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Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D. C. 20549

FORM 10-K

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

For the Fiscal Year Ended March 31, 2010
Commission File Number 0-146-02

CYANOTECH CORPORATION(Exact name of registrant as specified in its charter)

Nevada

91-1206026(State or other jurisdiction of
incorporation or organization)

(I. R. S. Employer
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) 326-1353Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange on which registered:None

NASDAQ Capital MarketSecurities registered pursuant to Section 12(g) of the Act:Common Stock, $.02 par value(Title of Class)


Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. o Yes]    ý No

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

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

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or such shorter period that the
registrant was required to submit and post such files). ý Yes    o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller
reporting company)

Smaller reporting company ý


Indicated
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). o Yes    ý No

The aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant on June 21, 2010 was approximately
$8,069,433 based on the closing sale price of the Common Stock on the NASDAQ Capital Market on that date.

Number
of shares outstanding of Registrant's Common Stock at June 21, 2010 was 5,252,572.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Definitive Proxy Statement for its 2010 Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission on or prior to July 23, 2010 and to be used in connection with the Annual Meeting of Stockholders expected to be held on September 1, 2010, are incorporated by reference in
Part III of this Form 10-K.



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TABLE OF CONTENTS



ItemPART IDiscussion of Forward-Looking Statements

31.

Business

41A.

Risk Factors

102.

Properties

163.

Legal Proceedings

16PART II5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

177.

Management's Discussion and Analysis of Financial Condition and Results of Operations

187A.

Quantitative and Qualitative Disclosures About Market Risk

288.

Financial Statements and Supplementary Data

299.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

519A

Controls and Procedures

519B.

Other Information

53PART III10.

Directors and Executive Officers of the Registrant

5311.

Executive Compensation

5312.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

5313.

Certain Relationships and Related Transactions

5314.

Principal Accountant Fees and Services

53PART IV15.

Exhibits and Financial Statement Schedules and Exhibits

5416.

Signatures

59


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FORWARD-LOOKING STATEMENTS

This Report and other presentations made by Cyanotech Corporation ("CYAN") and its subsidiaries contain "forward-looking statements,"
which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as "expects," "anticipates," "intends," "plan," "believes,"
"predicts", "estimates" or similar expressions. In addition, any statement concerning future financial performance, ongoing business strategies or prospects and possible future actions are also
forward-looking statements. Forward-looking statements are based upon current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions
concerning CYAN and its subsidiaries (collectively, the "Company"), the performance of the industry in which CYAN does business, and economic and market factors, among other things. These forward-looking statements are not
guarantees of future performance.

Forward-looking
statements speak only as of the date of the Report, presentation or filing in which they are made. Except to the extent required by the Federal Securities Laws, the
Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our forward-looking statements in this
Report include, but are not limited to:



These
forward-looking statements are subject to risk, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of
which are beyond our control. The following factors, among others, could cause our financial performance to differ significantly from the goals, plans, objectives, intentions and expectations
expressed in our forward-looking statements:



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PART I

Item 1.    Business

General

Cyanotech Corporation is a world leader in the production of high value natural products derived from microalgae. Incorporated in 1983,
the Company is guided by the principle of providing beneficial, quality microalgal products for health and human nutrition in a sustainable, reliable and environmentally sensitive operation. We are
ISO 9001:2000 compliant and GMP (Good Manufacturing Practices) certified by the Natural Products Association, reinforcing our commitment to quality in our products, quality in our
relationships (with our customers, suppliers, co-workers and the communities we live in), and quality of the environment we work in. Our products include:



Microalgae
are a diverse group of microscopic plants that have a wide range of physiological and biochemical characteristics and contain, among other things, high levels of natural
protein, amino acids, vitamins, pigments and enzymes. Microalgae have the following properties that make commercial production attractive: (1) microalgae grow much faster than land grown
plants, often up to 100 times faster; (2) microalgae have uniform cell structures with no bark, stems, branches or leaves, permitting easier extraction of products and higher utilization of the
microalgae cells; and (3) the cellular uniformity of microalgae makes it practical to manipulate and control growing conditions in order to optimize a particular cell characteristic. Efficient
and effective cultivation of microalgae requires consistent light, warm temperatures, low rainfall and proper chemical balance in a very nutrient-rich environment, free of environmental
contaminants and unwanted organisms. This is a challenge that has motivated us to design, develop and implement proprietary production and harvesting technologies, systems and processes in order to
provide human nutritional products derived from microalgae.

Our
production of these products at the 90-acre facility on the Kona Coast on the island of Hawaii provides several benefits. We selected the Keahole Point location in order
to take advantage of relatively consistent warm temperatures, sunshine and low levels of rainfall needed for optimal cultivation of microalgae. This location also offers us access to cold deep ocean
water, drawn from an offshore depth of 2,000 feet, which we use in our patentedOcean-Chill Dryingsystem to eliminate the
oxidative damage caused by standard drying techniques and as a source of trace nutrients for microalgal cultures. The area is also designated a Biosecure Zone, free of pesticides and herbicides. We
believe that our technology, systems, processes and favorable growing location generally permit year-round harvest of our microalgal products in a cost-effective manner.

Unless
otherwise indicated, all references in this report to the "Company," "we," "us," "our," and "Cyanotech" refer to Cyanotech Corporation and its wholly owned subsidiary, Nutrex
Hawaii, Inc. ("Nutrex Hawaii" or "Nutrex"), a Hawaii corporation.

Cyanotech's Business

The Company operates entirely in one operating segment, the cultivation and production of microalgae into high-value,
high-quality natural health and nutrition products. We cultivate, on a large-scale basis, two microalgal species from which our two major product lines, spirulina products and natural
astaxanthin products, are derived. We record revenue and cost of sales information by product category but do not record operating expenses by such product category.

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The
following table sets forth, for the three years ended March 31, 2010, the net sales contributed by each of the our product lines (in thousands):

Net Sales2010

2009

2008Spirulina products:Spirulina Pacifica

$
7,744

$
6,835

$
5,980Natural astaxanthin products:BioAstin


7,978


7,093


4,808NatuRose








443Other


20


22


133Total

$
15,742

$
13,950

$
11,364


Spirulina Products

We have been producing a strain of spirulina microalgae marketed asSpirulina Pacificasince 1984. Spirulina Pacificarepresents 49%, 49% and 53% of net sales for the years ended March 31, 2010, 2009 and 2008, respectively. Spirulina Pacificaprovides a vegetable-based, highly absorbable source of protein, natural beta-carotene, mixed carotenoids, B vitamins,
gamma linolenic acid, essential amino acids and other phytonutrients.Spirulina Pacificais produced in two forms: powder and tablets. Powder is used as
an ingredient in nutritional supplements and health beverages; tablets are consumed as a daily dietary supplement. Both forms are sold as raw material ingredients in bulk quantities, as a private
label consumer packaged product and as packaged consumer products under the Nutrex Hawaii label.

Spirulina Pacificais GRAS (generally recognized as safe) for addition to a variety of foods as determined by the United States Food and
Drug Administration. Our all naturalSpirulina Pacificais also certified Kosher by Organized Kashrus Laboratories of Brooklyn, New York, certified
Halal by the Islamic Food and Nutrition Council of America and is cultivated without the use of herbicides or pesticides.

OurSpirulina Pacificais cultivated in a combination of fresh water and a metered amount of nutrient-rich deep ocean water
(containing essential trace elements), drawn from a depth of 2,000 feet below sea level. This water mixture is supplemented with other major required nutrients. With the exception of deep ocean water,
the raw materials and nutrients required in our spirulina production are available from multiple sources; however, there can be no assurance that the pricing from a new source will be comparable to
current pricing. In the case of deep ocean water, although abundantly available at this location, the facility to pump and deliver the water to the Company is owned by the State of Hawaii. The
facility is constructed of two separately located pump stations providing redundancy should one station fail. The State of Hawaii sets the price for deep ocean water annually based on its cost to
deliver the water. If the pricing for a critical raw material or nutrient significantly increases, this could have a material adverse effect on our business, financial condition and results of
operations. The ability of our suppliers to meet performance and quality specifications and delivery schedules is also important to operations.

