ | 12,273 |   |
| Prior period  adjustments                                                 |       | —                    |       | —            |       | —                           |       | 211                      |       |                              |       | —                                                    |       | 211                                   |       |
| Balances at  March 31, 2003  (As restated)                           |       | 18,316,701                |       | 92                |       | 25,418                           |       | (13,023                  | )          | —                            |       | (3                                                        | )          | 12,484                                |       |
| Conversion of  debentures to common stock                                 |       | 1,923,076                 |       | 10                |       | 1,240                            |       | —                   |       | —                            |       | —                                                    |       | 1,250                                 |       |
| Issuances of  common stock for:                                           |       |                      |       |              |       |                             |       |                     |       |                              |       |                                                      |       |                                  |       |
| Exercise of stock options for cash                                        |       | 45,800                    |       | —            |       | 43                               |       | —                   |       | —                            |       | —                                                    |       | 43                                    |       |
| Exercise of warrants for cash, net of costs $19                           |       | 429,234                   |       | 2                 |       | 451                              |       | —                   |       | —                            |       | —                                                    |       | 453                                   |       |
| Third party services, at fair value                                       |       | 10,000                    |       | —            |       | 5                                |       | —                   |       | —                            |       | —                                                    |       | 5                                     |       |
| Non-employee directors’ services, at fair value                      |       | 6,000                     |       | —            |       | 3                                |       | —                   |       | —                            |       | —                                                    |       | 3                                     |       |
| Common stock  purchased at fair value and cancelled                       |       | (16,565                   | )          | —            |       | (19                              | )          | —                   |       | —                            |       | —                                                    |       | (19                                   | )          |
| Comprehensive  income:                                                    |       |                      |       |              |       |                             |       |                     |       |                              |       |                                                      |       |                                  |       |
| Net income (as restated)                                                  |       | —                    |       | —            |       | —                           |       | 318                      |       | 318                               |       | —                                                    |       | 318                                   |       |
| Other comprehensive income—foreign currency  translation adjustments |       | —                    |       | —            |       | —                           |       | —                   |       | 33                                |       | 33                                                        |       | 33                                    |       |
| Comprehensive income                                                      |       | —                    |       | —            |       | —                           |       | —                   |       | 351                               |       | —                                                    |       |                                  |       |
| Balances at  March 31, 2004  (As restated)                           |       | 20,714,246                |       | 104               |       | 27,141                           |       | (12,705                  | )          | —                            |       | 30                                                        |       | 14,570                                |       |
| Issuances of  common stock for:                                           |       |                      |       |              |       |                             |       |                     |       |                              |       |                                                      |       |                                  |       |
| Exercise of stock options for cash                                        |       | 36,019                    |       | —            |       | 32                               |       | —                   |       | —                            |       | —                                                    |       | 32                                    |       |
| Exercise of warrants for cash                                             |       | 132,000                   |       | —            |       | 104                              |       | —                   |       | —                            |       | —                                                    |       | 104                                   |       |
| Non-employee directors’ services, at fair value                      |       | 14,000                    |       | —            |       | 15                               |       | —                   |       | —                            |       | —                                                    |       | 15                                    |       |
| Issuance of  stock options for third party services, at fair value        |       | —                    |       | —            |       | 6                                |       | —                   |       | —                            |       | —                                                    |       | 6                                     |       |
| Comprehensive  income:                                                    |       |                      |       |              |       |                             |       |                     |       |                              |       |                                                      |       |                                  |       |
| Net income (as restated)                                                  |       | —                    |       | —            |       | —                           |       | 601                      |       | 601                               |       | —                                                    |       | 601                                   |       |
| Other comprehensive loss—foreign currency  translation adjustments   |       | —                    |       | —            |       | —                           |       | —                   |       | (3                                | )          | (3                                                        | )          | (3                                    | )          |
| Comprehensive income                                                      |       | —                    |       | —            |       | —                           |       | —                   |       | 598                               |       | —                                                    |       | —                                |       |
| Balances at  March 31, 2005  (As restated)                           |       | 20,896,265                |       | 104               |       | 27,298                           |       | (12,104                  | )          | —                            |       | 27                                                        |       | 15,325                                |       |
| Issuances of  common stock for:                                           |       |                      |       |              |       |                             |       |                     |       |                              |       |                                                      |       |                                  |       |
| Exercise of stock options for cash                                        |       | 14,500                    |       | 1                 |       | 8                                |       | —                   |       | —                            |       | —                                                    |       | 9                                     |       |
| Non-employee directors’ services, at fair value                      |       | 17,500                    |       | —            |       | 14                               |       | —                   |       | —                            |       | —                                                    |       | 14                                    |       |
| Compensation expense for accelerated vesting of  stock options            |       | —                    |       | —            |       | 10                               |       | —                   |       | —                            |       | —                                                    |       | 10                                    |       |
| Comprehensive  loss:                                                      |       |                      |       |              |       |                             |       |                     |       |                              |       |                                                      |       |                                  |       |
| Net loss (as restated)                                                    |       | —                    |       | —            |       | —                           |       | (391                     | )          | (391                              | )          | —                                                    |       | (391                                  | )          |
| Other comprehensive loss—foreign currency  translation adjustments   |       | —                    |       | —            |       | —                           |       | —                   |       | (28                               | )          | (28                                                       | )          | (28                                   | )          |
| Comprehensive loss                                                        |       | —                    |       | —            |       | —                           |       | —                   |       | $                                 | (419       | )                                                         | —     |                                  | —     |   |
| Balances at  March 31, 2006  (As restated)                           |       | 20,928,265                |       | $                 | 105        |                             | $          | 27,3300                  |       | $                                 | (12,495    | )                                                         |       |                                  | $          | (1 | ) | $ | 14,939 |   |

 

***See accompanying notes toconsolidated financial statements***

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**CYANOTECHCORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Years endedMarch 31, 2006, 2005 and 2004**
| ** **                                                                                                 | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------|------------|----------|------------|
| **(in thousands)**                                                                                    | ** ** | **(As restated, all periods)** | ** ** |
|                                                                                                       |       |                                          |       |     |       |     |       |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                                     |       |                                          |       |     |       |     |       |
| Net income  (loss)                                                                                         |       | $                                             | (391       | )        | $          | 601      |       | $ | 318 |   |
| Adjustments to  reconcile net income (loss) to cash provided by operating activities:                      |       |                                          |       |     |       |     |       |
| Depreciation and amortization                                                                              |       | 1,321                                         |       | 1,319    |       | 1,346    |       |
| Amortization of debt issue costs and other assets                                                          |       | 37                                            |       | 27       |       | 65       |       |
| Issuance of common stock and stock options in  exchange for services                                       |       | 14                                            |       | 21       |       | 8        |       |
| Compensation expense for accelerated vesting of  stock options                                             |       | 10                                            |       | —   |       | —   |       |
| Provision for (reduction of) allowance for doubtful  accounts                                              |       | (8                                            | )          | 50       |       | 36       |       |
| Net (increase) decrease in assets:                                                                         |       |                                          |       |     |       |     |       |
| Accounts receivable                                                                                        |       | (132                                          | )          | 92       |       | (418     | )          |
| Refundable income taxes                                                                                    |       | 58                                            |       | (39      | )          | (6       | )          |
| Inventories                                                                                                |       | (224                                          | )          | (628     | )          | 396      |       |
| Prepaid expenses and other assets                                                                          |       | (47                                           | )          | (1       | )          | (65      | )          |
| Net increase (decrease) in liabilities:                                                                    |       |                                          |       |     |       |     |       |
| Accounts payable                                                                                           |       | (492                                          | )          | 103      |       | 71       |       |
| Accrued expenses                                                                                           |       | 33                                            |       | (217     | )          | 215      |       |
| Net cash provided by operating activities                                                                  |       | 179                                           |       | 1,328    |       | 1,966    |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                     |       |                                          |       |     |       |     |       |
| Maturity  (purchase) of short-term investments                                                             |       | 300                                           |       | (900     | )          | (100     | )          |
| Investment in  equipment and leasehold improvements                                                        |       | (311                                          | )          | (649     | )          | (413     | )          |
| Net cash used in investing activities                                                                      |       | (11                                           | )          | (1,549   | )          | (513     | )          |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                                     |       |                                          |       |     |       |     |       |
| Proceeds from  issuance of common stock and exercise of stock options and warrants, net of  issuance costs |       | 9                                             |       | 136      |       | 477      |       |
| Release of  restricted cash deposit                                                                        |       | —                                        |       | —   |       | 250      |       |
| Principal  payments on long-term debt                                                                      |       | (347                                          | )          | (341     | )          | (328     | )          |
| Net cash provided by (used in) financing activities                                                        |       | (338                                          | )          | (205     | )          | 399      |       |
| Net increase  (decrease) in cash and cash equivalents                                                      |       | (170                                          | )          | (426     | )          | 1,852    |       |
| Cash and cash  equivalents at beginning of year                                                            |       | 2,005                                         |       | 2,431    |       | 579      |       |
| Cash and cash  equivalents at end of year                                                                  |       | $                                             | 1,835      |     | $          | 2,005    |       | $ | 2,431 |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                                         |       |                                          |       |     |       |     |       |
| Cash paid during  the year for:                                                                            |       |                                          |       |     |       |     |       |
| Interest                                                                                                   |       | $                                             | 148        |     | $          | 132      |       | $ | 260 |   |
| Income taxes                                                                                               |       | $                                             | —     |     | $          | 178      |       | $ | 17 |   |
| Supplemental  disclosure of non-cash financing activities:                                                 |       |                                          |       |     |       |     |       |
| Conversion of  debentures to common stock                                                                  |       | $                                             | —     |     | $          | —   |       | $ | 1,250 |   |

 

***Seeaccompanying notes to consolidated financial statements***

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**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**Note 1 Description of Businessand Summary of Accounting Policies**

***Restatement***

*Theaccompanying consolidated financial statements have been restated for allperiods presented.  The nature of therestatements and the effect on the consolidated financial statement line itemsis discussed in Note 13 of our notes to the consolidated  financial statements.  In addition, certain disclosures in thefollowing notes have been restated consistent with the consolidated financialstatements.*

**Description of Business**

CyanotechCorporation (the Company) cultivates and produces high-value, high-qualitynatural products derived from microalgae. The Company currently cultivates, ona large-scale basis, two microalgal species from which its two major productlines are derived. The Company is currently producing microalgal products forthe nutritional supplement, animal feed/pigments and immunological diagnosticsmarkets. The Company manufactures all of its products in the United States andsells its products worldwide. As the Company’s operations are solely related tomicroalgae-based products, management of the Company considers its operationsto be in one industry segment. Correspondingly, the Company records revenue andcost of sales information by product category but does not record operatingexpenses by such product category.

**Principles of Consolidation**

The accompanyingconsolidated financial statements include the accounts of Cyanotech Corporationand its wholly owned subsidiaries, Nutrex Hawaii, Inc. (“Nutrex Hawaii” or“Nutrex”) and Cyanotech Japan YK (“Cyanotech Japan” or “CJYK”). All significantintercompany balances and transactions have been eliminated in consolidation.

**Estimates and Assumptions**

The preparation ofthe consolidated financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of any contingent assets and liabilities as of the date of thefinancial statements and the reported amounts of revenues and expenses duringthe period reported. Management reviews theses estimates and assumptionsperiodically and reflects the effect of revisions in the period that they aredetermined to be necessary. Actual results could differ significantly fromthose estimates and assumptions.

**Foreign Currency Translation andRisk**

The Japanese Yenis the functional currency for Cyanotech Japan. As such, Cyanotech Japan’sassets and liabilities are translated at the exchange rate on the balance sheetdate and revenues and expenses are translated at average rates of exchangeprevailing during the year. Translation adjustments are charged or credited toaccumulated other comprehensive income (loss) in stockholders’ equity. Certaintransactions for Cyanotech Japan are exposed to foreign currency risk. TheCompany actively monitors and manages the balances subject to foreign currencyrisk. Currently, we do not hedge any of our foreign currency risk through theuse of derivative financial instruments.

**Financial Instruments**

Cash and cashequivalents consist of cash and highly liquid debt instruments such ascommercial paper and certificates of deposit with maturities of three months orless from the date of purchase. Short-term investments are certificates of depositsmaturing between three and nine months from the purchase date and are stated atcost. Interest earned on short-term investments is deposited monthly into anaccessible cash account and is therefore classified as cash and cashequivalents. The Company’s practice is to invest cash with financialinstitutions that have acceptable credit ratings and to limit the amount ofcredit exposure to any one financial institution.

Statement ofFinancial Accounting Standards (“SFAS”) No. 107, “Disclosures About FairValue of Financial Instruments,” defines the fair value of a financialinstrument as the amount at which the instrument could be exchanged in a

35

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current transactionbetween willing parties. Management applies the following methods andassumptions in estimating the fair value of each class of financial instrumentsfor all periods presented.

*Cash andCash Equivalents, Short-Term Investments, Accounts Receivable and AccountsPayable*   Due to the short-term nature of theseinstruments, management believes that the carrying amounts approximate fairvalue.

*Long-TermDebt*   The carrying amount of long-term debtapproximates fair value as interest rates applied to the underlying debt areadjusted quarterly to market interest rates which approximates current interestrates for similar debt instruments of comparable maturities.

**Trade Accounts Receivable andAllowance for Doubtful Accounts**

Trade accountsreceivable are recorded at the invoiced amount and do not accrue interest. Theallowance for doubtful accounts reflects management’s best estimate of probablecredit losses inherent in the accounts receivable balance. The Companydetermines the allowance based on historical experience, specificallyidentified nonpaying accounts and other currently available evidence. TheCompany reviews its allowance for doubtful accounts monthly with focus onsignificant individual past due balances over 90 days. All other balances arereviewed on a pooled basis. Account balances are charged off against theallowance after all means of collection have been exhausted and the potentialfor recovery is considered remote. The Company does not have any off-balancesheet credit exposure related to its customers.

**Inventories**

Inventories arestated at the lower of cost (which approximates first-in, first-out) or market.Market is defined as sales price less cost to dispose and a normal profitmargin.

**Equipment and LeaseholdImprovements and Long-Lived Assets**

Equipment andleasehold improvements are stated at cost. Depreciation and amortization areprovided using the straight-line method over the estimated useful lives forequipment and furniture and fixtures, or the shorter of the land lease term(see Note 3) or estimated useful lives for leasehold improvements as follows:

| Equipment               |   | 3 to 10 years  |
|-------------------------|--------|----------------|
| Furniture and  fixtures |   | 7 years        |
| Leasehold  improvements |   | 10 to 20 years |

 

The Companyaccounts for impairment of its equipment or leasehold improvements inaccordance with SFAS No. 144. Pursuant to SFAS No. 144, long-livedassets, such as property, plant and equipment and purchased intangibles subjectto amortization shall be reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to the estimated undiscountedfuture cash flows expected to be generated by the asset. If the carrying amountof an asset exceeds its estimated future cash flows, an impairment charge isrecognized to the extent that the carrying amount exceeds the asset’s fairvalue.

Assets to bedisposed of and related liabilities would be separately presented in theconsolidated balance sheet. Assets to be disposed of would be reported at thelower of the carrying value or fair value less costs to sell and would not bedepreciated.

SFAS No. 143 “Accountingfor Asset Retirement Obligations” requires the fair value of a liability for anasset retirement obligation to be recognized in the period in which it isincurred if a reasonable estimate of fair value can be made. The associatedasset retirement costs would be capitalized as part of the carrying amount ofthe long-lived asset and depreciated over the life of the asset. The liabilityis accreted at the end of each period through charges to operating expense. Ifthe obligation is settled for other than the carrying amount of the liability,the Company will recognize a gain or loss on settlement.

36

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**Revenue Recognition**

The Companyrecognizes revenues when goods are shipped (FOB shipping point) and whensignificant risks and benefits of ownership are transferred.

**Research and Development andAdvertising**

Research anddevelopment and advertising costs are expensed as incurred.

**Income Taxes**

Income taxes areaccounted for under the asset and liability method. The asset and liabilitymethod requires the recognition of deferred tax assets and liabilities for theexpected future tax consequences attributable to differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir tax bases and operating loss and tax credit carryforwards. Deferred taxassets and liabilities are measured using enacted income tax rates applicableto the period in which the deferred tax assets or liabilities are expected tobe recovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes theenactment date.

**Stock Option Plans**

The Companyapplies the intrinsic value-based method of accounting prescribed by AccountingPrinciple Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees”, and related interpretations, in accounting for its fixed plan stockoptions issued to employees, including non-employee directors. As such,compensation expense would be recorded on the date of grant only if the currentmarket price of the underlying stock exceeded the exercise price. The Companyapplies the fair value-based method of accounting prescribed by SFASNo. 123, “Accounting for Stock-Based Compensation”, and Emerging IssuesTask Force (“EITF”) Issue No. 96-18, “Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services” in accounting for its fixed planstock options issued to outside third parties other than non-employeedirectors. As such, expenses representing the fair value of stock-based awardson the date of grant are recognized over the vesting period.

As allowed by SFASNo. 123, for the fiscal year ended March 31, 2006 the Company haselected to continue to apply the intrinsic value-based method of accounting foremployee based stock options and adopted only the disclosure requirements ofSFAS No. 123.

On March 23,2006, in response to SFAS No. 123(R), the Compensation and Stock OptionCommittee of the Company’s Board of Directors approved accelerating the vestingof all outstanding unvested employee incentive stock options under theprovisions of APB Opinion No. 25, and related interpretations. Optionsheld by non-employees and directors were not included in the vestingacceleration since all such options were already fully vested. The decision toaccelerate vesting of all outstanding unvested employee incentive stock optionswas made to avoid recognizing, pursuant to the Company’s April 1, 2006adoption of SFAS No. 123(R), the non-cash compensation cost related tounvested Employee Incentive Stock Options. These would otherwise have beenunvested as of March 31, 2006 and would have been reflected as a non-cashexpense in future statements of operations.