Continuing
the production process, the spirulina crop in each pond is circulated by paddlewheels to keep an even blend of nutrients in suspension and a uniform exposure of the algae to
sunlight. Our ponds are engineered to maintain the right media depth for sunlight to permeate each crop completely, facilitating rapid growth. The design of our cultivation ponds promotes efficient
growing conditions, allowing theSpirulina Pacificaalgae to reproduce rapidly. Each pond can be harvested, on average, in six days. As sunlight is a
major component of cultivation, production can be impacted by seasonality changes during the winter months, with shortened daylight hours and potential inclement weather.

Once
ready for harvest, a majority of the spirulina algae are pumped from a pond to our processing building where the crop is separated from the culture media. The culture remaining in
the ponds serves as

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an
inoculum for the next growth cycle. Harvested spirulina is washed with fresh water and filtered before moving to the drying stage. Culture media separated from spirulina algae during processing are
conserved and recycled. OurIntegrated Culture Biology Management("ICBM") technology for microalgae cultivation has proven to be a reliable and stable
operating environment, allowing us to grow and harvest spirulina without significant contamination by unwanted microorganisms and without associated loss of productivity.

Spirulina Pacificapowder is dried via our patented low-oxygenOcean-Chill
Dryingprocess, thereby preserving high levels of antioxidant carotenoids and other nutrients sensitive to heat and oxygen. The drying process takes about six seconds and
results in a dark green powder. Spirulina powder is difficult to form into tablets. Most tablet manufacturers either add high amounts (from 10% to 30%) of inert substances to "glue" the tablet
together or use a heat granulation process that destroys nutrients. In contrast, ourSpirulina Pacificatablets contain a maximum of 2% of such
substances and are produced in cold press compression tablet-making machines. OurSpirulina Pacificaflakes are produced by combining freshly harvested Spirulina
Pacificawith food-grade lecithin and drying this blend in a proprietary system.

Each
production lot ofSpirulina Pacificais sampled and subjected to thorough quality control analyses including testing for moisture,
carotenoids, minerals, color and taste, among others. Further, each lot of ourSpirulina Pacificaundergoes a prescribed set of microbiological food
product tests, including total aerobic bacteria, coliform bacteria and E. coli. TheSpirulina Pacificapowder, flakes and tablets are packed. This
packaging ensures product freshness and extends the shelf life of bulkSpirulina Pacificaproducts. Our packaged consumer products are bottled and
labeled by two contractors in California. These contractors are subject to regular government inspections and hold Drug Manufacturing Licenses & Processed Food Registrations with the State of
California Department of Health. Such packaging services are readily available from multiple sources.

The
majority of our bulk spirulina sales are to health food manufacturers and formulators with their own spirulina product lines, many of whom identify and promote Cyanotech's Hawaiian Spirulina Pacificain
their products. Such customers purchase bulk powder or bulk tablets and package these products under their brand label for sale to
the health and natural food markets. Some of the brands produced by these customers are marketed and sold domestically in direct competition with the packaged consumer products sold through our Nutrex
Hawaii subsidiary. Nutrex Hawaii packaged consumer products are sold through an established health food distribution network in the domestic market and shipped through our wholesale distributors. The
Company has also introduced a line of multivitamins combining the health benefits of HawaiianSpirulina Pacificawith other proven nutrients targeted
for the specific health requirements of Men, Women and Seniors. In selected foreign markets, we have exclusive sales distributors for both our bulk and packaged consumer products.

OurSpirulina Pacificaproducts compete with a variety of vitamins, dietary supplements, other algal products and similar nutritional
products available to consumers. The nutritional products market is highly competitive and includes international, national, regional and local producers and distributors, many of whom have greater
resources than Cyanotech and many of whom offer a greater variety of products. Our direct competition in the spirulina market is currently from Dainippon Ink and Chemical Company's Earthrise facility
in California, Parry Nutraceuticals, a division of Murugappa Group of India and several farms in China. Other competitors include numerous smaller farms in China, India, Thailand, Taiwan, Cuba, South
Africa and South America. The market for spirulina is mature with slow growth expected in future periods. In this mature market, we have experienced increased price competition due to more spirulina
suppliers as well as customers who generally treat these products as commodities with price being the major determining factor driving their purchasing decision. As one of the largest producers of
spirulina, our challenge is to increase our market share among customers who seek the high-quality products we produce while concurrently adjusting our product mix to meet our revenue and
profitability targets.

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Natural Astaxanthin Products

We commenced commercial production of natural astaxanthin in 1997. Astaxanthin is a red pigment which we initially sold to the
aquaculture market, under the name NatuRose, primarily to impart a pink to red color to the flesh of commercially raised fish and shrimp. We discontinued NatuRose production and sales in March
2008 in order to focus our resources on producing and marketing natural astaxanthin for the higher value human nutrition market discussed below. NatuRosesales accounted for 0%, 0% and 4% of net sales
for the years ended March 31, 2010, 2009 and 2008, respectively.

In
1999,BioAstin, our natural astaxanthin product for the human health and nutrition market was introduced. BioAstinsales accounted for 51%, 51% and 42% of
net sales for the years ended March 31, 2010, 2009 and 2008, respectively. BioAstinis produced in three forms: a liquid lipid extract, gelcaps and microencapsulated "beadlets" with all three forms
sold in bulk quantities.BioAstingelcaps are also sold as a private label consumer packaged product and in packaged consumer form under the Nutrex Hawaii label. A growing body
of scientific literature suggests that the beneficial properties of natural astaxanthin as an antioxidant, anti-inflammatory, for joint, skin and eye health. Its antioxidant properties may
surpass many of the antioxidant properties of vitamin C, vitamin E, beta-carotene and other carotenoids. Independent scientific studies indicate that in certain models, natural astaxanthin
has up to 550 times the antioxidant activity of vitamin E and 10 times the antioxidant activity of beta-carotene.

We
produce natural astaxanthin fromHaematococcus pluvialismicroalgae grown in fresh water supplemented with nutrients. As these algae
are extremely susceptible to contamination by unwanted algae, protozoa and amoebae, we developed a proprietary system known as thePhytoDome Closed Culture
SystemorPhytoDome CCSto overcome this problem. Using these large-scale photobioreactors, we have generally been able to grow
consistently large volumes of contaminant-freeHaematococcusculture. Raw materials and nutrients for our natural astaxanthin production
share the same sourcing constraints and pricing risks as those existing in our spirulina production. Fresh water is critical to the production of our natural astaxanthin and is supplied by the County
of Hawaii. While we have not experienced any constraint on fresh water availability to date, availability could be impacted by a significant population growth in the region as well as throughput
constraints on the water delivery infrastructure. We have met with officials of the County of Hawaii to assess the fresh water situation and evaluate the probability of future risks. We recycle fresh
water in its production process where possible and continue to explore further recycling opportunities. However, there is no guarantee that these efforts will result in significant changes to our
fresh water utilization.

For
the final stage of cultivation, theHaematococcusalgae is transferred to open ponds where an environmental stress is applied causing
the algae to form spores which accumulate high levels of astaxanthin. Once ready for harvest, the media containing these spores is transported through underground pipes to our astaxanthin processing
building where the culture media and algal spores are separated. Fresh water recovered from this stage of processing may be recycled for further use in cultivation. The harvested algal spores are
dried to flakes or a fine powder. During processing, the spores are cracked in a proprietary system to assure high bioavailability of astaxanthin. Each production lot of astaxanthin is sampled and
tested for astaxanthin concentration. Finally, the bulk powder is vacuum-packed.

Unlike
spirulina, astaxanthin is produced in a batch-mode and each cultivation pond must be completely drained and thoroughly cleaned between cycles. Pond cultivation can be
negatively impacted seasonally with shortened daylight hours and potential inclement weather in winter months.

Natural
astaxanthin for human consumption is processed further utilizing a high-pressure extraction process. The resulting product is a lipid extract insoluble in water used
for the production of gelcaps. This product can also be micro-encapsulated into "beadlets" which our customers use in other formulations. All natural astaxanthin products destined for human
consumption undergo a prescribed set of microbiological food product tests to ensure safety and quality. We use third party contract manufacturers for the

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extraction
services, the production of gelcaps and the production of beadlets. . All third party contract manufacturers are audit inspected by Cyanotech's Quality Control Department, and are required
to comply with FDA Good Manufacturing Practices (GMP) regulations. The majority of these contract manufacturers hold independent third party GMP certifications. Although these services are available
only from a limited number of sources, we believe we have the ability to use other parties if any of the current contract manufacturers become unavailable; however, there is no assurance that the
pricing from a new contract manufacturer will be comparable to current negotiated pricing. In addition, a new
contract manufacturer would have to pass our qualification process ensuring quality standards can be met or exceeded. Significant pricing increases for any of these services could have a material
adverse effect on our business, financial condition and results of operations.

The
potential benefits of astaxanthin to human health are continuing to emerge. Natural astaxanthin is one of the most potent and bioactive biological antioxidants found in nature
therefore, the number of potential roles of natural astaxanthin for human health is growing. Much research has been published in recent years on the beneficial roles of antioxidants in our health, in
the aging process and on specific health conditions. The full efficacy ofBioAstinas a human nutraceutical supplement requires further significant
clinical study. We have spent limited amounts on clinical trials over the past two fiscal years. Independent antioxidant research and prior clinical trials show promising human applications. The
Company holds three United States patents relating to the usage ofBioAstinin the treatment of Carpal Tunnel Syndrome, the treatment of canker/cold
sores and for its use as a topical and oral sunscreen.

BioAstinis sold in liquid lipid form as a raw ingredient to dietary supplement manufacturers, health food formulators and cosmetic
manufacturers, andBioAstingelcaps and beadlets are sold in bulk quantities to distributors.BioAstingelcaps are also sold as a packaged consumer product through Nutrex Hawaii directly to natural product distributors, retailers and consumers. We also introduced in 2007 a line of BioAstinbased
nutritional supplements,MDFormulas. MDFormulascombined the health benefits ofBioAstinwith other proven
nutrients with benefits for
targeted applications such as skin, heart and joint health.

BioAstinandMDFormulascompete directly with similar products marketed by other
manufacturers including Fuji Chemical of Japan, Algatechnologies of Israel, and Valensa (formally U.S. Nutraceuticals) in the United States. In the general category of nutritional supplements, BioAstinalso competes with a variety of vitamins, dietary supplements and other antioxidant products available to consumers. The nutritional products
market is highly competitive and includes international, national, regional and local producers and distributors, many of whom have greater resources than Cyanotech and many of whom offer a greater
variety of products.

Major Customers

The Company has two major European customers. Sales to a single spirulina customer were approximately $1,027,000, or 7% of our total
net sales for the year ended March 31, 2010. Sales to this customer for fiscal 2009 and 2008 were $1,521,000 (11% of net sales) and $1,149,000 (10% of net sales), respectively. Sales to a
single astaxanthin customer were approximately $784,000 or 5% of sales for the year ended March 31, 2010. Sales to this customer were $1,806,000 (13% of net sales) and $495,000 (4% of net
sales), for the fiscal years 2009 and 2008, respectively. The Company has one major US customer, astaxanthin sales to this customer for the year ended March 31, 2010 were approximately
$1,653,000 or 10% of our total net sales. Sales to this customer were approximately $821,000 (6% of net sales) and $656,000 (6% of net sales), for the fiscal years 2009 and 2008, respectively.

Research and Development

Our expertise for many years has been in the development of efficient, stable and cost-effective production systems for
microalgal products. We have learned production levels from our systems may not

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be
sustainable across periods of days, weeks, or even months. Accordingly, we typically investigate each specific microalgae identified in the scientific literature for potentially marketable products
and for solutions to production stability and efficiency challenges, and then strive to develop the technology to grow such microalgae on a commercial scale or to incorporate procedures or technology
to improve production stability and efficiency. Successful microalgal product developments and technical solutions are highly uncertain and dependent on numerous factors, many beyond our control.
Products and solutions or improvements that appear promising in early phases of development may be found to be ineffective, may be uneconomical because of manufacturing costs or other factors, may be
precluded from commercialization due to the proprietary rights of other companies, or may fail to receive necessary regulatory approvals. We had research and development expenditures of $264,000,
$206,000 and $143,000 in fiscal years 2010, 2009 and fiscal 2008, respectively. We invested $68,000 in scientific clinical trials during 2010. No investment was made in scientific clinical trials
during fiscal 2009 and 2008.

Patents, Trademarks and Licenses

We have received five United States patents: two on aspects of our production methods and three relating to usage of our BioAstin
products. We view our proprietary rights as important but believe that a loss of such rights is not likely to have a material adverse effect on the our present business as a whole. Our operations are
not dependent upon any single trademark, although some trademarks are identified with a number of the our products and are important in the sale and marketing of such products.

Regulations

Several governmental agencies regulate various aspects of our business and our products in the United States, including the Food and
Drug Administration, the Federal Trade Commission, the Consumer Product Safety Commission, the State of Hawaii Department of Health, the Department of Agriculture, the Environmental Protection Agency,
the United States Postal Service, state attorney general offices and various agencies of the states and localities in which our products are sold. We believe we are in compliance the all material
government regulations which apply to our products and operations. However, we are not able to predict the nature of any future laws, regulations, interpretations or applications, nor can we predict
what effect future changes would have on our business.

Our
international customers are subject to similar governmental agency regulations in their various geographic regions. Compliance by our customers with such local regulations is beyond
our control and we cannot predict their ability to maintain such compliance. However, we strive to assist our customers in meeting local regulations pertaining to the use and sale of our products
whenever possible.

Environmental Matters

In 2002, we were issued 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 "incidental to, and not for the purpose of, the carrying out of an otherwise lawful activity." This permit authorizes
incidental take of the endangered Hawaiian stilt (Himantopus mexicanus knudseni)that is anticipated to occur as a result of ongoing operations and
maintenance at our Kona facility. As a mandatory component for the issuance of such permit, we submitted and maintain a Habitat Conservation Plan ("HCP") to ensure that the effects of the permitted
action on listed species are adequately minimized and mitigated.

The
HCP called for the creation of a nesting and breeding ground for the Hawaiian stilt to offset any take activity. We have complied with these requirements since 2002. The breeding
program was so successful that the increase in the Hawaiian stilt population in the area became a potential hazard for the adjacent State airport facility. We disassembled the stilt habitat and are
mitigating "take" by using standard non-lethal hazing devices to discourage nesting and breeding.

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A
requirement of the ITP is to provide insurance coverage for funding the project for the term of the ITP. Our insurance broker was unable to locate an underwriter who would provide such
a bond. As permitted by law, the FWS waived this requirement recognizing that this HCP did not involve a significant capital expenditure. However, under Hawaii state law, no waiver provision is
available. A new ITP was issued by the FWS on September 29, 2006 and by the State of Hawaii Division of Forestry and Wildlife (DOFAW) on October 13, 2006, both which expire on
March 17, 2016. In October, 2005, we submitted a new ten-year HCP to the FWS and the DOFAW.

Employees

As of March 31, 2010, we employed 67 people on a full-time basis and 2 people on a part-time
basis. Of the total, 33 are involved in harvesting, production and quality, the remainder in maintenance, shipping, sales, administration and support. Management believes that its relations
with employees are good. Attracting permanent entry level and skilled employees can be difficult due to the limited local population to draw from. None of our employees are subject to collective
bargaining agreements.

Internet Information

Our Internet address iswww.cyanotech.com. There we make available, free of charge,
copies of Cyanotech documents, news releases and financial statements issued in the last 12 months. Included are copies of the Company's Code of Conduct and Ethics, the Nominating and Corporate
Governance Committee Charter, and the Charter and Powers of the Audit Committee. The information found on our Web site, unless otherwise indicated, is not part of this or any other report we file or
furnish to the Securities and Exchange Commission.Spirulina Pacifica®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. Corporate data, product information and charters of our Board committees are also available at www.cyanotech.com.

Item 1A.    Risk Factors

You should carefully consider the risks described below which we believe are significant but not the only ones we face. Any of the
following risks could have a material adverse effect on our business, financial condition and operating results. You should also refer to the other information contained in this report, including our
financial statements and the related notes.

The nutritional products industry is extremely competitive. Many of our significant competitors have greater financial and other resources than we do, and one or more of
these competitors could use their greater resources to gain market share at our expense.

The nutritional products market includes international, national, regional and local producers and distributors, many of whom have
substantially greater production, financial, research and development, personnel and marketing resources than we do, and many of whom offer a greater variety of products. As a result, each of these
companies could compete more aggressively and sustain that competition over a longer period of time than we could. Our lack of resources relative to our significant competitors may cause us to fail to
anticipate or respond adequately to development of new products and changing consumer demands and preferences, or may cause us to experience significant delays in obtaining or introducing new or
enhanced products. These failures or delays could reduce our competitiveness and cause a decline in our market share and sales. Increased competition in our industry could result in price reductions,
reduced gross profit margin or loss of market share, any of which could have a material effect on our business, results of operations and financial condition.