Due to the Companyhaving fewer than 100 employees, it was deemed prudent to accelerate thevesting of all outstanding employee incentive stock options as noted above.This resulted in the company recognizing non-cash compensation expense ofapproximately $10,000 for the year ended March 31, 2006, representing theestimated benefit of accelerated vesting for those unvested incentive optionswith exercise prices less than the fair market value of the Company’s stock onMarch 23, 2006. It is estimated that the total future compensation expensethat will be avoided in future years is approximately $78,000, before tax,based on the March 23, 2006 acceleration date. The foregoing amount wouldhave primarily impacted fiscal years ending March 31, 2007 throughMarch 31, 2009.

Due to the Company’stax net operating loss carry forward position, no tax benefits are received orare expected to be received over the remaining life of the 2005 Stock Plan.Accordingly, Stock Plan amounts are the same both before and after tax.

37

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At the effectivevesting acceleration date of March 23, 2006, there were 20,000 unvestedemployee incentive stock options outstanding under the company’s 1995 and 2005Stock Plans, and 162,855 unvested employee incentive stock options outstandingunder the company’s 1994 and 2004 Stock Plans. Of the outstanding incentivestock options, 76,492 had exercise prices which were greater than the $0.68 pershare fair market value of the Company’s common stock on March 23, 2006.The remaining 106,363 options had exercise prices less than or equal to the$0.68 fair market value of the Company’s stock on March 23, 2006. As ofthe effective vesting acceleration date, exercise prices were $1.10 perincentive option for the 76,492 options with exercise prices greater than$0.68, and ranging from $0.50 to $0.65 per incentive option for the 106,363options with exercise prices less than or equal to $0.68.

The followingtable illustrates the effect on net income (loss) and net income (loss) percommon share if the Company had applied the fair-value method under SFASNo. 123 to its employee stock options: 
| ** **                                                                                              | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------|------------|----------|------------|
| **(in thousands, except per share amounts)**                                   | ** ** | **(As restated, all periods)** | ** ** |
| Net income  (loss), as reported                                                                         |       | $                                             | (391       | )        | $          | 601      |       | $ | 318 |   |
| Reverse  accelerated vesting expense recognized under intrinsic value method                            |       | 10                                            |       | —   |       | —   |       |
| Deduct  stock-based employee compensation expense determined under fair-value method  for all awards(1) |       | (135                                          | )          | (90      | )          | (82      | )          |
| Pro forma net  income (loss)                                                                            |       | $                                             | (516       | )        | $          | 511      |       | $ | 236 |   |
| Net income  (loss) per common share                                                                     |       |                                          |       |     |       |     |       |
| —Basic and  Diluted:                                                                               |       |                                          |       |     |       |     |       |
| As reported                                                                                             |       | $                                             | (0.02      | )        | $          | 0.03     |       | $ | 0.02 |   |
| Pro forma                                                                                               |       | $                                             | (0.02      | )        | $          | 0.02     |       | $ | 0.01 |   |

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(1)             Forthe year ended March 31, 2006, the amount includes the impact ofaccelerated vesting of unvested employee stock options on March 23, 2006amounting to $78,000.

**New Accounting Pronouncements**

InDecember 2005, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 123 (Revised 2004) (SFAS No. 123R), “Share-Based Payment”,which is a revision of FASB Statement No. 123 “Accounting for Stock-BasedCompensation.” SFAS No. 123R requires an entity to measure the cost ofemployee services received in exchange for an award. If an award vests orbecomes exercisable based on the achievement of a condition other than service,performance or market condition, the award is liability-classified.Liability-classified awards are remeasured to fair value at each balance sheetdate until the award is settled. Equity-classified awards, including grants ofemployee stock options, are measured at the grant-date fair value of the awardand are not subsequently remeasured. The cost of equity-classified awards isrecognized in the income statement over the period during which an employee isrequired to provide the service in exchange for the award. Currently thecompany accounts for its employee and non-employee director stock options underthe intrinsic value provision of APB Opinion No. 25. The Company isrequired to adopt the provisions for SFAS No. 123R as of the beginning ofthe first annual reporting period that begins after June 15, 2005,although earlier adoption is permitted. Management has elected to adopt theprovisions of SFAS No. 123R, “Share-Based Payment,” for its share-basedcompensation plans effective April 1, 2006 using the Modified Prospectivemethod of accounting.

SFAS No. 123Roffers several alternatives for implementation, among them the ModifiedProspective Method of accounting for compensation costs related to “Share BasedPayments.” In the Company’s case its Employee Incentive Options are “plainvanilla,” as defined by the SEC in SAB No. 107, normally vesting over afive year period and exercisable under the terms of the Company’s Stock Plan upto ten years from date of grant. The Company has determined that aBlack-Scholes-Merton model will be most reflective of the fair value of optiongrants. The Company’s methodology will incorporate volatility measurementsderived from the actual trading history of the Company’s publicly traded sharesand will incorporate exercise, forfeiture, and other required measurementsderived from actual results.

Because theCompany’s future Employee Incentive Stock Options are expected to be “plainvanilla” in the same sense the term is used by the SEC in SAB No. 107,they will be reflected only in the Company’s Equity and Compensation

38

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Expense accounts. Atpresent the Company does not have any unvested Employee Incentive Stock Optionssubject to measurement and recording under the requirements of SFASNo. 123R, “Share-Based Payment.” If Stock Options are granted in thefuture the impact on the Company’s compensation expense and net income willdepend on many variables, and assumptions, including those previouslydiscussed. Because there are no unvested employee incentive options as ofApril 1, 2006 the Company does not expect to record any share-basedpayment expense for currently outstanding employee incentive options in fiscal2007. Future employee incentive options, if granted, will be recognized andexpensed under the provisions of SFAS No. 123R.

InNovember 2004, the FASB issued SFAS No. 151 “Inventory Costs—anamendment of Accounting Research Bulletin No. 43, Chapter 4”. SFASNo. 151 requires that abnormal amounts of freight, handling costs andwasted material (spoilage) be recognized as current-period charges and fixedproduction overhead costs be allocated to inventory based on the normalcapacity of production facilities. Normal capacity is defined as “theproduction expected to be achieved over a number of periods or seasons undernormal circumstances, taking into account the loss of capacity resulting fromplanned maintenance.” Companies will no longer be permitted to capitalizeinventory costs on the balance sheet when the production defect rate variessignificantly from the expected defect rate. SFAS No. 151 is effective forinventory costs incurred during fiscal years beginning after June 15,2005. The Company will adopt SFAS No. 151 effective April 1, 2006.Adoption of the provisions of SFAS No. 151 is not expected to have amaterial impact on the Company’s financial condition, results of operations, orliquidity. However, unforeseen changes in any of the factors surrounding theestimates imbedded in the determination of inventory values and cost of salescould have a material impact on cost of sales under SFAS No. 151. Suchchanges in factors and estimates include but are not limited to: productionlevels and capacity, changes in the prices paid for raw materials, supplies,and labor, changes in yield, potency, and quality of biomass, and changes inprocessing or production methods.

InDecember 2004, the FASB issued SFAS No. 153, “Exchange of NonmonetaryAssets, an amendment of APB Opinion No. 29, ‘Accounting for NonmonetaryTransactions.’” SFAS No. 153 is based on the principle that exchange ofnonmonetary assets should be measured based on the fair market value of theassets exchanged. SFAS No. 153 eliminates the exception of nonmonetaryexchanges of similar productive assets and replaces it with a general exceptionfor exchanges of nonmonetary assets that do not have commercial substance. SFASNo. 153 is effective for nonmonetary asset exchanges in fiscal periodsbeginning after June 15, 2005. The Company will adopt SFAS No. 153effective April 1, 2006. Adoption of the provisions of SFAS No. 153is not expected to have a material impact on the Company’s financial condition,results of operations, or liquidity.

InMarch 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accountingfor Conditional Asset Retirement Obligations—an interpretation of FASBStatement No. 143.” FIN 47 clarifies that the term “conditional assetretirement obligation” as used in FASB Statement No. 143, “Accounting forAsset Retirement Obligations,” refers to a legal obligation to perform an assetretirement activity in which the timing and (or) method of settlement areconditional on a future event that may or may not be within the control of theentity. Accordingly, an entity is required to recognize a liability for thefair value of a conditional asset retirement obligation if the fair value ofthe liability can be reasonably estimated. FIN 47 is effective for fiscal yearsending after December 15, 2005. The Company adopted the provisions of FIN47 effective April 2005. Adoption of the provisions of FIN 47 had nomaterial impact on the Company’s financial condition, results of operations orliquidity.

On March 29,2005, the Securities and Exchange Commission (SEC) staff issued StaffAccounting Bulletin No. 107, “Share-Based Payment” (SAB No. 107),which expressed the SEC staff’s views on SFAS No. 123R, but did not modifyany of SFAS No. 123R’s provisions. . The views expressed by the SEC in SABNo. 107 in conjunction with its assessment of SFAS No. 123R are, forthis Company’s purposes, consistent with the requirements of SFAS No. 123Rwhich the Company will, as explained above, adopt effective April 1, 2006.

In May 2005,the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, areplacement of APB Opinion No. 20 and FASB Statement No. 3.” SFASNo. 154 requires retrospective application for voluntary changes inaccounting principle unless it is impracticable to do so. In addition, indirecteffects of a change in accounting principle should be recognized in the periodof the accounting change. SFAS No. 154 is effective for accounting changesand corrections of errors made in fiscal years beginning afterDecember 15, 2005.  The Companyadopted SFAS No. 154 effective April 1, 2006, also including prior periodrestated financial statements and notes thereto included in this document.

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**Note 2 Inventories**

Inventoriesconsist of the following as of March 31, 2006 and 2005: 

|                         | ** ** | **2006**               | ** ** | **2005** | ** ** |
|-------------------------|------------|------------------------|------------|----------|------------|
| **(in thousands)** | ** ** | **(As restated)** | ** ** |
| Raw materials           |       | $                      | 240        |     | $          | 253 |   |
| Work in process         |       | 260                    |       | 243      |       |
| Finished goods          |       | 1,432                  |       | 1,217    |       |
| Supplies                |       | 124                    |       | 119      |       |
|                    |       | $                      | 2,056      |     | $          | 1,832 |   |

 

**Note 3 Equipment and LeaseholdImprovements, Net**

Equipment andleasehold improvements consists of the following as of March 31, 2006 and2005:

|                                                 | ** ** | **2006**                | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| Equipment                                       |       | $                       | 10,461     |     | $          | 10,241 |   |
| Leasehold  improvements                         |       | 14,642                  |       | 14,603   |       |
| Furniture and  fixtures                         |       | 86                      |       | 86       |       |
|                                            |       | 25,189                  |       | 24,930   |       |
| Less accumulated  depreciation and amortization |       | (15,327                 | )          | (14,006  | )          |
| Construction  in-progress                       |       | 302                     |       | 250      |       |
|                                            |       | $                       | 10,164     |     | $          | 11,174 |   |

 

**Note 4 Accrued Expenses**

Components ofaccrued expenses as of March 31, 2006 and 2005 are as follows:

|                                   | ** ** | **2006**                | ** ** | **2005** | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                        | ** ** | **(in thousands)** | ** ** |
| Wages,  commissions and royalties |       | $                       | 181        |     | $          | 158 |   |
| Professional  fees                |       | 104                     |       | —   |       |
| Freight                           |       | 26                      |       | 88       |       |
| Other accrued  expenses           |       | 109                     |       | 141      |       |
|                              |       | $                       | 420        |     | $          | 387 |   |

 

**Note 5 Long-Term Debt**

Long-term debtconsists of the following as of March 31, 2006 and 2005:

|                                               | ** ** | **2006**                | ** ** | **2005** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                    | ** ** | **(in thousands)** | ** ** |
| Term loan                                     |       | $                       | 1,751      |     | $          | 2,098 |   |
| Less current  maturities                      |       | (364                    | )          | (355     | )          |
| Long-term debt,  excluding current maturities |       | $                       | 1,387      |     | $          | 1,743 |   |

 

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At March 31,2006, the aggregate maturities of long-term debt are as follows:

| Year ending March 31 | ** ** | **(in thousands)** | ** ** |
|-------------------------------------|------------|-------------------------|------------|
| 2007                                |       | $                       | 364        |   |
| 2008                                |       | 397                     |       |
| 2009                                |       | 434                     |       |
| 2010                                |       | 474                     |       |
| 2011                                |       | 82                      |       |
|                                |       | $                       | 1,751      |   |

 

*Term Loan Agreement*

InApril 2000, the Company executed a Term Loan Agreement (“Term Loan”) witha lender providing for $3.5 million in aggregate credit facilities, secured bythe Company’s assets. The Term Loan has a maturity date of May 1, 2010 andis payable in 120 equal monthly principal and interest payments. The interestrate under this Term Loan, in the absence of a default under the agreement, isthe prime rate, in effect as of the close of business on the first day of eachcalendar quarter, plus 1%. As of March 31, 2006 and 2005, the prime ratewas 7.25% and 5.25%, respectively. The Company is in compliance with allrestrictive covenants of the Term Loan as of March 31, 2006. The Companyis prohibited from declaring any common stock dividends without the lender’sprior written consent. A warrant to purchase 20,000 shares of the Company’scommon stock was issued in conjunction with this Term Loan. The warrant expiresin April 2011 and has an exercise price of $2.55 per share. The warrantmay only be exercised after the Company has repaid the Term Loan in full.

Of the loanproceeds, $500,000 had been deposited in an interest-bearing restricted cashaccount per the terms of the Term Loan. In July 2003, the Company received$250,000 of cash previously held as a restricted deposit. The remaining$250,000 restricted cash deposit continues to be held in the restricted cashaccount and is included in Other Assets in the accompanying consolidatedBalance Sheets at March 31, 2006 and 2005.

**Note 6 Leases**

The Company leasesfacilities, equipment and land under operating leases expiring between 2006 and2025. The land lease provides for contingent rentals in excess of minimumrental commitments based on a percentage of the Company’s sales. Contingentrental for the years ended March 31, 2006, 2005 and 2004 was $55,000,$88,000 and $39,000, respectively.

Future minimumlease payments under non-cancelable operating leases at March 31, 2006 areas follows:

| Year ending March 31 | ** ** | **(in thousands)** | ** ** |
|-------------------------------------|------------|-------------------------|------------|
| 2007                                |       | $                       | 234        |   |
| 2008                                |       | 227                     |       |
| 2009                                |       | 190                     |       |
| 2010                                |       | 151                     |       |
| 2011                                |       | 148                     |       |
| Thereafter  through 2025            |       | 2,183                   |       |
| Total minimum  lease payments       |       | $                       | 3,133      |   |

 

Rent expense underoperating leases amounted to $316,000, $338,000 and $271,000 for the yearsended March 31, 2006, 2005 and 2004, respectively.

**Note 7 Stock Options and Warrants**

*Stock Options*

On August 22,2005, the stockholders approved the 2005 Stock Option Plan (the “2005 Plan”).800,000 shares of common stock were reserved for issuance under the ten yearterm of the 2005 Plan. As of March 31, 2006 780,000 options remainedavailable for grant under the 2005 Plan. Under the 2005 Plan, eligibleemployees and certain independent

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consultants may begranted options to purchase shares of the Company’s Stock. The shares issuableunder the 2005 Plan will either be shares of the Company’s authorized but previouslyunissued common stock or shares reacquired by the Company, including sharespurchased on the open market.

Options under the2005 Plan are granted, and are vested and exercisable as determined by theBoard of Directors or the Stock Option and Compensation Committee of the Boardin accordance with the provisions of the 2005 Stock Option Plan. The number ofoptions granted and vesting, exercise, and other conditions are set forth in aStock Option Agreement evidencing each grant. No option can have a life inexcess of ten (10) years.

All shares grantedin the form of options under the 2005 Plan will reduce, on a share for sharebasis, the number of shares available for subsequent grants. Option grantswhich forfeit under the terms of the 2005 Plan will return to the pool ofreserved shares and be available for subsequent grants under the terms of the2005 Plan.

On August 16,2004, the stockholders approved the Independent Director Stock Option and StockGrant Plan (the “2004 Plan”). 300,000 shares of common stock are reserved forissuance under the 2004 Plan. As of March 31, 2006, 278,000 optionsremained available for grant under the 2004 Plan. Under the 2004 Plan, uponelection to the Board of Directors, a newly elected non-employee director isgranted a ten-year option to purchase 4,000 shares of the Company’s commonstock at a fair market value on the date of grant. All such options are grantedat Fair Market Value of Shares subject to the option on the date of grant.Options granted vest and become exercisable six months from the date of grant.In addition, on the date of each Annual Meeting of Stockholders, eachnon-employee director continuing in office is automatically granted, withoutpayment, 3,500 shares of common stock, non-transferable for six monthsfollowing the date of grant. Concurrent with the 2004 Plan approval, the 1994Non-Employee Director Stock Option and Stock Grant Plan was terminated exceptfor the outstanding options issued thereunder.

Previously underthe terminated 1994 Plan, upon election to the Board of Directors, non-employeedirectors were granted a ten-year option to purchase 3,000 shares of theCompany’s common stock at fair market value on the date of grant. In addition,on the date of each Annual Meeting of Stockholders, each non-employee directorcontinuing in office was granted, without payment, 2,000 shares of commonstock, non-transferable for six months following the date of grant. Expenserecognized from the 2004 Plan and the 1994 Plan grants of shares of common stockfor the years ended March 31, 2006, 2005 and 2004 was $14,000, $15,000 and$3,000, respectively.

At March 31,2006, there were 780,000 shares available under the 2005 Plan and no remainingshares available under previous Plans. The per share weighted average fairvalue of stock options granted during 2006, 2005 and 2004 was $0.65, $0.80 and$0.38, respectively, on the date of grant using a Black Scholes option pricingmodel with the following weighted average assumptions:

|                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected  dividend yield |       | 0        | %          | 0        | %          | 0        | %          |
| Risk-free  interest rate |       | 4.3      | %          | 4.5      | %          | 4.5      | %          |
| Expected  volatility     |       | 107      | %          | 104      | %          | 97       | %          |
| Expected life in years   |       | 4.5      |       | 4.0      |       | 5.0      |       |

 

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Activity for stockoptions outstanding during the periods indicated was as follows:

|                                 | ** ** | ** **         | ** ** | **Weighted**            | ** ** |
|---------------------------------|------------|--------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **Number of** | ** ** | **Average**             | ** ** |
| ** **                      | ** ** | **Shares**         | ** ** | **Exercise Price** | ** ** |
| Balance at  March 31, 2003 |       | 758,696            |       | $                       | 1.46       |   |
| Granted                         |       | 190,400            |       | 0.49                    |       |
| Exercised                       |       | (45,800            | )          | 0.95                    |       |
| Expired                         |       | (75,900            | )          | 3.13                    |       |
| Forfeited                       |       | (171,700           | )          | 1.31                    |       |
| Balance at  March 31, 2004 |       | 655,696            |       | 1.06                    |       |
| Granted                         |       | 139,095            |       | 1.10                    |       |
| Exercised                       |       | (36,019            | )          | 0.88                    |       |
| Expired                         |       | (58,952            | )          | 1.12                    |       |
| Forfeited                       |       | (93,833            | )          | 1.00                    |       |
| Balance at  March 31, 2005 |       | 605,987            |       | 1.09                    |       |
| Granted                         |       | 20,000             |       | 0.65                    |       |
| Exercised                       |       | (14,500            | )          | 0.53                    |       |
| Expired                         |       | (103,600           | )          | 1.69                    |       |
| Forfeited                       |       | (38,964            | )          | 0.82                    |       |
| Balance at  March 31, 2006 |       | 468,923            |       | 0.98                    |       |
|                                 |            |                    |            |                         |            |  |

 

The followingtable summarizes the weighted average characteristics of outstanding stockoptions at March 31, 2006 for various exercise price ranges:

|                                             | ** ** | **Outstanding Options** | ** ** | **Exercisable Options** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | **Number of**           | ** ** | **Remaining**                | ** ** | **Weighted** | ** ** | **Number of** | ** ** | **Weighted** | ** ** |
| **Range of Exercise Prices** | ** ** | **Shares**                   | ** ** | **Life (Years)**        | ** ** | **Average Price** | ** ** | **Shares** | ** ** | **Average Price** | ** ** |
| $0.46-$0.77                                 |       | 253,425                      |       | 2.3                          |       | $ | 0.56 |   | 251,363 |   | $ | 0.56 |   |
| $1.03-$1.63                                 |       | 187,498                      |       | 1.9                          |       | 1.09 |   | 177,748 |   | 1.09 |   |
| $3.69-$6.13                                 |       | 28,000                       |       | 1.9                          |       | 3.95 |   | 28,000 |   | 3.95 |   |
|                                             |            |                              |            |                              |            |  |  |  |  |  |  |  |  |

 

*Warrants*

The Company hadissued warrants which allow the warrant holders rights to acquire an equivalentnumber of shares of common stock at a stated exercise price. Warrants outstandingduring the periods indicated were as follows:

Warrants issued in connection with:
| ** **                      | ** ** | ** **             | ** ** | **50,000 Shares** | ** ** | ** **                 | ** ** | ** **                   | ** ** | ** ** | ** ** |
|---------------------------------|------------|------------------------|------------|------------------------|------------|----------------------------|------------|------------------------------|------------|------------|------------|
| ** **                      | ** ** | **3**rd Party     | ** ** | **Purchased by**  | ** ** | **Term Loan**         | ** ** | ** **                   | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Services**           | ** ** | **Stockholder**        | ** ** | **(See Note 5)** | ** ** | **Debentures**               | ** ** | ** ** | ** ** |
| **Grant date:**            | ** ** | **December 1999** | ** ** | **January 2000**  | ** ** | **April 2000**        | ** ** | **May 2000 &** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** **             | ** ** | ** **             | ** ** | ** **                 | ** ** | **May 2002**            | ** ** | ** ** | ** ** |
| **Expiration date:**       | ** ** | **December 2004** | ** ** | **January 2005**  | ** ** | **April 2011**        | ** ** | **May 2004**            | ** ** | ** ** | ** ** |
| **Exercise price:**        | ** ** | **$0.63**              | ** ** | **$1.00**              | ** ** | **$2.55**                  | ** ** | **$1.10**                    | ** ** | **Total**  | ** ** |
| Balance at  March 31, 2003 |       | 75,000                 |       | 50,000                 |       | 20,000                     |       | 454,734                      |       | 599,734    |       |
| Exercises                       |       | —                 |       | —                 |       | —                     |       | (429,234                     | )          | (429,234   | )          |
|                            |       |                   |       |                   |       |                       |       |                         |       |       |       |
| Balance at  March 31, 2004 |       | 75,000                 |       | 50,000                 |       | 20,000                     |       | 25,500                       |       | 170,500    |       |
| Exercises                       |       | (75,000                | )          | (50,000                | )          | —                     |       | (7,000                       | )          | (132,000   | )          |
| Expired                         |       | —                 |       | —                 |       | —                     |       | (18,500                      | )          | (18,500    | )          |
|                            |       |                   |       |                   |       |                       |       |                         |       |       |       |
| Balance at  March 31, 2005 |       | —                 |       | —                 |       | 20,000                     |       | —                       |       | 20,000     |       |
| Exercises                       |       | —                 |       | —                 |       | —                     |       | —                       |       | —     |       |
| Expired                         |       | —                 |       | —                 |       | —                     |       | —                       |       | —     |       |
|                            |       |                   |       |                   |       |                       |       |                         |       |       |       |
| Balance at  March 31, 2006 |       | —                 |       | —                 |       | 20,000                     |       | —                       |       | 20,000     |       |

 

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**Note 8 Earnings Per Share**

Basic earnings pershare is computed on the basis of the weighted average number of common sharesoutstanding. Diluted earnings per share is computed on the basis of theweighted average number of common shares outstanding plus the potentiallydilutive effect of outstanding stock options and warrants using the “treasurystock” method and convertible securities using the “if-converted” method.

Reconciliationsbetween the numerator and the denominator of the basic and diluted earnings pershare computations for the years ended March 31, 2006, 2005 and 2004 areas follows:  

|                                                                        | ** ** | **Net Income**    | ** ** | **Shares**        | ** ** | **Per Share**     | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                             | ** ** | **(Numerator)**        | ** ** | **(Denominator)** | ** ** | **Amount**             | ** ** |
| **(in thousands, except per share amounts)**  | ** ** | **(As restated)** | ** ** | ** **        | ** ** | **(As restated)** | ** ** |
| Year ended  March 31, 2006:                                       |       |                   |       |              |       |                   |       |
| Basic earnings per share                                               |       | $                      | (391       | )                 | 20,904     |                   | $          | (0.02 | ) |
| Effect of dilutive securities—  Common stock options and warrants |       | —                 |       | —            |       |                   |       |
| Diluted earnings per share                                             |       | $                      | (391       | )                 | 20,904     |                   | $          | (0.02 | ) |
|                                                                   |       |                   |       |              |       |                   |       |
| Year ended  March 31, 2005:                                       |       |                   |       |              |       |                   |       |
| Basic earnings per share                                               |       | $                      | 601        |              | 20,784     |                   | $          | 0.03 |   |
| Effect of dilutive securities—  Common stock options and warrants |       | —                 |       | 195               |       |                   |       |
| Diluted earnings per share                                             |       | $                      | 601        |              | 20,979     |                   | $          | 0.03 |   |
|                                                                   |       |                   |       |              |       |                   |       |
| Year ended  March 31, 2004:                                       |       |                   |       |              |       |                   |       |
| Basic earnings per share                                               |       | $                      | 318        |              | 18,971     |                   | $          | 0.02 |   |
| Effect of dilutive securities—  Common stock options and warrants |       | —                 |       | 140               |       |                   |       |
| Diluted earnings  per share                                            |       | $                      | 318        |              | 19,111     |                   | $          | 0.02 |   |

 

The followingsecurities were excluded from the calculation of diluted earnings per sharebecause their effect was antidilutive:

|                                  | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                       | ** ** | **(in thousands)** | ** ** |
| Debentures, prior  to conversion |       | —                  |       | —   |       | 1,329    |       |
| Stock options and  warrants      |       | 489                     |       | 158      |       | 441      |       |

 

**Note 9 Profit Sharing Plan**

The Companysponsors a profit sharing plan for all employees not covered under a separatemanagement incentive plan. Under the profit sharing plan, 5% of pre-tax profitson a quarterly basis may be allocated to non-management employees based ongross wages. At management’s discretion, the profit sharing bonus may bedistributed all in cash on an after-tax basis or distributed half in cash (onan after-tax basis) and the remainder deposited in an employee’s401(k) account on a pre-tax basis with a five year vesting schedule, basedon years of service with the Company. All employees may make voluntary pre-taxcontributions to their 401(k) accounts; Company contributions arediscretionary. For the years ended March 31, 2006, 2005 and 2004 compensationexpense relative to this plan was approximately $18,000, $30,000 and $36,000,respectively.

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**Note 10 Major Customers and Geographic Information**

Net sales byproduct line for the years 2006, 2005 and 2004 are as follows:

|                               | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                    | ** ** | **(in thousands)** | ** ** |
| Net sales:                    |       |                    |       |     |       |     |       |
| Spirulina  products           |       | $                       | 6,517      |     | $          | 6,626    |       | $ | 6,511 |   |
| Natural  astaxanthin products |       |                    |       |     |       |     |       |
| NatuRose                      |       | 1,403                   |       | 1,817    |       | 2,545    |       |
| BioAstin                      |       | 2,967                   |       | 2,855    |       | 2,388    |       |
| Other products                |       | 244                     |       | 147      |       | 138      |       |
|                          |       | $                       | 11,131     |     | $          | 11,445   |       | $ | 11,582 |   |

 

Approximately$1,285,000, or 12% of our total net sales for the year ended March 31, 2006,was to a single customer. Sales to this customer for fiscal 2005 and 2004 were$1,130,000 (10% of net sales) and $1,560,000 (13% of net sales), respectively.

The following table presents sales for the years 2006,2005 and 2004 by geographic region:

|                 | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|--------------------------------------|------------|----------|------------|----------|------------|
| ** **      | ** ** | **(dollars in thousands)** | ** ** |
| Net sales(1):   |       |                                 |       |     |       |     |       |   |   |   |   |   |   |
| United States   |       | $                                    | 5,343      |     | 48         | %        | $          | 5,847 |   | 51 | % | $ | 4,918 |   | 42 | % |
| Japan           |       | 1,328                                |       | 12       | %          | 1,759    |       | 16 | % | 2,020 |   | 17 | % |
| The Netherlands |       | 1,300                                |       | 12       | %          | 1,180    |       | 10 | % | 1,562 |   | 14 | % |
| Other areas     |       | 3,160                                |       | 28       | %          | 2,659    |       | 23 | % | 3,082 |   | 27 | % |
|            |       | $                                    | 11,131     |     | 100        | %        | $          | 11,445 |   | 100 | % | $ | 11,582 |   | 100 | % |

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(1)             Net sales areattributed to countries based on location of customer.

Substantially alllong-lived assets are located in the United States as of March 31, 2006and 2005.

 

**Note 11 Income Taxes**

Income (loss)before income taxes consisted of:

|                                    | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|-----------------------------------------------|------------|----------|------------|----------|------------|
| **(in thousands)**            | ** ** | **(As restated, all periods)** | ** ** |
| ** **                         | ** ** | ** **                                    | ** ** |
| United States                      |       | $                                             | (311       | )        | $          | 537      |       | $ | 139 |   |
| Foreign                            |       | (86                                           | )          | 70       |       | 250      |       |
| Income (loss) before  income taxes |       | $                                             | (397       | )        | $          | 607      |       | $ | 389 |   |

 

45

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Income tax expense(benefit) for the years ended March 31, 2006, 2005 and 2004 consisted of:

|                               | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|-----------------------------------------------|------------|----------|------------|----------|------------|
| **(in thousands)**       | ** ** | **(As restated, all periods)** | ** ** |
| ** **                    | ** ** | ** **                                    | ** ** |
| Current:                      |       |                                          |       |     |       |     |       |
| Foreign                       |       | $                                             | —     |     | $          | 11       |       | $ | 121 |   |
| Federal                       |       | —                                        |       | —   |       | —   |       |
| State                         |       | (9                                            | )          | (20      | )          | (32      | )          |
| Total current                 |       | (9                                            | )          | (9       | )          | 89       |       |
| Deferred:                     |       |                                          |       |     |       |     |       |
| Foreign                       |       | 3                                             |       | 15       |       | (18      | )          |
| Federal                       |       | —                                        |       | —   |       | —   |       |
| State                         |       | —                                        |       | —   |       | —   |       |
| Total deferred                |       | 3                                             |       | 15       |       | (18      | )          |
| Income tax expense  (benefit) |       | $                                             | (6         | )        | $          | 6        |       | $ | 71 |   |

 

The following tablereconciles the amount of income taxes computed at the federal statutory rate of34%, for all periods presented, to the amount reflected in the Company’sconsolidated statement of operations for the years ended March 31, 2006,2005 and 2004:

|                                                                      | ** ** | **2006**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------|------------|----------|------------|
| **(in thousands)**                                              | ** ** | **(As restated, all periods)** | ** ** |
| ** **                                                           | ** ** | ** **                                    | ** ** |
| Tax provision (benefit)  at federal statutory income tax rate        |       | $                                             | (135       | )        | $          | 206      |       | $ | 132 |   |
| State income taxes, net  of federal income tax effect                |       | (17                                           | )          | 26       |       | 16       |       |
| Foreign income taxes in  excess of federal statutory income tax rate |       | —                                        |       | 2        |       | 36       |       |
| Increase (decrease) in  valuation allowance for deferred tax assets  |       | 146                                           |       | (162     | )          | 24       |       |
| Other, net                                                           |       | —                                        |       | (66      | )          | (137     | )          |
| Income tax expense  (benefit)                                        |       | $                                             | (6         | )        | $          | 6        |       | $ | 71 |   |

 

The tax effects oftemporary differences related to various assets, liabilities and carryforwardsthat give rise to deferred tax assets and deferred tax liabilities as ofMarch 31, 2006 and 2005 are as follows:

|                                                                                                                | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------|------------|
| **(in thousands)**                                                                                        | ** ** | **(As restated, all periods)** | ** ** |
| ** **                                                                                                     | ** ** | ** **                                    | ** ** |
| Deferred tax assets:                                                                                           |       |                                          |       |     |       |
| Net operating  loss carryforwards                                                                              |       | $                                             | 5,359      |     | $          | 5,372 |   |
| Impairment loss  on leasehold improvements for financial reporting purposes                                    |       | 1,062                                         |       | 1,062    |       |
| Tax credit  carryforwards                                                                                      |       | 122                                           |       | 115      |       |
| Other                                                                                                          |       | 235                                           |       | 140      |       |
| Gross deferred  tax assets                                                                                     |       | 6,778                                         |       | 6,689    |       |
| Less valuation  allowance                                                                                      |       | (5,329                                        | )          | (5,183   | )          |
| Net deferred tax  assets                                                                                       |       | 1,449                                         |       | 1,506    |       |
| Deferred tax liability:  Differences in depreciation and amortization on equipment and leasehold  improvements |       | (1,449                                        | )          | (1,503   | )          |
| Net deferred tax assets                                                                                        |       | $                                             | —     |     | $          | 3 |   |

 

In assessing therealizability of deferred tax assets, management considers whether it is morelikely than not that some portion or all of the deferred tax assets will not berealized. The ultimate realization of deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which those temporarydifferences become deductible. Management considers the scheduled reversal ofdeferred tax liabilities, projected future taxable income and tax planning 

46

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strategies in making thisassessment. Based upon the level of historical taxable income and projectionsfor future taxable income over the periods in which net deferred tax assets aredeductible, management does not believe it is more likely than not the Companywill realize a portion of its gross deferred tax assets, and has thusestablished a valuation allowance to reflect its estimated realizability. Theamount of the deferred tax assets considered realizable, however, could changein the near term if estimates of future taxable income during the carryforwardperiod change.

At March 31, 2006,the Company has net operating loss carryforwards and tax carryforwardsavailable to offset future federal income tax as follows (in thousands):

|                                 | ** ** | ** **                                    | ** ** | **Research and** | ** ** |
|---------------------------------|------------|-----------------------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **Net Operating**                        | ** ** | **Experimentation**   | ** ** |
| **Expires March 31,** | ** ** | **Losses**                                    | ** ** | **Tax Credits**  | ** ** |
| ** **                      | ** ** | **(As restated, all periods)** | ** ** |
| ** **                      | ** ** | ** **                                    | ** ** |
| 2011                            |       | $                                             | —     |                  | $          | 23 |   |
| 2012                            |       | —                                        |       | 9                     |       |
| 2013                            |       | 1,403                                         |       | —                |       |
| 2019                            |       | 3,632                                         |       | —                |       |
| 2020                            |       | 2,051                                         |       | 7                     |       |
| 2021                            |       | 1,727                                         |       | —                |       |
| 2022                            |       | 3,161                                         |       | —                |       |
| 2023                            |       | 1,863                                         |       | —                |       |
| 2024                            |       | 269                                           |       | —                |       |
|                            |       | $                                             | 14,106     |                  | $          | 39 |   |

 

In addition, atMarch 31, 2006, the Company has alternative minimum tax creditcarryforwards of approximately $83,000 available to reduce future federalregular income taxes over an indefinite period.