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We depend heavily on the unique abilities and knowledge of our officers and key personnel. Our Chief Executive Officer and our Chief Scientific Officer have knowledge and
experience critical to the ongoing operations of the Company. We also depend on the unique knowledge of our Chief Financial Officer and Vice President of Finance and Administration, Vice President of
Operations, Vice President of Sales and Marketing, and Vice President of Quality & Regulatory Affairs. Cyanotech is a small company and the loss of any such personnel or the delay in the
replacement of one could significantly delay the achievement of our business objectives and could adversely affect our ability to do business or could hinder our ability to provide needed management.

Our success depends, to a significant extent, upon the services and collective experience of such personnel. The Company is conducting
a search to identify a Chief Executive Officer who has the industry knowledge, experience and operating discipline essential for the management of the Company and consistent delivery of our products.
Our Interim President and Chief Executive Officer has vital knowledge and experience gained through his prior work experience in related industries and his activities as a Director of the Company
since 2000 allowing him to direct the Company until a permanent Chief Executive Officer is identified, employed and able to commence the duties and functions of President and Chief Executive Officer.
The inability to identify and hire a Chief Executive Officer with the essential knowledge and experience in a timely manner could be detrimental to the future performance of the Company

The
Chief Scientific Officer and founder of the Company is the Company's primary scientific resource, continuing to improve production and cultivation technology and to investigate new
microalgal products. Our Chief Financial Officer has a unique understanding of the Company's financial systems and needs. Our Vice President Operations has years of experience with the mechanical
operation of the production facility and continues to improve our production process. Our Vice President Sales and Marketing has developed valuable personal relationships with domestic and foreign
customers. Our Vice President of Quality and Regulatory Affairs has experience and knowledge of federal and state regulations governing our production processes and product representation essential to
continuing compliance. Attracting permanent skilled employees can be difficult due to limited local qualified applicants.

Our production of algae involves an agricultural process, subject to such risks as weather, disease and contamination.

The production of our algae products involves complex agricultural systems with inherent risks including weather, disease, and
contamination. These risks are unpredictable and also include such elements as the control and balance of necessary nutrients and other factors. The efficient and effective cultivation of microalgae
requires consistent light, warm temperatures, low rainfall and proper chemical balance in a very nutrient-rich environment. If the chemical composition of a pond changes from its required
balance, unusually high levels of contamination due to
the growth of unwanted organisms or other biological problems may occur. These often arise without warning and sometimes there are few or no clear indicators as to appropriate remediation or
corrective measures. We believe that our technology, systems, processes and favorable growing location generally permit year-round harvest of our microalgal products in a
cost-effective manner. However, environmental factors cannot be controlled in an open air environment, therefore, we cannot, and do not attempt to, provide any form of assurance with
regard to our systems, processes, location, or cost-effectiveness.

There is risk in operating entirely in one business segment such as the cultivation and production of microalgae at a single production facility.

Single location agricultural and production facilities do not provide the protections and assurances afforded by operations in two or
more widely separated locations. Our single location in Hawaii is susceptible to increased energy and transportation costs, and energy and transportation disruptions with either limited alternatives
or no alternatives. The Company's most significant operating expenditures are

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for
electricity, related water pumping and nutrient and supply costs. These costs are directly or substantially affected by the price of fuel oil since Hawaii has virtually no hydroelectric power
resources and only limited alternative electrical energy resources. Also, a single agricultural facility provides limited biologic diversity protection against invasive, mutant, or harmful organisms.

Our operations are vulnerable because we have limited personnel and redundancy and backup systems in our data management function.

Our internal order, inventory and product data management system is an electronic system through which orders are placed for our
products and through which we manage product pricing, shipment, returns and other matters. This system's continued and uninterrupted performance is critical to our day-to-day
business operations. Despite our precautions, unanticipated interruptions in our computer and telecommunications systems have, in the past, caused problems or stoppages in this electronic system.
These interruptions, and resulting problems, could occur again in the future. We also have limited personnel available to process purchase orders and to manage product pricing and other matters in any
manner other than through this electronic system. Any significant interruption or delay in the operation of this electronic management system could cause a decline in our sales and profitability.

A significant or prolonged economic downturn could have a material adverse effect on our results of operations.

Our results of operations are affected by the business activity of our customers who in turn are affected by the level of economic
activity in the industries and markets that they serve. A decline in the level of business activity of our clients or the economy as a whole could have a material adverse effect on our revenues and
profit margin.

The
global cost of oil derived energy impacts Cyanotech in several ways, and it may hinder our efforts to achieve profitability. Oil prices primarily impact Cyanotech through the costs
of electricity, transportation, materials and supplies which are tied to the cost of oil either directly or indirectly. The return of last years high cost of oil on a global basis may signal a
prolonged economic downturn resulting in a material adverse effect on our business.

Our quarterly operating results may vary from quarter to quarter, which may result in increased volatility of our share price.

We have experienced, and may in the future continue to experience, fluctuations in our quarterly operating results. These fluctuations
could reduce the market price of our Common Stock. Factors that may cause our quarterly operating results to vary include, but are not limited to:



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

Our global operations expose us to complex management, foreign currency, legal, tax and economic risks, which we may not be able to address quickly and adequately.

Our products are marketed in a number of countries around the world. For the year ended March 31, 2010, approximately 43% of our
net sales were from sales to foreign customers. As a result, we are subject to a number of risks which include, but are not limited to:



If we are unable to protect our intellectual property rights or if we infringe upon the intellectual property rights of others our business may be harmed.

Cyanotech has received five United States patents: two on aspects of our production methods and three for use of our BioAstin®
products. Although we regard our proprietary technology, trade secrets, trademarks and similar intellectual property as important,
we rely on a combination of trade secret, contract, patent, copyright and trademark law to establish and protect our rights in our products and technology. There can be no assurance that we will be
able to protect our technology adequately or that competitors will not be able to develop similar technology independently. In addition, the laws of certain foreign countries may not protect the
Company's intellectual property rights to the same extent as the laws of the United States. Litigation in the United States or abroad may be necessary to enforce our patent or other intellectual
property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation, even if successful,
could result in substantial costs and diversion of resources and could have a material adverse effect on our business, results of operations and financial condition. Additionally, if any such claims
are asserted against us, we may seek 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 terms acceptable
or favorable to us, if at all.

Insurance liability coverage is limited.

In the ordinary course of business, we purchase insurance coverage (e.g., property and liability coverage) to protect the
Company against loss of or damage to its properties and claims made by third parties and employees for property damage or personal injuries. However, the protection provided by such insurance is
limited in significant respects and, in some instances, the Company has no coverage and

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certain
of the Company's insurance has substantial "deductibles" or has limits on the maximum amounts that may be recovered. For example, if a hurricane or other uninsured catastrophic natural
disaster should occur, we may not be able to recover all facility restoration costs and revenues lost from business interruption. In addition, we maintain product liability insurance in limited
amounts for all of its products involving human consumption; however, broader product liability coverage is prohibitively expensive. Insurers have also introduced new exclusions or limitations of
coverage 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 of lawsuits in the ordinary course of business
each of which were subject to the deductible amount, or if the maximum limit of the available insurance were substantially exceeded, we could incur losses in amounts that would have a material adverse
effect on its result of operations and financial condition.

Our ability to develop and market new products or modify existing products and production methods may be adversely affected if we lose the services of or cannot replace
certain employees knowledgeable in advanced scientific and other fields.

Our products are derived from and depend on proprietary and non-proprietary processes and methods founded on advanced
scientific knowledge, skills, and expertise. If the services of employees knowledgeable in these fields are lost and cannot be replaced in a reasonable time frame at reasonable costs, our ability to
develop and market new products or modify existing products and production methods would be adversely impacted. At the same time, regulatory compliance surrounding our products and financial matters
generally requires a basic knowledge and level of expertise related to production, quality assurance, and financial control. If we lose the services or cannot reasonably replace employees who have the
necessary knowledge and expertise our ability to remain in regulatory compliance could be adversely affected.