At March 31, 2006,the Company has state tax net operating loss carryforwards of $9,379,000 whichexpire in March 31, 2019 through 2023, available to offset future Hawaiistate taxable income.

**Note 12 SelectedQuarterly Financial Data (Unaudited)**

|                                                                    | ** ** | **First**                                              | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **                                                         | ** ** | **Quarter**                                            | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Year**   | ** ** |
| **(in thousands, except per share data)** | ** ** | **(As restated, all periods (1))** | ** ** |
|                                                               |       |                                                   |       |        |       |        |       |        |       |       |       |
| 2006                                                               |       |                                                   |       |        |       |        |       |        |       |       |       |
| Net sales                                                          |       | $                                                      | 3,029      |        | $          | 2,517       |       | $           | 2,333      |       | $          | 3,252 |   | $ | 11,131 |   |
| Gross profit                                                       |       | 1,005                                                  |       | 582         |       | 659         |       | 814         |       | 3,060      |       |
| Net income (loss)                                                  |       | 159                                                    |       | (297        | )          | (210        | )          | (43         | )          | (391       | )          |
| Net income (loss) per  share—  Basic and Diluted              |       | 0.01                                                   |       | (0.01       | )          | (0.01       | )          | (0.00       | )          | (0.02      | )          |
| 2005                                                               |       |                                                   |       |        |       |        |       |        |       |       |       |
| Net sales                                                          |       | $                                                      | 2,707      |        | $          | 2,998       |       | $           | 3,180      |       | $          | 2,560 |   | $ | 11,445 |   |
| Gross profit                                                       |       | 882                                                    |       | 1,116       |       | 1,167       |       | 727         |       | 3,892      |       |
| Net income (loss)                                                  |       | 135                                                    |       | 206         |       | 354         |       | (94         | )          | 601        |       |
| Net income (loss) per share—  Basic and Diluted               |       | 0.01                                                   |       | 0.01        |       | 0.02        |       | (0.00       | )          | 0.03       |       |

----

(1)          See Note 14 “QuarterlyFinancial Data (Unaudited) (As restated)” for discussion regarding theadjustments recorded in restated selected quarterly financial data.

47

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**Note13  Restatement of Consolidated FinancialStatements**

**On December 1, 2006, the Companyfiled a Current Report on Form 8-K with the SEC announcing that based on thecurrent findings of its previously announced accounting review, it hasdetermined to restate certain of its previously issued financialstatements.  Since that time, we havecompleted our accounting review and have determined that certain of the errorsresulted from deficiencies in our internal control over financialreporting.  See Item 9A Controls andProcedures in this Form 10-K/A.**

**The Company is filing this Form10-K/A for the fiscal year ended March 31, 2006 to amend and restate the:**

**(1) consolidated balance sheetsas of March 31, 2006 and 2005;**

***(2) consolidated statements of operations, stockholders’equity and comprehensive income (loss) and cash flows for each of the years inthe three year period ended March 31, 2006;***

**(3) accumulated deficit as ofMarch 31, 2003;**

**(4) selected financial data forthe years ended March 31, 2006, 2005, 2004, 2003 and 2002; and**

**(5)certain financial data for the quarterly periods ended March 31, 2006 andDecember 31, September 30, June 30,  and March31, 2005 and December 31, September 30, and June 30, 2004.**

*Theerrors or adjustments identified in our previously issued consolidatedfinancial statements are as follows:*

(A)        *We failed to include as a component of inventory cost certain fixedproduction costs such as depreciation, general insurance and minor compensationcost into inventory*.*  *Inventories for March 31, 2006, 2005,2004 and 2003 have been restated as were cost of sales and certain operatingexpenses as included in the Consolidated Statements of Operations for each ofthe years in the three year period ended March 31, 2006.  This restatement is a result of the discoveryof the error subsequent to the filing with the SEC of the Original Form 10-K asfiled with the SEC.  All inventories,cost of sales and operating expense balances, as presented in this******Form 10-K/A, properly reflect theinventory unit costs inclusive of these fixed production costs in accordancewith Accounting Research Bulletin No. 43.

*(B)*          We have recorded certain Hawaii State Tax Credit adjustments which wereconsidered immaterial in prior years. Refundable income taxes have beenrestated for the year ended March 31, 2005 and income tax expense (benefit) hasbeen restated for each of the years in the three year period ended March 31,2006.

*(C)*          We have recorded certain interest income adjustments which wereconsidered immaterial in prior years. These impacted the years ended March 31,2004 and 2003.

*(D)*         We reclassified certain certificates of deposit from cash to short-terminvestments in fiscal years 2005 and 2004. This reclassification had no effect on reported net income (loss) or incash flow from operations.

*(E)*           We haverecorded certain tax adjustments which were considered immaterial to reportsfiled in prior periods. These adjustments impacted the years ended March 31,2006, 2005, 2004 and 2003.

Subsequent Events (Unaudited):

On November 3,2006, the Company implemented a one for four stock split at which time theshare price closed at $0.43 with 20,934,565 common shares outstanding.  On November 6, 2006, the share price openedat $1.72 with 5,233,641 common shares outstanding resulting from the reversestock split with the expectation that most stockholders of common stock willnot exchange their shares as such exchange is not mandatory and stockholdersmay keep the originally issued shares for exchanged value.  Fractional shares were paid with cashtotaling less than $1,000.  The long termfuture impact of the reverse split on the Company’s stock price is uncertain. *The effect of this stock split has not been reflected in theaccompanying consolidated financial statements herein.*

48

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On November 20,2006, the Company received a letter from Nasdaq indicating the closing bidprice of it’s common stock has been at $1.00 per share or greater for at least10 consecutive business days. Accordingly, the Company has regained compliance with Marketplace Rule4310(c)(4) and this matter is now closed. For other subsequent events, please read our current reports on Form 8-Kfiled subsequent to the date of the Original Filing. As of the date of thisfiling the Company has been granted an extension by Nasdaq to file its Forms10-Q for the first and second quarters of fiscal 2007. Due to the restatementprocess and filing of this Form 10-K/A the foregoing Forms 10-Q have not yetbeen filed with the SEC and are delinquent as of the date of this filing.

The following tables set forth the amounts previouslyreported in the Company’s consolidated balance sheets as of March 31, 2006 and2005, and the Company’s consolidated statements of operations for the yearsended March 31, 2006, 2005 and 2004, the effect of the restatement adjustments,and the restated amounts.

Tables referred to above begin on page 50 and end onpage 57.

49

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**CYANOTECH CORPORATION ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
| ** **                                                                                                | ** ** | **Consolidated Balance Sheet** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                | ** ** | **March 31,  2006**                 | ** ** | **Adjustments** | ** ** | **March 31,  2006** | ** ** |
| **(in thousands, except share data)**                                                 | ** ** | **(As reported)**                   | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| ** **                                                                                                | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ASSETS                                                                                                    | ** ** | ** **                               |       |   |   |   |   |
| Current assets:                                                                                           |       |                                     |       |   |   |   |   |
| Cash and cash  equivalents                                                                                |       | $                                        | 1,835      |   | $ | — |   | $ | 1,835 |   |
| Short-term  investments                                                                                   |       | 700                                      |       | — |   | 700 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $25                                       |       | 2,209                                    |       | — |   | 2,209 |   |
| Refundable  income taxes (E)                                                                              |       | 16                                       |       | 1 |   | 17 |   |
| Inventories (A)                                                                                           |       | 1,935                                    |       | 121 |   | 2,056 |   |
| Prepaid expenses  and other current assets                                                                |       | 99                                       |       | — |   | 99 |   |
| Total current  assets                                                                                     |       | 6,794                                    |       | 122 |   | 6,916 |   |
| Equipment and leasehold  improvements, net                                                                |       | 10,164                                   |       | — |   | 10,164 |   |
| Other assets                                                                                              |       | 515                                      |       | — |   | 515 |   |
| Total assets                                                                                              |       | $                                        | 17,473     |   | $ | 122 |   | $ | 17,595 |   |
|                                                                                                      |       |                                     |       |   |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                |       |                                     |       |   |   |   |   |
| Current liabilities:                                                                                      |       |                                     |       |   |   |   |   |
| Current  maturities of long-term debt                                                                     |       | $                                        | 364        |   | $ | — |   | $ | 364 |   |
| Accounts payable                                                                                          |       | 485                                      |       | — |   | 485 |   |
| Accrued expenses                                                                                          |       | 420                                      |       | — |   | 420 |   |
| Total current  liabilities                                                                                |       | 1,269                                    |       | — |   | 1,269 |   |
| Long-term debt,  excluding current maturities                                                             |       | 1,387                                    |       | — |   | 1,387 |   |
| Total  liabilities                                                                                        |       | 2,656                                    |       | — |   | 2,656 |   |
| Stockholders’ equity:                                                                                |       |                                     |       |   |   |   |   |
| Common stock of  $.005 par value, authorized 30,000,000 shares; issued and outstanding  20,928,265 shares |       | 105                                      |       | — |   | 105 |   |
| Additional  paid-in capital                                                                               |       | 27,330                                   |       | — |   | 27,330 |   |
| Accumulated  other comprehensive loss-foreign currency translation adjustments                            |       | (1                                       | )          | — |   | (1 | ) |
| Accumulated  deficit (A, E)                                                                               |       | (12,617                                  | )          | 122 |   | (12,495 | ) |
| Total  stockholders’ equity                                                                          |       | 14,817                                   |       | 122 |   | 14,939 |   |
| Total liabilities and  stockholders’ equity                                                          |       | $                                        | 17,473     |   | $ | 122 |   | $ | 17,595 |   |

 

50

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**CYANOTECH CORPORATION ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
| ** **                                                                                                | ** ** | **Consolidated Balance Sheet** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                | ** ** | **March 31,  2005**                 | ** ** | **Adjustments** | ** ** | **March 31,  2005** | ** ** |
| **(in thousands, except share data)**                                                 | ** ** | **(As reported)**                   | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| ** **                                                                                                | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ASSETS                                                                                                    |       |                                     |       |   |   |   |   |
| Current assets:                                                                                           |       |                                     |       |   |   |   |   |
| Cash and cash  equivalents                                                                                |       | $                                        | 2,005      |   | $ | — |   | $ | 2,005 |   |
| Short-term  investments                                                                                   |       | 1,000                                    |       | — |   | 1,000 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $46                                       |       | 2,069                                    |       | — |   | 2,069 |   |
| Refundable  income taxes (B, E)                                                                           |       | 97                                       |       | (22 | ) | 75 |   |
| Inventories (A)                                                                                           |       | 1,565                                    |       | 267 |   | 1,832 |   |
| Prepaid expenses  and other current assets                                                                |       | 85                                       |       | — |   | 85 |   |
| Total current  assets                                                                                     |       | 6,821                                    |       | 245 |   | 7,066 |   |
| Equipment and leasehold  improvements, net                                                                |       | 11,174                                   |       | — |   | 11,174 |   |
| Other assets                                                                                              |       | 547                                      |       | — |   | 547 |   |
| Total assets                                                                                              |       | $                                        | 18,542     |   | $ | 245 |   | $ | 18,787 |   |
|                                                                                                      |       |                                     |       |   |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                |       |                                     |       |   |   |   |   |
| Current liabilities:                                                                                      |       |                                     |       |   |   |   |   |
| Current  maturities of long-term debt                                                                     |       | $                                        | 355        |   | $ | — |   | $ | 355 |   |
| Accounts payable                                                                                          |       | 977                                      |       | — |   | 977 |   |
| Accrued expenses                                                                                          |       | 387                                      |       | — |   | 387 |   |
| Total current liabilities                                                                                 |       | 1,719                                    |       | — |   | 1,719 |   |
| Long-term debt,  excluding current maturities                                                             |       | 1,743                                    |       | — |   | 1,743 |   |
| Total  liabilities                                                                                        |       | 3,462                                    |       | — |   | 3,462 |   |
| Stockholders’ equity:                                                                                |       |                                     |       |   |   |   |   |
| Common stock of  $.005 par value, authorized 30,000,000 shares; issued and outstanding  20,896,265 shares |       | 104                                      |       | — |   | 104 |   |
| Additional  paid-in capital                                                                               |       | 27,298                                   |       | — |   | 27,298 |   |
| Accumulated  other comprehensive income-foreign currency translation adjustments                          |       | 27                                       |       | — |   | 27 |   |
| Accumulated  deficit (A, B, E)                                                                            |       | (12,349                                  | )          | 245 |   | (12,104 | ) |
| Total  stockholders’ equity                                                                          |       | 15,080                                   |       | 245 |   | 15,325 |   |
| Total liabilities and  stockholders’ equity                                                          |       | $                                        | 18,542     |   | $ | 245 |   | $ | 18,787 |   |

 

51

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**CYANOTECH CORPORATION ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
| ** **                                                         | ** ** | **Consolidated Statement of Operations** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Year Ended  March 31,  2006**               | ** ** | **Adjustments** | ** ** | **Year Ended  March 31,  2006** | ** ** |
| **(in thousands, except per share data)** | ** ** | **(As reported)**                                  | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| ** **                                                         | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                          |       | $                                                       | 11,131     |   | $ | — |   | $ | 11,131 |   |
| Cost of sales (A)                                                  |       | 7,832                                                   |       | 239 |   | 8,071 |   |
| Gross profit                                                       |       | 3,299                                                   |       | (239 | ) | 3,060 |   |
| Operating expenses:                                                |       |                                                    |       |   |   |   |   |
| Research and  development (A)                                      |       | 192                                                     |       | (5 | ) | 187 |   |
| Sales and  marketing (A)                                           |       | 1,331                                                   |       | (19 | ) | 1,312 |   |
| General and  administrative (A)                                    |       | 1,883                                                   |       | (69 | ) | 1,814 |   |
| Total operating  expense                                           |       | 3,406                                                   |       | (93 | ) | 3,313 |   |
| Income (loss)  from operations                                     |       | (107                                                    | )          | (146 | ) | (253 | ) |
| Other income (expense):                                            |       |                                                    |       |   |   |   |   |
| Interest income                                                    |       | 46                                                      |       | — |   | 46 |   |
| Interest expense                                                   |       | (180                                                    | )          | — |   | (180 | ) |
| Other income  (expense), net                                       |       | (10                                                     | )          | — |   | (10 | ) |
| Total other  expense, net                                          |       | (144                                                    | )          | — |   | (144 | ) |
| Income (loss)  before income taxes                                 |       | (251                                                    | )          | (146 | ) | (397 | ) |
| Income tax  expense (benefit) (B, E)                               |       | 17                                                      |       | (23 | ) | (6 | ) |
| Net income  (loss)                                                 |       | $                                                       | (268       | ) | $ | (123 | ) | $ | (391 | ) |
| Net income (loss) per  share:                                      |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | $                                                       | (0.01      | ) | $ | (0.01 | ) | $ | (0.02 | ) |
| Diluted                                                            |       | $                                                       | (0.01      | ) | $ | (0.01 | ) | $ | (0.02 | ) |
| Shares used in  calculation of net income (loss) per share:        |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | 20,904                                                  |       | — |   | 20,904 |   |
| Diluted                                                            |       | 20,904                                                  |       | — |   | 20,904 |   |

 

52

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**CYANOTECH CORPORATION ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
| ** **                                                            | ** ** | **Consolidated Statement of Operations** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                            | ** ** | **Year Ended  March 31,  2005**               | ** ** | **Adjustments** | ** ** | **Year Ended  March 31,  2005** | ** ** |
| **(in thousands, except per share amounts)** | ** ** | **(As reported)**                                  | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| ** **                                                            | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                                                       | 11,445     |   | $ | — |   | $ | 11,445 |   |
| Cost of sales (A)                                                     |       | 7,627                                                   |       | (74 | ) | 7,553 |   |
| Gross profit                                                          |       | 3,818                                                   |       | 74 |   | 3,892 |   |
| Operating expenses:                                                   |       |                                                    |       |   |   |   |   |
| Research and  development (A)                                         |       | 257                                                     |       | (6 | ) | 251 |   |
| Sales and  marketing (A)                                              |       | 1,202                                                   |       | (13 | ) | 1,189 |   |
| General and  administrative (A)                                       |       | 1,797                                                   |       | (69 | ) | 1,728 |   |
| Total operating  expense                                              |       | 3,256                                                   |       | (88 | ) | 3,168 |   |
| Income from  operations                                               |       | 562                                                     |       | 162 |   | 724 |   |
| Other income (expense):                                               |       |                                                    |       |   |   |   |   |
| Interest income                                                       |       | 31                                                      |       | — |   | 31 |   |
| Interest expense                                                      |       | (163                                                    | )          | — |   | (163 | ) |
| Other income,  net                                                    |       | 15                                                      |       | — |   | 15 |   |
| Total other  expense, net                                             |       | (117                                                    | )          | — |   | (117 | ) |
| Income before  income taxes                                           |       | 445                                                     |       | 162 |   | 607 |   |
| Income tax  expense (benefit) (B, E)                                  |       | (41                                                     | )          | 47 |   | 6 |   |
| Net income                                                            |       | $                                                       | 486        |   | $ | 115 |   | $ | 601 |   |
| Net income per share:                                                 |       |                                                    |       |   |   |   |   |
| Basic                                                                 |       | $                                                       | 0.02       |   | $ | 0.01 |   | $ | 0.03 |   |
| Diluted                                                               |       | $                                                       | 0.02       |   | $ | 0.01 |   | $ | 0.03 |   |
| Shares used in  calculation of net income (loss) per share:           |       |                                                    |       |   |   |   |   |
| Basic                                                                 |       | 20,784                                                  |       | — |   | 20,784 |   |
| Diluted                                                               |       | 20,979                                                  |       | — |   | 20,979 |   |