We may need to raise additional capital in the future which may not be available.

At March 31, 2010, our working capital was $4,942,000. Cash and cash equivalents at the same date totaled $817,000. Our cash
requirements will depend on numerous factors, including demand for products; normal requirements to maintain and upgrade facilities and equipment, whether opportunities emerge in either new markets or
in research and development activities, or in the event we need to expand or contract our production or distribution infrastructure.

On
February 19, 2008, Cyanotech Corporation entered into an additional Senior Debt direct financial obligation term loan (the "Term Loan A") with Bridgeview Capital
Solutions, LLC ("Bridgeview") under the provisions of a United States Department of Agriculture (USDA) Rural Development (RD) Guarantee program. Term Loan proceeds, remaining after deducting
closing costs, statutory fees, and other customary borrowing costs, will be used for working capital purposes. The full amount of the obligation assumed February 19, 2008 was $1,078,000,
payable in monthly installments to Bridgeview. The obligation fully amortizes over seven (7) years at an interest rate of Prime Rate plus one percent (1%) per annum, initially an effective rate
of seven percent (7%) per annum, adjustable on the first day of each calendar quarter for the term of the obligation. Repayment may be accelerated under specified conditions of default if the Company
is not able to remedy such default within the terms and conditions of the Loan. The Term Loan is fully secured by all of the assets of Cyanotech. Also, because the Loan is under a USDA Rural
Development Guarantee program, Bridgeview has certain rights of recourse to the Rural Development Guaranty program to recover up to eighty percent (80%) of Bridgeview loss on the Term Loan. The Term
Loan contains certain restrictive covenants requiring the consent of Bridgeview prior to taking action. The obligation is similar to and in addition to Cyanotech Corporation's previously reported
Senior Debt obligation payable to Bridgeview under the USDA Rural Development Guarantee program originally incurred April 21, 2000. The amount of such previously reported Senior Debt at
March 31, 2010, was $80,000 plus accrued interest of $300. As of March 31, 2010, Cyanotech Corporation's combined

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obligations
to Bridgeview Capital Solutions, LLC under the USDA Rural Development Guarantee program total approximately $889,000 plus accrued interest of $3,200.

On
April 24, 2009, the Company entered into an agreement with First Hawaiian Bank for a Line of credit in the amount of $150,000 for a term of one year. Upon renewal on
March 25, 2010, the credit limit was increased to $350,000. The obligation is secured by the Company's U.S. accounts receivable and bears a variable interest rate based on prime plus 2%. The
outstanding balance as of March 31, 2010 was $150,000.

We
believe our cash and cash equivalents to be provided from operations will be sufficient to meet our capital and operating requirements for at least the next 12 months, but we
may need to raise additional funds and we may not be able to secure funding on acceptable terms, if at all. If we raise additional funds through the issuance of equity or convertible debt securities,
the percentage ownership of our then current stockholders may be reduced. If we raise additional funds through the issuance of convertible debt securities, or through additional debt or similar
instruments, such securities, debt, or similar instruments could have rights senior to those of our common stockholders and such instruments could contain provisions restricting our operations. If
adequate funds are not available to satisfy either short-term or long-term capital requirements, we may be required to limit operations with adverse results.

We have incurred significant losses in the past. If we incur significant losses in the future, we will experience negative cash flow which may hamper current operations and
prevent us from sustaining or expanding our business.

We have incurred net losses in three of the last five fiscal years. As of March 31, 2010, we had an accumulated deficit of
approximately $18.5 million. Net income for the fiscal year ended March 31, 2010 was $1,391,000. During fiscal year 2009 we had net income of $1,142,000 and in 2008, we incurred a net
loss in the amount of $1,139,000 million. During 2007, we incurred a net loss in the amount of approximately $7.4 million, of which $4.5 million was due to a non-cash
impairment loss on equipment and leasehold improvements. These account for approximately 46% of our accumulated deficit since our inception. Historically, we have relied upon cash from operations and
financing activities to fund all of the cash requirements of our business. However, extended periods of net income do not assure positive cash flows. Future periods of net losses from operations could
result in negative cash flow, and may hamper ongoing operations and prevent us from sustaining or expanding our business. We cannot assure you that we will sustain or increase profitability on a
quarterly or annual basis in the future. If we do not achieve, sustain or increase profitability, our business will be adversely affected and our stock price may decline. The global cost of oil
derived energy impacts Cyanotech in several ways, and it may hinder our efforts to achieve profitability. Oil prices primarily impact Cyanotech through the costs of electricity, transportation,
materials and supplies which are tied to the cost of oil either directly or indirectly.

Our stock price is volatile, which could result in substantial losses for investors purchasing shares of our common stock.

The market price of our common stock has fluctuated significantly in the past and may continue to fluctuate significantly in the
future. During the first two months of fiscal 2011, the high and low closing bid prices of a share of our common stock were $3.38 and $2.00, respectively. During fiscal 2010, the high and low closing
bid prices of a share of our common stock were $5.68 and $1.78, respectively. During fiscal 2009, the high and low closing bid prices of a share of
our common stock were $2.12 and $1.12, respectively. During fiscal 2008, the high and low closing bid prices of a share of our common stock were $1.90 and $0.79, respectively. The market price of our
common stock may continue to fluctuate in response to one or more of the following factors, many of which are beyond our control:



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The
price at which you purchase shares of our common stock may not be indicative of the price that will prevail later in the trading market. You may be unable to sell your shares of
common stock at or above your purchase price, which may result in substantial losses to you. As of March 31, 2010, there were approximately 5.3 million shares of our common stock
outstanding. We cannot predict the effect, if any, that future sales of shares of our common stock into the public market will have on the market price of our common stock. Sales of substantial
amounts of common stock, including shares issued upon the exercise of stock options, or in anticipation of such sales, may materially and adversely affect prevailing market prices for our common
stock.

Recent European Union regulations include stringent requirements for health claims on food and supplement labels.

The European Union has harmonized standards amount Member States for health claims on food and supplement labels. The scientific
assessment of health claims is performed by the European Food Safety Authority (EFSA), an advisory panel to the European Commission. The European Commission will consider the opinions of EFSA in
determining whether to include a health claim on a Positive List of permissible claims. Once the list is published, only health claims for ingredients and products included on the list may be used in
promotional materials for products marketed and sold in the European Union. This could severely decrease or limit the marketability for our products in this market area. We are developing strategies
that we believe will
allow for continued and increasing sales of our products in the European Union. However there can be no guarantee that such strategies will be successful.

Item 2.    Properties

Our principal facility and corporate headquarters are located at the Natural Energy Laboratory of Hawaii Authority ("NELHA") at Keahole
Point in Kailua-Kona, Hawaii. It encompasses approximately 90 fully developed acres containing microalgal cultivation ponds, processing facilities, research and quality control
laboratories, and sales and administrative offices. The property is leased from the State of Hawaii under a 30-year commercial lease expiring in 2025. We believe that there is sufficient
available land at NELHA to meet anticipated needs if a revised NELHA lease can be negotiated with acceptable terms. Under the terms of the existing NELHA lease, we could be required to remove
improvements at the end of the lease term. Based upon our analysis, we do not believe the projected cost for such removal to be material to the consolidated financial statements, or likely, given
historical practices. However, conditions could change in the future. It is not possible to predict such changes or estimate any impact thereof.

We
also rent warehouse space near NELHA and in San Dimas, California.

Item 3.    Legal Proceedings

From time to time the Company may become party to lawsuits and claims that arise in the ordinary course of business relating to
employment, intellectual property, and other matters. There were no significant legal matters outstanding at March 31, 2010.

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Table of Contents

PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company's common stock is listed and traded on the NASDAQ Capital Market under the symbol "CYAN". The closing price of our common
stock was $2.20 as of
June 21, 2010. The approximate number of holders of record of our common stock was 1,400. The high and low selling prices as reported by NASDAQ were as follows:

Quarter Ended:

June 30

September 30

December 31

March 31Fiscal 2010Common stock price per share:High

$
2.16

$
2.84

$
5.68

$
5.58Low

$
1.88

$
1.78

$
2.24

$
3.11Fiscal 2009Common stock price per share:High

$
2.00

$
2.12

$
2.05

$
2.12Low

$
1.41

$
1.50

$
1.35

$
1.12


The
Company is prohibited from declaring any common stock dividends without the prior written consent of a lender per the conditions of an existing term loan agreement with such lender.
The Company has never declared or paid cash dividends on its common stock. We currently intend to retain all of our earnings for use in the business and do not anticipate paying any cash dividends on
common stock in the foreseeable future.