 

53

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**CYANOTECH CORPORATION ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
| ** **                                                         | ** ** | **Consolidated Statement of Operations** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Year Ended  March 31,  2004**               | ** ** | **Adjustments** | ** ** | **Year Ended  March 31,  2004** | ** ** |
| **(in thousands, except per share data)** | ** ** | **(As reported)**                                  | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| ** **                                                         | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                          |       | $                                                       | 11,582     |   | $ | — |   | $ | 11,582 |   |
| Cost of sales (A)                                                  |       | 7,642                                                   |       | 196 |   | 7,838 |   |
| Gross profit                                                       |       | 3,940                                                   |       | (196 | ) | 3,744 |   |
| Operating expenses:                                                |       |                                                    |       |   |   |   |   |
| Research and  development (A)                                      |       | 149                                                     |       | (11 | ) | 138 |   |
| Sales and  marketing (A)                                           |       | 1,239                                                   |       | (14 | ) | 1,225 |   |
| General and  administrative (A)                                    |       | 1,823                                                   |       | (76 | ) | 1,747 |   |
| Total operating  expense                                           |       | 3,211                                                   |       | (101 | ) | 3,110 |   |
| Income (loss)  from operations                                     |       | 729                                                     |       | (95 | ) | 634 |   |
| Other income (expense):                                            |       |                                                    |       |   |   |   |   |
| Interest income  (C)                                               |       | 6                                                       |       | 10 |   | 16 |   |
| Interest expense                                                   |       | (286                                                    | )          | — |   | (286 | ) |
| Other income,  net                                                 |       | 25                                                      |       | — |   | 25 |   |
| Total other  expense, net                                          |       | (255                                                    | )          | 10 |   | (245 | ) |
| Income (loss)  before income taxes                                 |       | 474                                                     |       | (85 | ) | 389 |   |
| Income tax  expense (B, E)                                         |       | 75                                                      |       | (4 | ) | 71 |   |
| Net income  (loss)                                                 |       | $                                                       | 399        |   | $ | (81 | ) | $ | 318 |   |
| Net income (loss) per  share:                                      |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | $                                                       | 0.02       |   | $ | (0.00 | ) | $ | 0.02 |   |
| Diluted                                                            |       | $                                                       | 0.02       |   | $ | (0.00 | ) | $ | 0.02 |   |
| Shares used in  calculation of net income (loss) per share:        |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | 18,971                                                  |       | — |   | 18,971 |   |
| Diluted                                                            |       | 19,111                                                  |       | — |   | 19,111 |   |

 

54

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**CYANOTECHCORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
| ** **                                                                                                 | ** ** | **Consolidated Statement of Cash Flows** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **Year Ended  March 31,  2006**                    | ** ** | **Adjustments** | ** ** | **Year Ended  March 31,  2006** | ** ** |
| **(in thousands)**                                                                                    | ** ** | **(As reported)**                                       | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                                     | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss (A, B, E)                                                                                         |       | $                                                            | (268       | ) | $ | (123 | ) | $ | (391 | ) |
| Adjustments to  reconcile net loss to cash provided by operating activities:                               |       |                                                         |       |   |   |   |   |
| Depreciation and  amortization                                                                             |       | 1,321                                                        |       | — |   | 1,321 |   |
| Amortization of  debt issue costs and other assets                                                         |       | 37                                                           |       | — |   | 37 |   |
| Issuance of  common stock and stock options in exchange for services                                       |       | 14                                                           |       | — |   | 14 |   |
| Compensation  expense for accelerated vesting of stock options                                             |       | 10                                                           |       | — |   | 10 |   |
| Reduction of  allowance for doubtful accounts                                                              |       | (8                                                           | )          | — |   | (8 | ) |
| Net (increase)  decrease in assets:                                                                        |       |                                                         |       |   |   |   |   |
| Accounts  receivable                                                                                       |       | (132                                                         | )          | — |   | (132 | ) |
| Refundable  income taxes (B, E)                                                                            |       | 81                                                           |       | (23 | ) | 58 |   |
| Inventories (A)                                                                                            |       | (370                                                         | )          | 146 |   | (224 | ) |
| Prepaid expenses  and other assets                                                                         |       | (47                                                          | )          | — |   | (47 | ) |
| Net increase  (decrease) in liabilities:                                                                   |       |                                                         |       |   |   |   |   |
| Accounts payable                                                                                           |       | (492                                                         | )          | — |   | (492 | ) |
| Accrued expenses                                                                                           |       | 33                                                           |       | — |   | 33 |   |
| Net cash  provided by operating activities                                                                 |       | 179                                                          |       | — |   | 179 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                     |       |                                                         |       |   |   |   |   |
| Maturity of short-term  investments                                                                        |       | 300                                                          |       | — |   | 300 |   |
| Investment in equipment  and leasehold improvements                                                        |       | (311                                                         | )          | — |   | (311 | ) |
| Net cash used in  investing activities                                                                     |       | (11                                                          | )          | — |   | (11 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                                     |       |                                                         |       |   |   |   |   |
| Proceeds from issuance  of common stock and exercise of stock options and warrants, net of issuance  costs |       | 9                                                            |       | — |   | 9 |   |
| Principal payments on  long-term debt                                                                      |       | (347                                                         | )          | — |   | (347 | ) |
| Net cash used in  financing activities                                                                     |       | (338                                                         | )          | — |   | (338 | ) |
| Net decrease in cash  and cash equivalents                                                                 |       | (170                                                         | )          | — |   | (170 | ) |
| Cash and cash  equivalents at beginning of year                                                            |       | 2,005                                                        |       | — |   | 2,005 |   |
| Cash and cash  equivalents at end of year                                                                  |       | $                                                            | 1,835      |   | $ | — |   | $ | 1,835 |   |
|                                                                                                       |       |                                                         |       |   |   |   |   |
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOW INFORMATION:                                                         |       |                                                         |       |   |   |   |   |
| Cash paid during the  year for:                                                                            |       |                                                         |       |   |   |   |   |
| Interest                                                                                                   |       | $                                                            | 148        |   | $ | — |   | $ | 148 |   |
| Income taxes                                                                                               |       | $                                                            | —     |   | $ | — |   | $ | — |   |

** **

55

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** **
| ** **                                                                                                 | ** ** | **Consolidated Statement of Cash Flows** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **Year Ended  March 31,  2005**                    | ** ** | **Adjustments** | ** ** | **Year Ended  March 31,  2005** | ** ** |
| **(in thousands)**                                                                                    | ** ** | **(As reported)**                                       | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                                     | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (A,  B, E)                                                                                      |       | $                                                            | 486        |   | $ | 115 |   | $ | 601 |   |
| Adjustments to  reconcile net income to cash provided by operating activities:                             |       |                                                         |       |   |   |   |   |
| Depreciation and amortization                                                                              |       | 1,319                                                        |       | — |   | 1,319 |   |
| Amortization of debt issue costs and other assets                                                          |       | 27                                                           |       | — |   | 27 |   |
| Issuance of common stock and stock options in  exchange for services                                       |       | 21                                                           |       | — |   | 21 |   |
| Provision for allowance for doubtful accounts                                                              |       | 50                                                           |       | — |   | 50 |   |
| Net (increase) decrease in assets:                                                                         |       |                                                         |       | — |   |   |   |
| Accounts receivable                                                                                        |       | 92                                                           |       | — |   | 92 |   |
| Refundable income taxes (B, E)                                                                             |       | (86                                                          | )          | 47 |   | (39 | ) |
| Inventories (A)                                                                                            |       | (466                                                         | )          | (162 | ) | (628 | ) |
| Prepaid expenses and other assets                                                                          |       | (1                                                           | )          | — |   | (1 | ) |
| Net increase (decrease) in liabilities:                                                                    |       |                                                         |       |   |   |   |   |
| Accounts payable                                                                                           |       | 103                                                          |       | — |   | 103 |   |
| Accrued expenses                                                                                           |       | (217                                                         | )          | — |   | (217 | ) |
| Net cash provided by operating activities                                                                  |       | 1,328                                                        |       | — |   | 1,328 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                     |       |                                                         |       |   |   |   |   |
| Maturity  (purchase) of short-term investments (D)                                                         |       | (1,000                                                       | )          | 100 |   | (900 | ) |
| Investment in  equipment and leasehold improvements                                                        |       | (649                                                         | )          | — |   | (649 | ) |
| Net cash used in investing activities                                                                      |       | (1,649                                                       | )          | 100 |   | (1,549 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                                     |       |                                                         |       |   |   |   |   |
| Proceeds from  issuance of common stock and exercise of stock options and warrants, net of  issuance costs |       | 136                                                          |       | — |   | 136 |   |
| Principal  payments on long-term debt                                                                      |       | (341                                                         | )          | — |   | (341 | ) |
| Net cash used in financing activities                                                                      |       | (205                                                         | )          | — |   | (205 | ) |
| Net decrease in  cash and cash equivalents (D)                                                             |       | (526                                                         | )          | 100 |   | (426 | ) |
| Cash and cash  equivalents at beginning of year (D)                                                        |       | 2,531                                                        |       | (100 | ) | 2,431 |   |
| Cash and cash  equivalents at end of year                                                                  |       | $                                                            | 2,005      |   | $ | — |   | $ | 2,005 |   |
|                                                                                                       |       |                                                         |       |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                                         |       |                                                         |       |   |   |   |   |
| Cash paid during  the year for:                                                                            |       |                                                         |       |   |   |   |   |
| Interest                                                                                                   |       | $                                                            | 132        |   | $ | — |   | $ | 132 |   |
| Income taxes                                                                                               |       | $                                                            | 178        |   | $ | — |   | $ | 178 |   |

** **

56

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** **
| ** **                                                                                                 | ** ** | **Consolidated Statement of Cash Flows** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **Year Ended  March 31,  2004**                    | ** ** | **Adjustments** | ** ** | **Year Ended  March 31,  2004** | ** ** |
| **(in thousands)**                                                                                    | ** ** | **(As reported)**                                       | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                                     | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss) (A, B, E)                                                                               |       | $                                                            | 399        |   | $ | (81 | ) | $ | 318 |   |
| Adjustments to  reconcile net income (loss) to cash provided by operating activities:                      |       |                                                         |       | — |   |   |   |
| Depreciation and amortization                                                                              |       | 1,346                                                        |       | — |   | 1,346 |   |
| Amortization of debt issue costs and other assets                                                          |       | 65                                                           |       | — |   | 65 |   |
| Issuance of common stock and stock options in  exchange for services                                       |       | 8                                                            |       | — |   | 8 |   |
| Provision for (reduction of) allowance for doubtful  accounts                                              |       | 36                                                           |       | — |   | 36 |   |
| Net (increase) decrease in assets:                                                                         |       |                                                         |       |   |   |   |   |
| Accounts receivable (C)                                                                                    |       | (408                                                         | )          | (10 | ) | (418 | ) |
| Refundable income taxes (B, E)                                                                             |       | (2                                                           | )          | (4 | ) | (6 | ) |
| Inventories (A)                                                                                            |       | 301                                                          |       | 95 |   | 396 |   |
| Prepaid expenses and other assets                                                                          |       | (65                                                          | )          | — |   | (65 | ) |
| Net increase (decrease) in liabilities:                                                                    |       |                                                         |       |   |   |   |   |
| Accounts payable                                                                                           |       | 71                                                           |       | — |   | 71 |   |
| Accrued expenses                                                                                           |       | 215                                                          |       | — |   | 215 |   |
| Net cash provided by operating activities                                                                  |       | 1,966                                                        |       | — |   | 1,966 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                     |       |                                                         |       |   |   |   |   |
| Purchase of short-term  investments (D)                                                                    |       | —                                                       |       | (100 | ) | (100 | ) |
| Investment in  equipment and leasehold improvements                                                        |       | (413                                                         | )          | — |   | (413 | ) |
| Net cash used in investing activities                                                                      |       | (413                                                         | )          | (100 | ) | (513 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                                     |       |                                                         |       |   |   |   |   |
| Proceeds from  issuance of common stock and exercise of stock options and warrants, net of  issuance costs |       | 477                                                          |       | — |   | 477 |   |
| Release of  restricted cash deposit                                                                        |       | 250                                                          |       | — |   | 250 |   |
| Principal  payments on long-term debt                                                                      |       | (328                                                         | )          | — |   | (328 | ) |
| Net cash provided by financing activities                                                                  |       | 399                                                          |       | — |   | 399 |   |
| Net increase  (decrease) in cash and cash equivalents (D)                                                  |       | 1,952                                                        |       | (100 | ) | 1,852 |   |
| Cash and cash  equivalents at beginning of year                                                            |       | 579                                                          |       | — |   | 579 |   |
|                                                                                                       |       |                                                         |       |   |   |   |   |
| Cash and cash  equivalents at end of year (D)                                                              |       | $                                                            | 2,531      |   | $ | (100 | ) | $ | 2,431 |   |
|                                                                                                       |       |                                                         |       |   |   |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                                         |       |                                                         |       |   |   |   |   |
| Cash paid during  the year for:                                                                            |       |                                                         |       |   |   |   |   |
| Interest                                                                                                   |       | $                                                            | 260        |   | $ | — |   | $ | 260 |   |
| Income taxes                                                                                               |       | $                                                            | 17         |   | $ | — |   | $ | 17 |   |
|                                                                                                       |       |                                                         |       |   |   |   |   |
| Supplemental disclosure  of non-cash financing activities:                                                 |       |                                                         |       |   |   |   |   |
| Conversion of  debentures to common stock                                                                  |       | $                                                            | 1,250      |   | $ | — |   | $ | 1,250 |   |

 

57

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**Note 14 QuarterlyFinancial Data (Unaudited) (As Restated)**

The following quarterly data has been derived from ourunaudited consolidated financial statements that, in our opinion, reflect allrecurring adjustments necessary to fairly present our financial informationwhen read in conjunction with our Consolidated Financial Statements andNotes.  This quarterly information hasbeen restated for, and as of the end of, all quarters of fiscal 2006 and allquarters of fiscal 2005 from previously reported information filed on Forms10-Q and Forms 10-K, as a result of the restatement of our financial results asdiscussed in Note 13.  The results ofoperations for any quarter are not necessarily indicative of the results to beexpected for any future period.

*Theerrors identified in our previously issued consolidated financial statementsare as follows:*

(A)  *We failed to include as a component of inventory cost certain fixedproduction costs such as depreciation, general insurance and minor compensationcost into inventory.  *Inventoriesfor March 31, 2006, 2005, 2004, 2003, and 2002 have been restated as were costof sales and certain operating expenses as included in the ConsolidatedStatements of Operations for each of the years in the three year period endedMarch 31, 2006.  This restatement is aresult of the discovery of the error subsequent to the filing of the originalForm 10-K as filed with the SEC.  Allinventories, cost of sales and operating expense balances, as presented in this******Form 10-K/A, properly reflect theinventory unit costs inclusive of these fixed production costs in accordancewith Accounting Research Bulletin No. 43.

*(B)  We have recorded certain Hawaii State TaxCredit adjustments which were considered immaterial in prior years. Refundableincome taxes have been restated for the year ended March 31, 2005 and incometax expense (benefit) has been restated for each of the years in the three yearperiod ended March 31, 2006.*

*(C)  We have recorded certain interest incomeadjustments which were considered immaterial in prior years. These impacted theyears ended March 31, 2004 and 2003. These adjustments did not effect theattached quarerly information.*

*(D)*         We reclassified certain certificates of deposit from cash to short-terminvestments in fiscal years 2005 and 2004. This reclassification had no effect on reported net income (loss) or incash flow from operations.

*(E)*           We have recordedcertain tax adjustments which were considered immaterial to reports filed inprior periods. These adjustments impacted the years ended March 31, 2006, 2005,2004 and 2003.

The following tables set forth the amounts previouslyreported in the Company’s consolidated balance sheets as of December 31, 2005,September 30, 2005, June 30, 2005, December 31, 2004, September 30, 2004, andJune 30, 2004, and the Company’s consolidated statements of operations for theperiods ended March 31, 2006, December 31, 2005, September 30, 2005, June 30,2005, March 31, 2005, December 31, 2004, September 30, 2004, June 30, 2004, andthe effect of the restatement adjustments, and the restated amounts.

Tables referred to above begin on page 59 and end onpage 72.

58

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** **
| ** **                                                                                               | ** ** | **Consolidated Balance Sheet** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                               | ** ** | **December 31,  2005**              | ** ** | **Adjustments** | ** ** | **December 31,  2005** | ** ** |
| **(in thousands, except share data)**                                                | ** ** | **(As reported)**                   | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| ASSETS                                                                                                   |       |                                     |       |   |   |   |   |
|                                                                                                     |       |                                     |       |   |   |   |   |
| Current assets:                                                                                          |       |                                     |       |   |   |   |   |
| Cash and cash equivalents                                                                                |       | $                                        | 1,951      |   | $ | — |   | $ | 1,951 |   |
| Short-term investments                                                                                   |       | 1,000                                    |       | — |   | 1,000 |   |
| Accounts receivable, net                                                                                 |       | 1,445                                    |       | — |   | 1,445 |   |
| Refundable income taxes (E)                                                                              |       | 27                                       |       | 2 |   | 29 |   |
| Inventories (A)                                                                                          |       | 2,011                                    |       | 357 |   | 2,368 |   |
| Prepaid expenses and other current assets                                                                |       | 131                                      |       | — |   | 131 |   |
| Total current assets                                                                                     |       | 6,565                                    |       | 359 |   | 6,924 |   |
|                                                                                                     |       |                                     |       |   |   |   |   |
| Equipment and  leasehold improvements, net                                                               |       | 10,358                                   |       | — |   | 10,358 |   |
| Other assets                                                                                             |       | 538                                      |       | — |   | 538 |   |
| Total assets                                                                                             |       | $                                        | 17,461     |   | $ | 359 |   | $ | 17,820 |   |
|                                                                                                     |       |                                     |       |   |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                               |       |                                     |       |   |   |   |   |
| Current  liabilities:                                                                                    |       |                                     |       |   |   |   |   |
|                                                                                                     |       |                                     |       |   |   |   |   |
| Current maturities of long-term debt                                                                     |       | $                                        | 354        |   | $ | — |   | $ | 354 |   |
| Accounts payable                                                                                         |       | 448                                      |       | — |   | 448 |   |
| Accrued expenses                                                                                         |       | 567                                      |       | — |   | 567 |   |
| Total current liabilities                                                                                |       | 1,369                                    |       | — |   | 1,369 |   |
|                                                                                                     |       |                                     |       |   |   |   |   |
| Long-term debt,  excluding current maturities                                                            |       | 1,485                                    |       | — |   | 1,485 |   |
| Total liabilities                                                                                        |       | 2,854                                    |       | — |   | 2,854 |   |
|                                                                                                     |       |                                     |       |   |   |   |   |
| Stockholders’  equity:                                                                              |       |                                     |       |   |   |   |   |
| Common stock of $.005 par value, authorized  30,000,000 shares; issued and outstanding 20,913,765 shares |       | 104                                      |       | — |   | 104 |   |
| Additional paid-in capital                                                                               |       | 27,312                                   |       | — |   | 27,312 |   |
| Accumulated other comprehensive income-foreign currency  translation adjustments                         |       | 2                                        |       | — |   | 2 |   |
| Accumulated deficit (A, E)                                                                               |       | (12,811                                  | )          | 359 |   | (12,452 | ) |
| Total stockholders’ equity                                                                          |       | 14,607                                   |       | 359 |   | 14,966 |   |
| Total  liabilities and stockholders’ equity                                                         |       | $                                        | 17,461     |   | $ | 359 |   | $ | 17,820 |   |

 

59

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** **
| ** **                                                                                               | ** ** | **Consolidated Balance Sheet** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                               | ** ** | **September 30,  2005**             | ** ** | **Adjustments** | ** ** | **September 30,  2005** | ** ** |
| **(in thousands, except share data)**                                                | ** ** | **(As  reported)**                       | ** ** | ** ** | ** ** | **(As restated)** |   |
| ASSETS                                                                                                   |       |                                     |       |   |   |   |   |
|                                                                                                     |       |                                     |       |   |   |   |   |
| Current assets:                                                                                          |       |                                     |       |   |   |   |   |
| Cash and cash equivalents                                                                                |       | $                                        | 2,054      |   | $ | — |   | $ | 2,054 |   |
| Short-term investments                                                                                   |       | 1,000                                    |       | — |   | 1,000 |   |
| Accounts receivable, net                                                                                 |       | 1,612                                    |       | — |   | 1,612 |   |
| Refundable income taxes (B, E)                                                                           |       | 51                                       |       | (22 | ) | 29 |   |
| Inventories (A)                                                                                          |       | 1,747                                    |       | 297 |   | 2,044 |   |
| Prepaid expenses and other current assets                                                                |       | 141                                      |       | — |   | 141 |   |
| Total current assets                                                                                     |       | 6,605                                    |       | 275 |   | 6,880 |   |
| Equipment and  leasehold improvements, net                                                               |       | 10,621                                   |       | — |   | 10,621 |   |
|                                                                                                     |       |                                     |       |   |   |   |   |
| Other assets                                                                                             |       | 543                                      |       | — |   | 543 |   |
| Toal assets                                                                                              |       | $                                        | 17,769     |   | $ | 275 |   | $ | 18,044 |   |
|                                                                                                     |       |                                     |       |   |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                               |       |                                     |       |   |   |   |   |
|                                                                                                     |       |                                     |       |   |   |   |   |
| Current  liabilities:                                                                                    |       |                                     |       |   |   |   |   |
| Current maturities of long-term debt                                                                     |       | $                                        | 354        |   | $ | — |   | $ | 354 |   |
| Accounts payable                                                                                         |       | 473                                      |       | — |   | 473 |   |
| Accrued expenses                                                                                         |       | 466                                      |       | — |   | 466 |   |
| Total current liabilities                                                                                |       | 1,293                                    |       | — |   | 1,293 |   |
|                                                                                                     |       |                                     |       |   |   |   |   |
| Long-term debt,  excluding current maturities                                                            |       | 1,572                                    |       | — |   | 1,572 |   |
| Total liabilities                                                                                        |       | 2,865                                    |       | — |   | 2,865 |   |
|                                                                                                     |       |                                     |       |   |   |   |   |
| Stockholders’  equity:                                                                              |       |                                     |       |   |   |   |   |
| Common stock of $.005 par value, authorized  30,000,000 shares; issued and outstanding 20,896,265 shares |       | 104                                      |       | — |   | 104 |   |
| Additional paid-in capital                                                                               |       | 27,298                                   |       | — |   | 27,298 |   |
| Accumulated other comprehensive income—foreign  currency translation adjustments                    |       | 19                                       |       | — |   | 19 |   |
| Accumulated deficit (A, B, E)                                                                            |       | (12,517                                  | )          | 275 |   | (12,245 | ) |
| Total stockholders’ equity                                                                          |       | 14,904                                   |       | 275 |   | 15,179 |   |
| Total  liabilities and stockholders’ equity                                                         |       | $                                        | 17,769     |   | $ | 275 |   | $ | 18,044 |   |

 

60

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** **
| ** **                                                                                               | ** ** | **Consolidated Balance Sheet** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                               | ** ** | **June 30,  2005**                  | ** ** | **Adjustments** | ** ** | **June 30,  2005** | ** ** |
| **(in thousands, except share data)**                                                | ** ** | **(As reported)**                   | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| ASSETS                                                                                                   |       |                                     |       |   |   |   |   |
| Current assets:                                                                                          |       |                                     |       |   |   |   |   |
| Cash and cash equivalents                                                                                |       | $                                        | 1,743      |   | $ | — |   | $ | 1,743 |   |
| Short-term investments                                                                                   |       | 1,000                                    |       | — |   | 1,000 |   |
| Accounts receivable, net                                                                                 |       | 2,371                                    |       | — |   | 2,371 |   |
| Refundable income taxes (B, E)                                                                           |       | 51                                       |       | (22 | ) | 29 |   |
| Inventories (A)                                                                                          |       | 1,589                                    |       | 273 |   | 1,862 |   |
| Prepaid expenses and other current assets                                                                |       | 168                                      |       | — |   | 168 |   |
| Total current assets                                                                                     |       | 6,922                                    |       | 251 |   | 7,173 |   |
| Equipment and  leasehold improvements, net                                                               |       | 10,877                                   |       | — |   | 10,877 |   |
| Other assets                                                                                             |       | 541                                      |       | — |   | 541 |   |
| Total assets                                                                                             |       | $                                        | 18,340     |   | $ | 251 |   | $ | 18,591 |   |
|                                                                                                     |       |                                     |       |   |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                               |       |                                     |       |   |   |   |   |
| Current  liabilities:                                                                                    |       |                                     |       |   |   |   |   |
| Current maturities of long-term debt                                                                     |       | $                                        | 354        |   | $ | — |   | $ | 354 |   |
| Accounts payable                                                                                         |       | 576                                      |       | — |   | 576 |   |
| Accrued expenses                                                                                         |       | 521                                      |       | — |   | 521 |   |
| Total current liabilities                                                                                |       | 1,451                                    |       | — |   | 1,451 |   |
| Long-term debt,  excluding current maturities                                                            |       | 1,658                                    |       | — |   | 1,658 |   |
| Total liabilities                                                                                        |       | 3,109                                    |       | — |   | 3,109 |   |
| Stockholders’  equity:                                                                              |       |                                     |       |   |   |   |   |
| Common stock of $.005 par value, authorized  30,000,000 shares; issued and outstanding 20,896,265 shares |       | 104                                      |       | — |   | 104 |   |
| Additional paid-in capital                                                                               |       | 27,298                                   |       | — |   | 27,298 |   |
| Accumulated other comprehensive income—foreign  currency translation adjustments                    |       | 25                                       |       | — |   | 25 |   |
| Accumulated deficit (A, B, E)                                                                            |       | (12,196                                  | )          | 251 |   | (11,945 | ) |
| Total stockholders’ equity                                                                          |       | 15,231                                   |       | 251 |   | 15,482 |   |
| Total  liabilities and stockholders’ equity                                                         |       | $                                        | 18,340     |   | $ | 251 |   | $ | 18,591 |   |

 

61

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** **
| ** **                                                                                                | ** ** | **Consolidated Balance Sheet** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                | ** ** | **December 31,  2004**              | ** ** | **Adjustments** | ** ** | **December 31,  2004** | ** ** |
| **(in thousands, except share data)**                                                 | ** ** | **(As reported)**                   | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| ASSETS                                                                                                    |       |                                     |       |   |   |   |   |
| Current assets:                                                                                           |       |                                     |       |   |   |   |   |
| Cash and cash equivalents (D)                                                                             |       | $                                        | 2,582      |   | $ | (1,000 | ) | $ | 1,582 |   |
| Short-term investments (D)                                                                                |       | —                                   |       | 1,000 |   | 1,000 |   |
| Accounts receivable, net                                                                                  |       | 2,414                                    |       | — |   | 2,414 |   |
| Refundable income taxes (E)                                                                               |       | 14                                       |       | 25 |   | 39 |   |
| Inventories (A)                                                                                           |       | 1,476                                    |       | 240 |   | 1,716 |   |
| Prepaid expenses and other current assets                                                                 |       | 126                                      |       | — |   | 126 |   |
| Total current assets                                                                                      |       | 6,612                                    |       | 265 |   | 6,877 |   |
| Equipment and  leasehold improvements, net                                                                |       | 11,393                                   |       | — |   | 11,393 |   |
| Other assets                                                                                              |       | 568                                      |       | — |   | 568 |   |
| Total assets                                                                                              |       | $                                        | 18,573     |   | $ | 265 |   | $ | 18,838 |   |
|                                                                                                      |       |                                     |       |   |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                |       |                                     |       |   |   |   |   |
| Current  liabilities:                                                                                     |       |                                     |       |   |   |   |   |
| Current maturities of long-term debt                                                                      |       | $                                        | 346        |   | $ | — |   | $ | 346 |   |
| Accounts payable                                                                                          |       | 618                                      |       | — |   | 618 |   |
| Accrued expenses                                                                                          |       | 657                                      |       | — |   | 657 |   |
| Total current liabilities                                                                                 |       | 1,621                                    |       | — |   | 1,621 |   |
| Long-term debt,  excluding current maturities                                                             |       | 1,838                                    |       | — |   | 1,838 |   |
| Total liabilities                                                                                         |       | 3,459                                    |       | — |   | 3,459 |   |
| Stockholders’  equity:                                                                               |       |                                     |       |   |   |   |   |
| Common stock of $.005 par value, authorized  30,000,000 shares; issued and outstanding 20,840,365 shares. |       | 104                                      |       | — |   | 104 |   |
| Additional paid-in capital                                                                                |       | 27,245                                   |       | — |   | 27,245 |   |
| Accumulated other comprehensive income—foreign  currency translation adjustments                     |       | 40                                       |       | — |   | 40 |   |
| Accumulated deficit (A, E)                                                                                |       | (12,275                                  | )          | 265 |   | (12,010 | ) |
| Total stockholders’ equity                                                                           |       | 15,114                                   |       | 265 |   | 15,379 |   |
| Total liabilities  and stockholders’ equity                                                          |       | $                                        | 18,573     |   | $ | 265 |   | $ | 18,838 |   |

 

62

----

** **
| ** **                                                                                               | ** ** | **Consolidated Balance Sheet** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                               | ** ** | **September 30,  2004**             | ** ** | **Adjustments** | ** ** | **September 30,  2004** | ** ** |
| **(in thousands, except share data)**                                                | ** ** | **(As reported)**                   | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| ASSETS                                                                                                   |       |                                     |       |   |   |   |   |
| Current assets:                                                                                          |       |                                     |       |   |   |   |   |
| Cash and cash equivalents (D)                                                                            |       | $                                        | 2,395      |   | $ | (1,000 | ) | $ | 1,395 |   |
| Short-term investments (D)                                                                               |       | —                                   |       | 1,000 |   | 1,000 |   |
| Accounts receivable, net                                                                                 |       | 2,102                                    |       | — |   | 2,102 |   |
| Refundable income taxes (E)                                                                              |       | —                                   |       | 25 |   | 25 |   |
| Inventories (A)                                                                                          |       | 1,404                                    |       | 212 |   | 1,616 |   |
| Prepaid expenses and other current assets                                                                |       | 225                                      |       | — |   | 225 |   |
| Total current assets                                                                                     |       | 6,126                                    |       | 237 |   | 6,363 |   |
| Equipment and  leasehold improvements, net                                                               |       | 11,598                                   |       | — |   | 11,598 |   |
| Other assets                                                                                             |       | 572                                      |       | — |   | 572 |   |
| Total assets                                                                                             |       | $                                        | 18,296     |   | $ | 237 |   | $ | 18,533 |   |
|                                                                                                     |       |                                     |       |   |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                               |       |                                     |       |   |   |   |   |
| Current  liabilities:                                                                                    |       |                                     |       |   |   |   |   |
| Current maturities of long-term debt                                                                     |       | $                                        | 346        |   | $ | — |   | $ | 346 |   |
| Accounts payable                                                                                         |       | 676                                      |       | — |   | 676 |   |
| Accrued expenses                                                                                         |       | 630                                      |       | — |   | 630 |   |
| Total current liabilities                                                                                |       | 1,652                                    |       | — |   | 1,652 |   |
| Long-term debt,  excluding current maturities                                                            |       | 1,924                                    |       | — |   | 1,924 |   |
| Total liabilities                                                                                        |       | 3,576                                    |       | — |   | 3,576 |   |
| Stockholders’  equity:                                                                              |       |                                     |       |   |   |   |   |
| Common stock of $.005 par value, authorized  30,000,000 shares; issued and outstanding 20,764,140 shares |       | 104                                      |       | — |   | 104 |   |
| Additional paid-in capital                                                                               |       | 27,197                                   |       | — |   | 27,197 |   |
| Accumulated other comprehensive income—foreign  currency translation adjustments                    |       | 20                                       |       | — |   | 20 |   |
| Accumulated deficit (A, E)                                                                               |       | (12,601                                  | )          | 237 |   | (12,364 | ) |
| Total stockholders’ equity                                                                          |       | 14,720                                   |       | 237 |   | 14,957 |   |
| Total  liabilities and stockholders’ equity                                                         |       | $                                        | 18,296     |   | $ | 237 |   | $ | 18,533 |   |

 

63

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** **
| ** **                                                                                               | ** ** | **Consolidated Balance Sheet** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                               | ** ** | **June 30,  2004**                  | ** ** | **Adjustments** | ** ** | **June 30,  2004** | ** ** |
| **(in thousands, except share data)**                                                | ** ** | **(As reported)**                   | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| ASSETS                                                                                                   |       |                                     |       |   |   |   |   |
| Current assets:                                                                                          |       |                                     |       |   |   |   |   |
| Cash and cash equivalents (D)                                                                            |       | $                                        | 2,441      |   | $ | (500 | ) | $ | 1,941 |   |
| Short-term investments (D)                                                                               |       | —                                   |       | 500 |   | 500 |   |
| Accounts receivable, net                                                                                 |       | 1,945                                    |       | — |   | 1,945 |   |
| Refundable income taxes (E)                                                                              |       | 11                                       |       | 25 |   | 36 |   |
| Inventories (A)                                                                                          |       | 1,307                                    |       | 127 |   | 1,434 |   |
| Prepaid expenses and other current assets                                                                |       | 200                                      |       | — |   | 200 |   |
| Total current assets                                                                                     |       | 5,904                                    |       | 152 |   | 6,056 |   |
| Equipment and  leasehold improvements, net                                                               |       | 11,748                                   |       | — |   | 11,748 |   |
| Other assets                                                                                             |       | 588                                      |       | — |   | 588 |   |
| Total assets                                                                                             |       | $                                        | 18,240     |   | $ | 152 |   | $ | 18,392 |   |
|                                                                                                     |       |                                     |       |   |   |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                               |       |                                     |       |   |   |   |   |
| Current  liabilities:                                                                                    |       |                                     |       |   |   |   |   |
| Current maturities of long-term debt                                                                     |       | $                                        | 346        |   | $ | — |   | $ | 346 |   |
| Accounts payable                                                                                         |       | 716                                      |       | — |   | 716 |   |
| Accrued expenses                                                                                         |       | 568                                      |       | — |   | 568 |   |
| Total current liabilities                                                                                |       | 1,630                                    |       | — |   | 1,630 |   |
| Long-term debt,  excluding current maturities                                                            |       | 2,009                                    |       | — |   | 2,009 |   |
| Total liabilities                                                                                        |       | 3,639                                    |       | — |   | 3,639 |   |
| Stockholders’  equity:                                                                              |       |                                     |       |   |   |   |   |
| Common stock of $.005 par value, authorized  25,000,000 shares; issued and outstanding 20,748,990 shares |       | 104                                      |       | — |   | 104 |   |
| Additional paid-in capital                                                                               |       | 27,175                                   |       | — |   | 27,175 |   |
| Accumulated other comprehensive income—foreign  currency translation adjustments                    |       | 44                                       |       | — |   | 44 |   |
| Accumulated deficit (A, E)                                                                               |       | (12,722                                  | )          | 152 |   | (12,570 | ) |
| Total stockholders’ equity                                                                          |       | 14,601                                   |       | 152 |   | 14,753 |   |
| Total  liabilities and stockholders’ equity                                                         |       | $                                        | 18,240     |   | $ | 152 |   | $ | 18,392 |   |