The
following table sets forth the Company's common shares authorized for issuance under equity compensation plans:

Common shares to be issued
upon exercise of options
outstanding

Weighted-average
exercise price of
outstanding options

Common shares available for
future grant under equity
compensation plansEquity compensation, plans approved by security holders


333,606 shares

$
1.69


416,767 shares


A
single warrant is outstanding which allows the warrant holder to purchase 5,000 shares of the Company's common stock at $10.20 per share.

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Table of Contents

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere in this Form 10-K. For a more comprehensive description of the Company's products and markets for such products, see Part I. Item 1.
Business.

Results of Operations for the 2010, 2009 and 2008 Fiscal Years

Fiscal Year 2010 vs. 2009

Fiscal Year 2009 vs. 2008Fiscal Year

Favorable / (Unfavorable)2010

2009

2008

$

%

$

%(In thousands)Net sales

$
15,742

$
13,950

$
11,364

$
1,792


12.8
%
$
2,586


22.8
%Cost of sales


9,109


8,438


8,293


(671
)

(8.0
)

(145
)

(1.7
)Gross profit


6,633


5,512


3,071


1,121


20.3


2,441


79.5Operating expensesResearch & development


264


206


143


(58
)

(28.2
)

(63
)

(44.1
)Sales and marketing


1,402


1,125


1,355


(277
)

(24.6
)

230


17.0General & administrative


3,311


2,873


2,478


(438
)

(15.2
)

(395
)

(15.9
)Loss on disposal of equipment and leasehold improvements


155








(155
)

(100.0
)




Total operating expense


5,132


4,204


3,976


(928
)

(22.1
)

(228
)

(5.7
)Income (loss) from operations


1,501


1,308


(905
)

193


14.8


2,213


244.5Other income (expense)Interest income


4


8


24


(4
)

(50.0
)

(16
)

(66.7
)Interest expense


(113
)

(162
)

(164
)

49


30.2


2


1.2Other income (expense), net


23


10


(65
)

13


130.0


75


115.4Total other expense


(86
)

(144
)

(205
)

58


40.3


61


29.8Income (loss) before income tax expense (benefit)


1,415


1,164


(1,110
)

251


21.6


2,274


204.9Income tax expense (benefit)


24


22


29


(3
)

(13.6
)

7


24.1Net income (loss)

$
1,391

$
1,142

$
(1,139
)
$
248


21.7
%
$
2,281


200.3
%


Overview

Cyanotech Corporation's core competency is cultivating and processing microalgae into high-value, high-quality
natural products for the human nutrition market. Our products are sold in bulk quantities to manufacturers, formulators and distributors in the health foods and nutritional supplements markets and as
packaged consumer products to distributors, retailers and direct consumers. The Company manufactures its products in Hawaii, but markets them worldwide, generating 43%, 47% and 43% of its revenues
outside of the United States for each of the years ended March 31, 2010, 2009 and 2008, respectively. Competing in a global marketplace, the Company is influenced by the general economic
conditions of the countries in which its customers operate, including adherence to its customers' local governmental regulations and requirements. The Company currently has no material foreign
exchange exposure as all sales are in U.S. currency.

The
Company reported a net income of $1,391,000 or $.26 per diluted share for fiscal 2010 compared to net income of $1,142,000, or $.22 per diluted share for fiscal year 2009. Cash and
cash equivalents at March 31, 2010 were $817,000, down $160,000 from a year ago. Working capital increased 21% to

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$4,942,000
at March 31, 2010 from working capital of $3,892,000 a year ago, primarily due to increased inventory balances and reclassification of $250,000 restricted cash from long term to
current.

The
following table details selected financial data highlighting three key areas:

Year Ended March 31,2010

2009

2008(In thousands)Net sales:Spirulina products

$
7,744

$
6,835

$
5,980Natural astaxanthin products


7,978


7,093


5,251Other products


20


22


133$
15,742

$
13,950

$
11,364Gross profit as a percentage of sales


42
%

40
%

27
%Operating expenses as a percentage of sales


32
%

30
%

35
%


Net
sales for fiscal 2010 were $15,742,000, or 12.8% higher than the $13,950,000 reported for the prior fiscal year. Sales increased in both spirulina and astaxanthin lines as production
levels remained high and the Company focused on human nutrition and expansion of its higher margin consumer products.

The
Company's emphasis is on growing the market for its high quality health and nutritional product, BioAstin and Spirulina Pacifica, in both bulk form for use worldwide and in consumer
packaged goods distributed primarily in the U.S. The Company introduced three new vitamin products during 2010 based on the nutrition value of spirulina and enhanced with other key ingredients to
support the specific health requirements of men, women and seniors. Two new astaxanthin products were introduced promoting the benefits of vegetarian omegas and targeting eye health. Consumer
acceptance of these products cannot be predicted. The Company will continue to emphasize the higher nutritional content of its Hawaiian spirulina and the benefits of our natural astaxanthin over
synthetics however, increased competition may result in the decline of margins in the future. Management cannot predict whether the outcomes of any of its strategies will be successful.

The
Company's gross profit margin as a percentage of net sales increased to 42% for the fiscal year ended March 31, 2010, up from 40% for fiscal 2009 and 27% for fiscal 2008. The
fiscal year 2010 gross margin increase of 2% was primarily due a reduction of per unit costs as production levels remained high throughout the year. Pricing increases were instituted in fiscal year
2009 and remained unchanged in 2010.

Spirulina
and astaxanthin production levels remained high for a second straight year resulting in lower per unit costs. However, because complex biological processes are involved and
these processes are influenced by factors beyond the Company's controlthe weather, for examplewe cannot assure that such production levels will continue. Because the
Company's processes are agricultural, it is important to maintain reasonably strong production volumes in order to support the basic resource levels required to sustain a large scale, open culture,
natural agricultural facility.

The
Company continues to strive to increase production efficiencies in volume yield, potency and quality consistent with the Company's commitment to produce high-value,
high-quality products. However, these efforts cannot be guaranteed to achieve the desired results.

Results of Operations

RevenuesNet sales for fiscal 2010 totaled $15,742,000, a 12.8% increase from net sales of $13,950,000 in fiscal 2009 and a 38.5%
increase from net
sales of $11,364,000 reported in fiscal 2008. The following is a discussion of revenues by major product category.

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SpirulinaThe Company has been producing Spirulina Pacifica, a strain of spirulina microalgae, since 1985. Revenues generated
from the Company's
spirulina products are a significant portion of total revenues, amounting to $7,744,000, $6,835,000 and $5,980,000 for the years ended March 31, 2010, 2009 and 2008 respectively. Spirulina
revenues as a percentage of total revenues for the three years ended March 31, 2010, is 49%, 49% and 53%, respectively. Approximately $1,027,000 or 7% of net sales for the year ended
March 31, 2010 were to a spirulina marketing and distribution company based in the Netherlands. Sales to this customer during fiscal years 2009 and 2008 amounted to $1,521,000 or 11% of net
sales, and $1,149,000 or 10% of net sales.

Fiscal
2010 spirulina sales increased $909,000 or 13%, a result of 11% more units sold and 2% increase in average selling price as compared to 2009. In fiscal 2009, sales increased 14%
from 2008 resulting from 4% more units sold and 10% increase in average selling price. Competition for sales of spirulina remains intense due to the high number of suppliers. We expect competitive
pricing pressure to continue in future periods and will continue to focus on the higher quality of Hawaiian spirulina in support of customers who demand higher quality raw materials for their
formulations.

Natural AstaxanthinIn fiscal 2010, the Company's sales of its natural astaxanthin products were $7,978,000, an increase of 12%
from $7,093,000 in
fiscal 2009, and an increase of 52% from $5,251,000 in fiscal 2008. The increase in natural astaxanthin sales for 2010 was the result of a 9% increase in units sold and an increase in average selling
price of 3%. The increase in natural astaxanthin sales for 2009 was the result of a 38% increase in units sold. A single customer accounted for $1,653,000 or 10% of net sales for the year ended
March 31, 2010. A single customer accounted for $1,806,000 or 13% of net sales for the year ended March 31, 2009. We believe that sales to these customers will continue to represent a
significant portion of total net sales in future periods.