 

64

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**CYANOTECH CORPORATION ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
| ** **                                                         | ** ** | **Consolidated Statement of Operations** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Three Months  Ended  March 31,  2006**      | ** ** | **Adjustments** | ** ** | **Three Months  Ended  March 31,  2006** | ** ** |
| **(in thousands, except per share data)** | ** ** | **(As reported)**                                  | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| Net sales                                                          |       | $                                                       | 3,252      |   | $ | — |   | $ | 3,252 |   |
| Cost of sales (A)                                                  |       | 2,180                                                   |       | 258 |   | 2,438 |   |
| Gross profit                                                       |       | 1,072                                                   |       | (258 | ) | 814 |   |
| Operating expenses:                                                |       |                                                    |       |   |   |   |   |
| Research and  development (A)                                      |       | 48                                                      |       | (1 | ) | 47 |   |
| Sales and marketing (A)                                            |       | 343                                                     |       | (6 | ) | 337 |   |
| General and  administrative (A)                                    |       | 462                                                     |       | (15 | ) | 447 |   |
| Total operating expense                                            |       | 853                                                     |       | (22 | ) | 831 |   |
| Income (loss) from  operations                                     |       | 219                                                     |       | (236 | ) | (17 | ) |
| Other income (expense):                                            |       |                                                    |       |   |   |   |   |
| Interest income                                                    |       | 10                                                      |       | — |   | 10 |   |
| Interest expense                                                   |       | (44                                                     | )          | — |   | (44 | ) |
| Total other expense,  net                                          |       | (34                                                     | )          | — |   | (34 | ) |
| Income (loss) before  income taxes                                 |       | 185                                                     |       | (236 | ) | (51 | ) |
| Income tax benefit (E)                                             |       | (9                                                      | )          | 1 |   | (8 | ) |
| Net income (loss)                                                  |       | $                                                       | 194        |   | $ | (237 | ) | $ | (43 | ) |
| Net income (loss) per  share:                                      |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | $                                                       | 0.01       |   | $ | (0.01 | ) | $ | (0.00 | ) |
| Diluted                                                            |       | $                                                       | 0.01       |   | $ | (0.01 | ) | $ | (0.00 | ) |
| Shares used in  calculation of net income (loss) per share:        |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | 20,919                                                  |       | — |   | 20,919 |   |
| Diluted                                                            |       | 20,955                                                  |       | — |   | 20,919 |   |

** **

65

----

**CYANOTECH CORPORATION ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
| ** **                                                         | ** ** | **Consolidated Statement of Operations** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Three Months  Ended  December 31,  2005**   | ** ** | **Adjustments** | ** ** | **Three Months  Ended  December 31,  2005** | ** ** |
| **(in thousands, except per share data)** | ** ** | **(As reported)**                                  | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| Net sales                                                          |       | $                                                       | 2,333      |   | $ | — |   | $ | 2,333 |   |
| Cost of sales  (A)                                                 |       | 1,712                                                   |       | (38 | ) | 1,674 |   |
| Gross profit                                                       |       | 621                                                     |       | 38 |   | 659 |   |
| Operating  expenses:                                               |       |                                                    |       |   |   |   |   |
| Research and development (A)                                       |       | 45                                                      |       | (1 | ) | 44 |   |
| Sales and marketing (A)                                            |       | 351                                                     |       | (4 | ) | 347 |   |
| General and administrative (A)                                     |       | 461                                                     |       | (17 | ) | 444 |   |
| Total operating expense                                            |       | 857                                                     |       | (22 | ) | 835 |   |
| Income (loss) from operations                                      |       | (236                                                    | )          | 60 |   | (176 | ) |
| Other income  (expense):                                           |       |                                                    |       |   |   |   |   |
| Interest income                                                    |       | 13                                                      |       | — |   | 13 |   |
| Interest expense                                                   |       | (46                                                     | )          | — |   | (46 | ) |
| Other expense, net                                                 |       | (2                                                      | )          | — |   | (2 | ) |
| Total other expense, net                                           |       | (35                                                     | )          | — |   | (35 | ) |
| Income (loss) before income taxes                                  |       | (271                                                    | )          | 60 |   | (211 | ) |
| Income tax expense (benefit) (B, E)                                |       | 23                                                      |       | (24 | ) | (1 | ) |
| Net income (loss)                                                  |       | $                                                       | (294       | ) | $ | 84 |   | $ | (210 | ) |
| Net income  (loss) per share:                                      |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | $                                                       | (0.01      | ) | $ | 0.00 |   | $ | (0.01 | ) |
| Diluted                                                            |       | $                                                       | (0.01      | ) | $ | 0.00 |   | $ | (0.01 | ) |
| Shares used in  calculation of net income (loss) per share:        |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | 20,906                                                  |       | — |   | 20,906 |   |
| Diluted                                                            |       | 20,906                                                  |       | — |   | 20,906 |   |

** **

66

----

**CYANOTECH CORPORATION ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
| ** **                                                         | ** ** | **Consolidated Statement of Operations** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Three Months  Ended  September 30,  2005**  | ** ** | **Adjustments** | ** ** | **Three Months  Ended  September 30,  2005** | ** ** |
| **(in thousands, except per share data)** | ** ** | **(As reported)**                                  | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| Net sales                                                          |       | $                                                       | 2,517      |   | $ | — |   | $ | 2,517 |   |
| Cost of sales  (A)                                                 |       | 1,936                                                   |       | (1 | ) | 1,935 |   |
| Gross profit                                                       |       | 581                                                     |       | 1 |   | 582 |   |
| Operating  expenses:                                               |       |                                                    |       |   |   |   |   |
| Research and development (A)                                       |       | 53                                                      |       | (1 | ) | 52 |   |
| Sales and marketing (A)                                            |       | 304                                                     |       | (4 | ) | 300 |   |
| General and administrative (A)                                     |       | 522                                                     |       | (18 | ) | 504 |   |
| Total operating expense                                            |       | 879                                                     |       | (23 | ) | 856 |   |
| Income (loss) from operations                                      |       | (298                                                    | )          | 24 |   | (274 | ) |
| Other income  (expense):                                           |       |                                                    |       |   |   |   |   |
| Interest income                                                    |       | 8                                                       |       | — |   | 8 |   |
| Interest expense                                                   |       | (35                                                     | )          | — |   | (35 | ) |
| Other income, net                                                  |       | 2                                                       |       | — |   | 2 |   |
| Total other expense, net                                           |       | (25                                                     | )          |   |   | (25 | ) |
| Income (loss) before income taxes                                  |       | (323                                                    | )          | 24 |   | (299 | ) |
| Income tax benefit                                                 |       | (2                                                      | )          | — |   | (2 | ) |
| Net income (loss)                                                  |       | $                                                       | (321       | ) | $ | 24 |   | $ | (297 | ) |
| Net income  (loss) per share:                                      |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | $                                                       | (0.02      | ) | $ | 0.01 |   | $ | (0.01 | ) |
| Diluted                                                            |       | $                                                       | (0.02      | ) | $ | 0.01 |   | $ | (0.01 | ) |
|  Shares used in calculation of net income  (loss) per share:  |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | 20,896                                                  |       | — |   | 20,896 |   |
| Diluted                                                            |       | 20,896                                                  |       | — |   | 20,896 |   |

** **

67

----

**CYANOTECH CORPORATION ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
| ** **                                                         | ** ** | **Consolidated Statement of Operations** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Three Months  Ended  June 30,  2005**       | ** ** | **Adjustments** | ** ** | **Three Months  Ended  June 30,  2005** | ** ** |
| **(in thousands, except per share data)** | ** ** | **(As reported)**                                  | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| Net sales                                                          |       | $                                                       | 3,029      |   | $ | — |   | $ | 3,029 |   |
| Cost of sales  (A)                                                 |       | 2,004                                                   |       | 20 |   | 2,024 |   |
| Gross profit                                                       |       | 1,025                                                   |       | (20 | ) | 1,005 |   |
| Operating  expenses:                                               |       |                                                    |       |   |   |   |   |
| Research and development (A)                                       |       | 46                                                      |       | (2 | ) | 44 |   |
| Sales and marketing (A)                                            |       | 333                                                     |       | (5 | ) | 328 |   |
| General and administrative (A)                                     |       | 438                                                     |       | (19 | ) | 419 |   |
| Total operating expense                                            |       | 817                                                     |       | (26 | ) | 791 |   |
| Income (loss) from operations                                      |       | 208                                                     |       | 6 |   | 214 |   |
| Other income  (expense):                                           |       |                                                    |       |   |   |   |   |
| Interest income                                                    |       | 15                                                      |       | — |   | 15 |   |
| Interest expense                                                   |       | (55                                                     | )          | — |   | (55 | ) |
| Other expense, net                                                 |       | (10                                                     | )          | — |   | (10 | ) |
| Total other expense, net                                           |       | (50                                                     | )          | — |   | (50 | ) |
| Income (loss) before income taxes                                  |       | 158                                                     |       | 6 |   | 164 |   |
| Income tax expense                                                 |       | 5                                                       |       | — |   | 5 |   |
| Net income (loss)                                                  |       | $                                                       | 153        |   | $ | 6 |   | $ | 159 |   |
| Net income (loss) per share:                                       |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | $                                                       | 0.01       |   | $ | 0.00 |   | $ | 0.01 |   |
| Diluted                                                            |       | $                                                       | 0.01       |   | $ | 0.00 |   | $ | 0.01 |   |
| Shares used in  calculation of net income (loss) per share:        |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | 20,896                                                  |       | — |   | 20,896 |   |
| Diluted                                                            |       | 21,019                                                  |       | — |   | 21,019 |   |

** **

68

----

**CYANOTECH CORPORATION ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
| ** **                                                         | ** ** | **Consolidated Statement of Operations** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Three Months  Ended  March 31,  2005**      | ** ** | **Adjustments** | ** ** | **Three Months  Ended  March 31,  2005** | ** ** |
| **(in thousands, except per share data)** | ** ** | **(As reported)**                                  | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| Net sales                                                          |       | $                                                       | 2,560      |   | $ | — |   | $ | 2,560 |   |
| Cost of sales  (A)                                                 |       | 1,846                                                   |       | (13 | ) | 1,833 |   |
| Gross profit                                                       |       | 714                                                     |       | 13 |   | 727 |   |
| Operating  expenses:                                               |       |                                                    |       |   |   |   |   |
| Research and development (A)                                       |       | 92                                                      |       | (1 | ) | 91 |   |
| Sales and marketing (A)                                            |       | 310                                                     |       | (5 | ) | 305 |   |
| General and administrative (A)                                     |       | 402                                                     |       | (8 | ) | 394 |   |
| Total operating expense                                            |       | 804                                                     |       | (14 | ) | 790 |   |
| Income (loss) from operations                                      |       | (90                                                     | )          | 27 |   | (63 | ) |
| Other income  (expense):                                           |       |                                                    |       |   |   |   |   |
| Interest income                                                    |       | 6                                                       |       | — |   | 6 |   |
| Interest expense                                                   |       | (41                                                     | )          | — |   | (41 | ) |
| Other expense, net                                                 |       | (11                                                     | )          | — |   | (11 | ) |
| Total other expense, net                                           |       | (46                                                     | )          | — |   | (46 | ) |
| Income (loss) before income taxes                                  |       | (136                                                    | )          | 27 |   | (109 | ) |
| Income tax expense (benefit) (B, E)                                |       | (62                                                     | )          | 47 |   | (15 | ) |
| Net loss                                                           |       | $                                                       | (74        | ) | $ | (20 | ) | $ | (94 | ) |
| Net loss per  share:                                               |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | $                                                       | (0.00      | ) | $ | 0.00 |   | $ | (0.00 | ) |
| Diluted                                                            |       | $                                                       | (0.00      | ) | $ | 0.00 |   | $ | (0.00 | ) |
| Shares used in  calculation of net loss per share:                 |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | 20,877                                                  |       | — |   | 20,877 |   |
| Diluted                                                            |       | 20,877                                                  |       | — |   | 20,877 |   |

** **

69

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**CYANOTECH CORPORATION ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
| ** **                                                         | ** ** | **Consolidated Statement of Operations** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Three Months  Ended  December 31,  2004**   | ** ** | **Adjustments** | ** ** | **Three Months  Ended  December 31,  2004** | ** ** |
| **(in thousands, except per share data)** | ** ** | **(As reported)**                                  | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| Net sales                                                          |       | $                                                       | 3,180      |   | $ | — |   | $ | 3,180 |   |
| Cost of sales  (A)                                                 |       | 2,017                                                   |       | (4 | ) | 2,013 |   |
| Gross profit                                                       |       | 1,163                                                   |       | 4 |   | 1,167 |   |
| Operating  expenses:                                               |       |                                                    |       |   |   |   |   |
| Research and development (A)                                       |       | 38                                                      |       | (1 | ) | 37 |   |
| Sales and marketing (A)                                            |       | 301                                                     |       | (3 | ) | 298 |   |
| General and administrative (A)                                     |       | 506                                                     |       | (20 | ) | 486 |   |
| Total operating expense                                            |       | 845                                                     |       | (24 | ) | 821 |   |
| Income from operations                                             |       | 318                                                     |       | 28 |   | 346 |   |
| Other income  (expense):                                           |       |                                                    |       |   |   |   |   |
| Interest income                                                    |       | 8                                                       |       | — |   | 8 |   |
| Interest expense                                                   |       | (43                                                     | )          | — |   | (43 | ) |
| Other income, net                                                  |       | 37                                                      |       | — |   | 37 |   |
| Total other income, net                                            |       | 2                                                       |       | — |   | 2 |   |
| Income before income taxes                                         |       | 320                                                     |       | 28 |   | 348 |   |
| Income tax benefit                                                 |       | (6                                                      | )          | — |   | (6 | ) |
| Net income                                                         |       | $                                                       | 326        |   | $ | 28 |   | $ | 354 |   |
| Net income per  share:                                             |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | $                                                       | 0.02       |   | $ | 0.00 |   | $ | 0.02 |   |
| Diluted                                                            |       | $                                                       | 0.02       |   | $ | 0.00 |   | $ | 0.02 |   |
| Shares used in  calculation of net income per share:               |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | 20,771                                                  |       | — |   | 20,771 |   |
| Diluted                                                            |       | 20,988                                                  |       | — |   | 20,988 |   |

** **

70

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**CYANOTECH CORPORATION ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
| ** **                                                         | ** ** | **Consolidated Statement of Operations** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Three Months  Ended  September 30,  2004**  | ** ** | **Adjustments** | ** ** | **Three Months  Ended  September 30,  2004** | ** ** |
| **(in thousands, except per share data)** | ** ** | **(As reported)**                                  | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| Net sales                                                          |       | $                                                       | 2,998      |   | $ | — |   | $ | 2,998 |   |
| Cost of sales  (A)                                                 |       | 1,944                                                   |       | (62 | ) | 1,882 |   |
| Gross profit                                                       |       | 1,054                                                   |       | 62 |   | 1,116 |   |
| Operating  expenses:                                               |       |                                                    |       |   |   |   |   |
| Research and development (A)                                       |       | 62                                                      |       | (2 | ) | 60 |   |
| Sales and marketing (A)                                            |       | 297                                                     |       | (2 | ) | 295 |   |
| General and administrative (A)                                     |       | 522                                                     |       | (19 | ) | 503 |   |
| Total operating expense                                            |       | 881                                                     |       | (23 | ) | 858 |   |
| Income from operations                                             |       | 173                                                     |       | 85 |   | 258 |   |
| Other income  (expense):                                           |       |                                                    |       |   |   |   |   |
| Interest income                                                    |       | 9                                                       |       | — |   | 9 |   |
| Interest expense                                                   |       | (40                                                     | )          | — |   | (40 | ) |
| Other expense, net                                                 |       | (9                                                      | )          | — |   | (9 | ) |
| Total other expense, net                                           |       | (40                                                     | )          | — |   | (40 | ) |
| Income before income taxes                                         |       | 133                                                     |       | 85 |   | 218 |   |
| Income tax expense                                                 |       | 12                                                      |       | — |   | 12 |   |
| Net income                                                         |       | $                                                       | 121        |   | $ | 85 |   | $ | 206 |   |
| Net income per  share:                                             |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | $                                                       | 0.01       |   | $ | 0.00 |   | $ | 0.01 |   |
| Diluted                                                            |       | $                                                       | 0.01       |   | $ | 0.00 |   | $ | 0.01 |   |
| Shares used in  calculation of net income per share:               |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | 20,752                                                  |       | — |   | 20,752 |   |
| Diluted                                                            |       | 21,035                                                  |       | — |   | 21,035 |   |

** **

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**CYANOTECH CORPORATION ANDSUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
| ** **                                                         | ** ** | **Consolidated Statement of Operations** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Three Months  Ended  June 30,  2004**       | ** ** | **Adjustments** | ** ** | **Three Months  Ended  June 30,  2004** | ** ** |
| **(in thousands, except per share data)** | ** ** | **(As reported)**                                  | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| Net sales                                                          |       | $                                                       | 2,707      |   | $ | — |   | $ | 2,707 |   |
| Cost of sales  (A)                                                 |       | 1,820                                                   |       | 5 |   | 1,825 |   |
| Gross profit                                                       |       | 887                                                     |       | (5 | ) | 882 |   |
| Operating  expenses:                                               |       |                                                    |       |   |   |   |   |
| Research and development (A)                                       |       | 65                                                      |       | (2 | ) | 63 |   |
| Sales and marketing (A)                                            |       | 294                                                     |       | (3 | ) | 291 |   |
| General and administrative (A)                                     |       | 367                                                     |       | (22 | ) | 345 |   |
| Total operating expense                                            |       | 726                                                     |       | (27 | ) | 699 |   |
| Income from operations                                             |       | 161                                                     |       | 22 |   | 183 |   |
| Other income  (expense):                                           |       |                                                    |       |   |   |   |   |
| Interest income                                                    |       | 8                                                       |       | — |   | 8 |   |
| Interest expense                                                   |       | (39                                                     | )          | — |   | (39 | ) |
| Other expense, net                                                 |       | (2                                                      | )          | — |   | (2 | ) |
| Total other expense, net                                           |       | (33                                                     | )          | — |   | (33 | ) |
| Income before income taxes                                         |       | 128                                                     |       | 22 |   | 150 |   |
| Income tax expense                                                 |       | 15                                                      |       | — |   | 15 |   |
| Net income                                                         |       | $                                                       | 113        |   | $ | 22 |   | $ | 135 |   |
| Net income per  share:                                             |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | $                                                       | 0.01       |   | $ | 0.00 |   | $ | 0.01 |   |
| Diluted                                                            |       | $                                                       | 0.01       |   | $ | 0.00 |   | $ | 0.01 |   |
| Shares used in  calculation of net income per share:               |       |                                                    |       |   |   |   |   |
| Basic                                                              |       | 20,738                                                  |       | — |   | 20,738 |   |
| Diluted                                                            |       | 20,992                                                  |       | — |   | 20,992 |   |

 

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**Item 9. Changes in andDisagreements with Accountants on Accounting and Financial Disclosure**

Not applicable.

**Item 9A. Controls and Procedures**

(a) **Disclosure Controls and Procedures**

Ourmanagement evaluated the effectiveness of our disclosure controls andprocedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the endof the period covered by the Original Filing. Based on that evaluation, ourmanagement initially concluded and disclosed in our Original Filing that, as ofthe end of such period, our disclosure controls and procedures were effective.As previously announced and disclosed in the Company’s Form 12b-25 (NT 10-Q)filed on August 8, 2006, an accounting review was initiated to address a matterinvolving the Company’s historical treatment of certain inventory relatedcosts.  As a result of this review,errors were identified in the application of certain accounting practices andprocedures related to accounting for certain fixed costs such as portions ofdepreciation, general insurance and minor compensation costs which should beincluded in the carrying value of inventory.  Based on the foregoing information, our chief executive officer andchief financial officer have re-evaluated the effectiveness of our disclosurecontrols and procedures (as such term is defined in Rules 13a-15(e) or15d-15(e) under the Exchange Act of 1934) as of the end of the period coveredby the Original Filing. Based on such re-evaluation, our chief executiveofficer and our chief financial officer concluded and reported by filing a Form8-K on December 1, 2006 that as of March 31, 2006 our disclosure controls andprocedures were not effective because of the material weakness in our internalcontrol described below.

                A material weakness in internalcontrol over financial reporting (as defined in paragraph 140 of AuditingStandard No. 2 of the Public Company Accounting Oversight Board) is asignificant deficiency, or combination of significant deficiencies, thatresults in more than a remote likelihood that a material misstatement of theannual or interim consolidated financial statements will not be prevented ordetected. A significant deficiency is a control deficiency, or combination ofcontrol deficiencies, that adversely affects a company’s ability to initiate,authorize, record, process, or report external financial data reliably inaccordance with generally accepted accounting principles (GAAP) such that thereis more than a remote likelihood that a misstatement of the company’s annual orinterim consolidated financial statements that is more than inconsequentialwill not be prevented or detected.

                TheCompany identified the following internal control deficiency during the first quarterof fiscal year 2007 in conjunction with the Company’s previously disclosedintent to adopt Statement of Financial Accounting Standards No. 151 for thefirst quarter of fiscal year 2007:

                ·  **Controls over theaccounting for inventory:**The Company did not maintain effectivecontrols over accounting for inventory. Specifically, the Company did not haveeffective policies and procedures and adequately trained and qualifiedaccounting department staff to ensure that inventory included all inventoriablefixed cost components such as depreciation, portions of general insurancecosts, and portions of direct labor burden costs in accordance with GAAP. As aresult, of this material weakness, the Company was required to restate itsconsolidated financial statements as of and for fiscal years ended March 31,2006, 2005 and 2004, and has restated selected financial data for the yearsended March 31, 2003 and 2002 to adjust its inventory balances, cost of goodssold, and restated amounts of income and loss.

In light of the material weakness in our internalcontrol over financial reporting described above, we performed additionalanalysis and other post-closing procedures to ensure our consolidated financialstatements as restated are prepared in accordance with GAAP. We implementedcertain changes in internal control over financial reporting and will continueto implement remediation efforts, as described below under section (b).Accordingly, we believe that the consolidated financial statements included inthis Form 10-K/A fairly present in all material respects our financialposition, results of operations and cash flows for the periods presented.

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**(b)Changes in Internal Control Over Financial Reporting**

                In the Original Filing, ourmanagement concluded that there had not been any changes in the Company’sinternal controls over financial reporting (as defined in Rule 13a-15(f) and15d-15(f) under the Exchange Act) during the quarter and year ended March 31,2006, that had materially affected, or were reasonably likely to materiallyaffect, the Company’s internal control over financial reporting. Subsequently,in connection with the identification of the material weaknesses described insection (a) above we have made improvements and will make additionalimprovements to our internal control over financial reporting, including:

          ·  We will hire additional qualified accountingdepartment staff to oversee inventory and related accounting and financialreporting matters.

          ·  We will thoroughly document our inventoryaccounting system and procedures and will regularly review this documentationin light of actual practice to ensure that both are adequately controlled toassure that the accounting for inventory is in accordance with GAAP.

          ·  We will conduct periodic analysis of ourinventory accounting systems and procedures and will regularly review theresults to ensure that our procedures and systems are adequately controlled andthat the accounting for inventory is in accordance with GAAP.

          ·  In response to the foregoing and as part ofits remediation efforts, management has recommended and the Company’s AuditCommittee and Board of Directors have approved and adopted a remediation planwhich includes, in summary, that policies and procedures will be designed toensure full compliance with GAAP, particularly as it applies to inventoryaccounting, and will address key financial reporting risk elements.  In addition, the Company will assure that itsresulting disclosures are subject to adequate review and a rigorous review processprior to finalizing and releasing financial statements.  The Company has and will continue to updateits inventory accounting systems and procedures to properly accommodatespecific inventoriable fixed costs in accordance with GAAP.   Additionally, the Company will continue toidentify resources with the critical skills necessary to ensure full compliancewith GAAP.

**Item 9B. OtherInformation**

Not applicable

**PART III**

**Item 10. Directors andExecutive Officers of the Registrant**

Information with respectto Directors may be found under captions “Proposal One: Election of Directors,”“Board Meetings and Committees,” “Director Compensation,” “Security Ownershipof Certain Beneficial Owners and Management” and “Compliance withSection 16(a) of the Exchange Act” contained in Cyanotech’sdefinitive 2006 Proxy Statement. Information on Executive Officers may be foundunder the caption “Executive Officers” contained in Cyanotech’s definitive 2006Proxy Statement. Such information is incorporated herein by reference.

We have adopted theCyanotech Code of Ethics for Chief Executive Officer and Senior FinancialOfficers (the “Code of Ethics”) included in our Code of Conduct. Our Code ofConduct and Ethics is publicly available on our website at www.cyanotech.com.If we make any substantive amendments to or grant any waivers from such Coderelating to our Chief Executive Officer, Chief Financial Officer or Controller,we will disclose the nature of such amendment in a report on Form 8-Kand amend the website disclosure.

**Item 11. ExecutiveCompensation**

The information requiredby this Item is incorporated herein by reference from the sections captioned “ExecutiveCompensation and Other Information,” “Equity Compensation Plan Information,” “OptionGrants in Last Fiscal Year,” “Aggregated Option Exercises in Last Fiscal Yearand Fiscal Year-End Option Values,” and “Stockholder Return Performance Graph”contained in Cyanotech’s definitive 2006 Proxy Statement.

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**Item12. Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters**

The security ownership information required by thisItem is incorporated herein by reference from the sections captioned “EquityCompensation Plan Information” and “Security Ownership of Certain BeneficialOwners and Management” contained in Cyanotech’s definitive 2006 ProxyStatement.

**Item13. Certain Relationships and Related Transactions**

Not applicable.

**Item14. Principal Accountant Fees and Services**

Information concerning principal accountant fees andservices appears in Cyanotech’s definitive 2006 Proxy Statement under theheading “Independent Registered Public Accounting Firm’s Fees” and isincorporated herein by reference.

**PART IV**

**Item15. Financial Statement Schedules and Exhibits**

(a)                                  FinancialStatements and Schedules

·              The followingFinancial Statements of Cyanotech Corporation and subsidiaries and the Reportof Independent Registered Public Accounting Firm are included in Item 8 of thisreport:

| Consolidated Balance Sheets,  March 31, 2006 and 2005                                                                                    |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Consolidated Statements of Operations for the years  ended March 31, 2006, 2005 and 2004                                                 |   |   |
| Consolidated Statements of Stockholders’ Equity and  Comprehensive Income (Loss) for the years ended March 31, 2006, 2005 and  2004 |   |   |
| Consolidated Statements of Cash Flows for the years  ended March 31, 2006, 2005 and 2004                                                 |   |   |
| Notes to Consolidated Financial Statements                                                                                                    |   |   |

 

·              The followingfinancial statement schedule is included in this report on the pages indicatedbelow:

| Schedule II—Valuation and  Qualifying Accounts      |   |   |
|----------------------------------------------------------|--------|--------|
| Report of Independent Registered Public Accounting  Firm |   |   |

 

Financialstatement schedules not listed above have been omitted since they are eithernot required, not applicable or the information is included in the consolidatedfinancial statements or notes thereto.

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(b)                                 Exhibit Listing
| Exhibit Number | ** ** | **Document Description**                                                                                                                                                                                                                                                                                                                                             |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Restated Articles of Incorporation (Incorporated by  reference to Exhibit 3.1 to the Company’s Quarterly Report on  Form 10-QSB for the quarter ended December 31, 1996, File  No. 0-14602)                                                                                                                                                 |
| 3.2                 |       | Bylaws of the Registrant, as amended (Incorporated  by reference to Exhibit 3.1 to the Company’s Quarterly Report on  Form 10-QSB for the quarter ended December 31, 1996, File  No. 0-14602)                                                                                                                                               |
| 4.1                 |       | Specimen Common Stock Certificate (Incorporated by  reference to Exhibit 4.1 to The Company’s Registration Statement on  Form SB-2 filed on February 28, 1996, File No. 333-00951)                                                                                                                                                          |
| 10.1                |       | 1994 Non-Employee Directors Stock Option and Stock  Grant Program (Incorporated by reference to Exhibit 10.7 to the  Company’s Annual Report on Form 10-KSB for the fiscal year ended  March 31, 1994, File No. 0-14602)                                                                                                                    |
| 10.2                |       | 1995 Stock Option Plan for Cyanotech Corporation  dated August 9, 1995, as amended (Incorporated by reference to  Exhibit 4(c) to the Company’s Registration Statement on  Form S-8 filed on October 27, 1995, File No. 33-63789)                                                                                                 |
| 10.3                |       | Sub-Lease Agreement between the Company and Natural  Energy Laboratory of Hawaii Authority dated December 29, 1995  (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly  Report on Form 10-QSB for the quarter ended December 31, 1995, File  No. 0-14602)                                                           |
| 10.4                |       | Term Loan Agreement dated April 21, 2000  between the Company and B&I Lending, LLC (Incorporated by reference to  Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the  year ended March 31, 2000, File No. 0-14602)                                                                                                  |
| 10.5                |       | 2005 Stock Option Plan for Cyanotech Corporation  dated August 22, 2005, incorporated by reference to Exhibit A of  the Company’s definitive Proxy Statement filed July 14, 2005, File  No. 0-14602                                                                                                                                         |
| 14.1                |       | Amended Code of Ethics for Chief Executive Officer  and Senior Financial Officers, which is included in the Code of Conduct and  Ethics.(Incorporated by reference to Exhibit 99.2 to the  Company’s Report on Form 8-K filed on December 19, 2005, and by  reference and attachment to the Company’s Internet address  www.cyanotech.com.) |
| 21.1                |       | Subsidiaries of the Company (Incorporated by  reference to Exhibit 21.1 to the Company’s Annual Report on  Form 10-K for the year ended March 31, 2003, File No. 0-14602)                                                                                                                                                                   |
| 23.1*               |       | Consent of Independent Registered Public Accounting  Firm signed February 13, 2007.                                                                                                                                                                                                                                                                             |
| 31.1*               |       | Certifications of Chief Executive Officer Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February 13,  2007.                                                                                                                                                                                                                      |
| 31.2*               |       | Certifications of Chief Financial Officer Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February 13,  2007.                                                                                                                                                                                                                      |
| 32.1*               |       | Certifications of Chief Executive Officer Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of February 13,  2007.                                                                                                                                                                                                                      |
| 32.2*               |       | Certifications of Chief Financial Officer Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of February 13,  2007.                                                                                                                                                                                                                      |

 

----

***Included herewith. Other exhibits were filed as shown above.**

76

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**Schedule II**

**CyanotechCorporation and SubsidiariesValuation and Qualifying Accounts**

**Years Ended March 31, 2006, 2005 and 2004(In Thousands)**
| ** **                           | ** ** | ** **          | ** ** | **Additions**       | ** ** | ** **          | ** ** | ** **     | ** ** |
|--------------------------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|----------------|------------|
| ** **                           | ** ** | **Balance at** | ** ** | **Charged to** | ** ** | **Charged to** | ** ** | ** **     | ** ** | **Balance at** | ** ** |
| ** **                           | ** ** | **Beginning**       | ** ** | **Costs and**  | ** ** | **Other**           | ** ** | ** **     | ** ** | **End of** | ** ** |
| **Description**                      | ** ** | **of Year**    | ** ** | **Expense**         | ** ** | **Accounts**        | ** ** | **Deductions** | ** ** | **Year** | ** ** |
| Allowance for Doubtful  Receivables: |       |                |       |                |       |                |       |           |       |   |   |
| 2006                                 |       | $                   | 46         |                | $          | (8                  | )          | $              | —     |   | $ | 13 |   | $ | 25 |   |
| 2005                                 |       | $                   | 96         |                | $          | 31                  |       | $              | —     |   | $ | 81 |   | $ | 46 |   |
| 2004                                 |       | $                   | 60         |                | $          | 37                  |       | $              | —     |   | $ | 1 |   | $ | 96 |   |

 

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**Reportof Independent Registered Public Accounting Firm**

The Board of Directorsand StockholdersCyanotech Corporation:

Under date of June 16, 2006, except as to Note 13,which is as of February 13, 2007, we reported on the consolidated balancesheets of Cyanotech Corporation and subsidiaries (the Company) as ofMarch 31, 2006 and 2005, and the related consolidated statements ofoperations, stockholders’ equity and comprehensive income (loss), and cashflows for each of the years in the three-year period ended March 31, 2006,which are included in the Company’s March 31, 2006 annual report on Form10-K/A.  In connection with our audits ofthe aforementioned consolidated financial statements, we also audited therelated financial statement schedule as listed in Item 15(a)(2). The financialstatement schedule is the responsibility of the Company’s management. Ourresponsibility is to express an opinion on the financial statement schedulebased on our audits.

In our opinion, suchfinancial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

As discussedin Note 13 to the consolidated financial statements, the Company has restatedits consolidated financial statements as of March 31, 2006 and 2005 and foreach of the years in the three-year period ended March 31, 2006.
| /s/ KPMG LLP                               |
|--------------------------------------------|
|                                       |
| Honolulu, Hawaii                           |
| June 16, 2006, except as to Note 13, which |
| is as of February  13, 2007                |

 

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized, on the 13th day of February, 2007.
|            | **CYANOTECH CORPORATION** |
|------------|---------------------------|
| ** ** | ** **                |
|       | By:                       | /s/ Gerald R.  Cysewski, Ph. D. |
|       |                      | Gerald R.  Cysewski, Ph. D. |
|       | * *                  | *Chairman  of the Board, President* |
|       | * *                  | *and  Chief Executive Officer* |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.
| Signatures                      | ** ** | **Title**                                                           | ** ** | **Date**          |
|---------------------------------|------------|---------------------------------------------------------------------|------------|-------------------|
|                            |       |                                                                |       |              |
| /s/ Gerald R.  Cysewski, Ph. D. |       | Chairman of the Board, President and                                |       | February 13, 2007 |
| Gerald R.  Cysewski, Ph. D.     |       | Chief Executive Officer (Principal Executive Officer  and Director) |       |              |
|                            |       |                                                                |       |              |
| /s/ William R.  Maris           |       | Chief Financial Officer, Vice President—                       |       | February 13, 2007 |
| William R. Maris                |       | Finance and Administration, Secretary and Treasurer                 |       |              |
|                            |       |                                                                |       |              |
| /s/ Michael A.  Davis           |       | Director                                                            |       | February 13, 2007 |
| Michael A. Davis                |       |                                                                |       |              |
|                            |       |                                                                |       |              |
| /s/ Gregg W.  Robertson         |       | Director                                                            |       | February 13, 2007 |
| Gregg W.  Robertson             |       |                                                                |       |              |
|                            |       |                                                                |       |              |
| /s/ David I.  Rosenthal         |       | Director                                                            |       | February 13, 2007 |
| David I.  Rosenthal             |       |                                                                |       |              |
|                            |       |                                                                |       |              |
| /s/ John T.  Waldron            |       | Director                                                            |       | February 13, 2007 |
| John T. Waldron                 |       |                                                                |       |              |
|                            |       |                                                                |       |              |
| /s/ Paul C. Yuen                |       | Director                                                            |       | February 13, 2007 |
| Paul C. Yuen                    |       |                                                                |       |              |

 

 

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