During
2008, the Company discontinued production of its animal product, NatuRose, in order to focus on the human astaxanthin products which are experiencing greater demand and have
higher gross margins.

Cost of SalesCost of sales, as a percentage of net sales, was at 58%, 60% and 73% for fiscal years 2010, 2009, and 2008,
respectively. Cost of sales
includes the cost of nutrients and materials, direct labor and
manufacturing overhead costs; depreciation and amortization of production equipment, buildings and leasehold improvements associated with the production of inventory units sold; and other
production-related period costs. The cost of sales as a percent of sales decrease of 2 points between 2010 and 2009; and 13 points between 2009 and 2008, is the result of improved control of customary
and complex production variables related to astaxanthin and spirulina production. Customary variables include availability and costs of personnel, raw materials, energy and freight. These variables
fluctuate based on changes in the local, national and world economies. Complex variables include cultivation methods, feeding formulations and harvesting processes, all of which include efforts to
anticipate the extent of weather and environmental events and make timely and sufficient adjustments. Although the variability of such costs can not be fully anticipated, the Company has focused
increased effort in this area in order to produce both spirulina and astaxanthin at levels sufficient to fully absorb production costs into inventory. Because the Company's processes are agricultural,
it is important to maintain production volumes in order to support the minimal resource levels required to sustain a large-scale open culture agricultural facility. The Company had $0
non-inventoriable costs in fiscal 2010. The Company expensed $59,000 of non-inventoriable costs in fiscal year 2009.

In
fiscal 2008, $1,298,000 of non-inventoriable costs were deemed to be period costs resulting from an abnormal usage of chemicals, labor and utilities expended to manage the
spirulina production problems, re-inoculation and subsequent flooding which occurred in December 2007. These expenditures combined to significantly increase cost of sales relative to units
produced and correspondingly reduced gross profit for the year ended March 31, 2008. On March 23, 2008, the Company announced its decision to abandon the animal nutrition market in favor
of human products with higher demand and margins.

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Fresh
water is critical for the Company's natural astaxanthin production and, while the Company has not experienced any constraint on fresh water availability, future availability could
be negatively impacted by significant growth in the local population as well as by throughput constraints on the water delivery infrastructure owned by the County of Hawaii. Given the criticality of
fresh water to our operations and the community, the Company recycles fresh water where possible and has developed additional water recycling systems in its efforts to utilize fresh water efficiently.
Both fresh and sea water require electricity for pumping; and electricity, the Company's single largest expenditure, depends on the cost of fuel oil which is, in turn, tied to the global price of
crude oil.

Fuel
costs remained at consistent levels throughout fiscal 2010 and the Company did not incur the extreme highs experienced in fiscal 2009. However, continued volatility in fuel cost in
the future is likely. Therefore, the Company expects that electricity, water and shipping costs could be higher due to the impact of fuel cost increases for fiscal 2011.

The
Company utilizes two third-party contractors for the process of extraction for its natural astaxanthin product for the human nutrition market, and several third-party contractors are
utilized for both encapsulation (for gelcaps) and micro-encapsulation (for beadlets). Although these services are available from a limited number of sources, management believes the Company has the
ability to use other parties if any of the current contractors become unavailable. If pricing for any of these services significantly increases, there could be a material adverse effect on our
business, financial condition and results of operations. There have not been any significant changes in the cost of extraction or encapsulation services and none are currently anticipated.

To
offset increased production costs, the Company seeks ways to increase production efficiencies in volume yield, potency, and quality consistent with the Company's commitment to produce
high-value, high-quality products. However, these efforts cannot be guaranteed to achieve the desired results.

The
Company recognizes abnormal production costs including fixed cost variances from normal production capacity as an expense in the period incurred. Abnormal amounts of freight,
handling costs and wasted material (spoilage) are recognized as current-period charges and fixed production overhead costs are allocated to inventory based on the normal capacity of production
facilities. Normal capacity is defined as "the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting
from planned maintenance." These amounts were $0, $136,000 and $1,298,000 for the fiscal years ended March 31, 2010, 2009 and 2008, respectively.

Unforeseen
changes in any of the factors surrounding the estimates imbedded in the determination of inventory values and cost of sales could have a material impact on cost of sales. Such
changes in factors and estimates include but are not limited to production levels and capacity; changes in the prices paid for raw materials, supplies, and labor; changes in yield, potency, and
quality of biomass; and changes in processing or production methods.

Gross Profit MarginThe Company's gross profit margin as a percentage of net sales increased 2 points to 42% for the fiscal year
ended
March 31, 2010, up from 40% for fiscal 2009. The improvement is the result of increased sales volume driven by product availability and quality, price increases instituted throughout 2009 and
increases in units produced resulting in lower unit costs. The increase of 13 percentage points in fiscal 2009 over 2008 was primarily the result of lower period costs resulting from production
levels below normal capacity in 2008 as previously explained.

Management
expects the Company's fiscal 2011 gross profit margin percentage to remain generally consistent with the results reported for fiscal 2010. However, as discussed elsewhere in
this Annual Report, management cannot predict future production levels. Producing the highest quality microalgae is a complex biological process which requires the tenuous balancing of numerous
factors including microalgal strain variations, temperature, acidity, nutrient and other environmental considerations, some of which are

21

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not
in the Company's control. As a result, it can be difficult and time consuming to adjust, improve or correct production process when quality levels fall below specifications. While the Company
generally possesses scientific knowledge and resources to correct its production processes, there are too many variables involved for the Company to make reliable projections concerning such efforts.
However, management constantly strives to anticipate events requiring adjustments to nutrients, processes, customer demands, etc. and strive to achieve increased production yields and improve quality.
In addition to the items discussed above, there are many factors which could materially diminish gross profit.

Operating ExpensesOperating expenses as a percentage of net sales were 33% for fiscal 2010, 30% for fiscal 2009 and 35% for
fiscal 2008. Total
operating expense increased by $928,000 or 22% over 2009 levels. The increase includes an increase in General and administrative expenses of $438,000, an increase Sales and marketing expense of
$277,000, an increase in Research and development expense of $58,000 and an increase in loss on disposal of equipment and leasehold improvements of $155,000. The decrease in 2009 from 2008 as a
percentage of sales was primarily due to the increase in net sales.

General
and administrative expenses were $3,311,000, $2,873,000 and $2,478,000 in fiscal 2010, 2009 and 2008, respectively. General and administrative expenses increased 15% from 2009
due to costs associated with separation of the Chief Executive Officer in March 2010 and salary and benefits increases. General and administrative expense in 2009 increased 16% over 2008 due to
increased salaries and benefits from the addition of a new Chief Executive Officer, an accountant to improve internal controls, and salary and benefits increases. Current staffing has returned to the
pre-workforce reduction levels in order to maintain adequate administration and financial accounting and reporting. The Company is committed to ongoing cost containment aimed at
controlling its level of operating expenses, but may increase some discretionary spending in future periods as necessary to maintain product quality and the Company's competitive position.

Sales
and marketing costs were $1,402,000, $1,125,000 and $1,355,000 in fiscal 2010, 2009 and 2008, respectively, increasing 25% in 2010 from fiscal 2009 and decreasing 17% in 2009 from
fiscal 2008. The increase in 2010 over 2009 is due to the Company resuming selected advertising and promotional programs in fiscal 2010 in order to maintain and expand sales levels. The decrease in
2009 from 2008 is due to the cessation of advertising programs and selling promotions eliminated with efforts to control expenses in the latter part of fiscal 2008. The Company anticipates continuing
selected advertising and promotional programs in fiscal 2011 in order to maintain and expand sales levels as determined by the needs of the business.

Research
and development costs increased to $264,000 in 2010, up 28% from $206,000 in fiscal 2009, and up by 85% from $143,000 in fiscal 2008. During fiscal year 2010, new clinical
trials initiated to expand the application of its products. In fiscal 2009, resources returned their focus on identifying potential areas to improve cultivation and production processes, therefore
2009 R&D expense increased from 2008. The Company benefited from these efforts in fiscal 2009 and 2010, and they will continue in 2011. The Company began to sponsor clinical studies once again in
fiscal year 2010, in order to expand the applications of its health products. No new clinical trials were conducted in 2009 and 2008.

Loss
on disposal of equipment and leasehold improvements was $155,000 in 2010. There was no loss on disposal of assets in 2009.

The
Company reviews the recoverability of the carrying value of long-lived assets. The Company reviews long-lived assets and intangible assets for potential
impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. This analysis at March 31, 2010 determined that the Company's
equipment and leasehold improvements are not impaired in Cyanotech's Consolidated Balance Sheet at March 31, 2010.

The
Company expects fiscal 2011 operating expense spending will remain consistent with or increase from fiscal 2010 due to increased personnel costs, inflationary increases of expenses
and the resumption of

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selected
marketing and research activities as previously discussed. The Company will continue to leverage customer supported research where and as practicable. Increases in sales and marketing
expenses may become necessary as the Company seeks new and increased markets and market share. Also, the cost of regulatory complianceincluding international standards (ISO), US food and
drug manufacturing practice (GMP), Securities and Exchange Commission requirements including Sarbanes Oxley, NASDAQ Capital Market listing requirements and other regulatory compliance
areascontinue to increase. The Company will be required under Sarbanes-Oxley to have an independent audit of the Company's internal controls over financial reporting for fiscal year
ending March 31, 2011. This will be an expense not currently incurred by the Company. Finally, the Company must remain competitive in the labor market, and this may lead to some increases in
general and administrative costs.

Other ExpenseThe following details the amounts included in other expense:

2010

2009

2008(In thousands)Interest expense on Term Loan Agreement(1)

$
103

$
152

$
148Other interest expense(2)


10


10


16Other (income) expense, net(3)


(27
)

(18
)

41Total other expense

$
86

$
144

$
205


---

Income TaxesFor fiscal 2010 the Company recorded income tax expense of $24,000 compared with an income tax expense of $22,000
for 2009 and $29,000
for 2008. The income tax expense represents primarily alternative minimum taxes due to the utilization of tax loss carry forwards. At March 31, 2010 the Company had Federal and Hawaii state net
operating loss carry forwards of approximately $15,455,000 and $8,957,000, respectively. The deferred tax assets resulting from these net operating loss benefits have been fully reserved as their
utilization is not assured.

Liquidity and Capital Resources

Financial ConditionAt March 31, 2010, the Company's working capital was $4,942,000, an increase of $1,050,000 compared to
$3,892,000 at
March 31, 2009. Cash and cash equivalents at March 31, 2010 totaled $817,000, a decrease of $160,000 from $977,000 at March 31, 2009. The increase in working capital is mainly due
to an increase in inventories from the prior year and the reclassification of $250,000 restricted cash from long term to current. Good production levels throughout fiscal 2010 and 2009 have allowed
the Company to build sufficient inventory to meet the needs of our customers on a
timely basis. The decrease in cash and cash equivalents is due to cash used in investing in equipment and leasehold improvements and financing activities.

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The
Company has two Term Loan Agreements ("Term Loans") with a lender. These provided up to $4.6 million in combined credit facilities which are secured by substantially all the
assets of the Company. The outstanding combined balance under the Term Loans as of March 31, 2010 is approximately $889,000. The Term Loans have maturity dates of May 1, 2010 as to
$80,000 and March 1, 2015 as to $809,000 and are payable in equal monthly principal and interest payments of approximately $55,000. One term loan with a balance of $80,000 was subsequently paid
in full on May 1, 2010.

The
interest rate under the Term Loans, in absence of a default under the agreement, is the prime rate in effect as of the close of business on the first day of each calendar quarter,
plus 1%. The prime rate was 3.25% at March 31, 2010. The Company is prohibited by the Term Loan from declaring any cash dividends without the lender's prior written consent. A $250,000
restricted cash deposit is held in an interest-bearing restricted cash account per the terms of the Term Loan and is included in Other Assets in the consolidated balance sheets at March 31,
2010. The restricted cash was subsequently returned to the company in May of 2010.

The
Company has two equipment loans with John Deere at March 31, 2010 with a total outstanding combined balance of approximately $49,000. The equipment loans have maturity dates
of December 28, 2012 as to $27,000 and March 25, 2013 as to $22,000 and are payable in equal monthly principal payments of approximately $1,400. The loans are at a 0% rate of interest
and are net of imputed interest of $3,000.

The
Company has an equipment capital lease with Thermo Fisher Financial Services. The outstanding balance under the capital lease as of March 31, 2010 is approximately $97,000 and
has a maturity date of March 2013.

Contractual Obligations

The following table presents the Company's debt and lease obligations at March 31, 2010 (in thousands):

Less Than
1 Year

1-3
Years

4-5
Years

After 5
Years

TotalTerm Loans(1)

$
275

$
413

$
344

$
0

$
1,032Interest Expense on Term Loan(2)


37


47


16


0


100Operating Leases


167


315


314


1,591


2,387Total

$
479

$
775

$
674

$
1,591

$
3,519


---

On
April 24, 2009, the Company entered into an agreement with First Hawaiian Bank for a Line of credit in the amount of $150,000 for a term of one year. Upon renewal on
March 25, 2010, the credit limit was increased to $350,000. The obligation is secured by the Company's U.S. accounts receivable and bears a variable interest rate based on prime plus 2%. The
outstanding balance as of March 31, 2010 was $150,000.

Cash FlowsOur cash and cash equivalents were $817,000, $977,000 and $1,090,000 at March 31, 2010, 2009 and 2008,
respectively.

The
Company generated cash from operating activities of $1,219,000 and $908,000 fiscal years 2010 and 2009 respectively, compared to cash used in operations of $782,000 in fiscal 2008.
The increase in cash provided by operations from 2009 was primarily due to the fiscal 2010 net income of $1,391,000, non-cash expenses totaling $680,000, and timing differences in current
payables, offset by increased inventory and prepaid balances of $809,000. The improved cash provided by operations in fiscal year 2009 compared to

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fiscal
year 2008 is primarily due to the fiscal 2009 net income of $1,142,000, non-cash expenses totaling $740,000 and timing differences in current payables and receivables, offset by
increased inventory balances of $1,523,000. Depreciation and amortization expense was $512,000, $431,000 and $490,000 for the years ended March 31, 2010, 2009 and 2008, respectively.
Depreciation
expense for 2010 was more than 2009 as a result of additions to depreciable assets in fiscal 2010. It is uncertain whether operating activities will generate cash in future periods due to the
volatility of the world economy and its impact on our foreign customers.

Net
cash of $1,032,000 was used in investing activities during fiscal 2010 compared to net cash used in investing activities of $449,000 during fiscal 2009. Net cash used in investing
activities in 2008 was $131,000. Investments are primarily plant and equipment purchases aimed toward enhancing or maintaining our ability to respond to market demand. Management expects to continue
to invest in equipment upgrades and leasehold improvements tied to market requirements and production efficiency. Investment was also made in phase one of the Company's resource management system
upgrade. Continued expenditures to expand the system are anticipated for the next fiscal year. Future capital expenditures are expected to remain level or decrease as compared to amounts expended in
fiscal 2010.

During
fiscal 2010, cash used in financing activities was $347,000, consisting of $150,000 cash provided from drawing on the credit line with First Hawaiian Bank, offset by principal
payments on term debt of $497,000. During fiscal 2009, cash used in financing activities was $572,000 representing principal payments on long-term debt. During fiscal 2008, cash obtained
from financing activities amounted to $1,078,000, the proceeds of senior debt. Cash used in financing activities in fiscal 2008 was $396,000 in principal payments on long-term debt and
$123,000 of closing costs related to the senior debt.

Sufficiency of LiquidityBased upon our current operating plan, analysis of our consolidated financial position and projected
future results of
operations, we believe that our operating cash flows and existing cash balances will be sufficient to finance current operating requirements, debt service, and planned capital expenditures, for the
next 12 months. With total working capital of $4.9 million, and a current ratio of 3 to 1 as of March 31, 2010, management expects liquidity in fiscal 2011 to be
generated primarily from operating cash flows. Currently unanticipated capital expenditures or business expansion could require the Company to identify additional debt or equity funding sources.

The
Company has used estimates of future financial results including projected revenue, expenses, borrowings, and capital expenditures in reaching its conclusions. Such estimates are
subject to change based on future results and such change could cause future results to vary significantly from expected results presented in this Form 10-K.

The
Company's results of operations and financial condition can be affected by numerous factors, many of which are beyond its control and could cause future results of operations to
fluctuate materially as it has in the past. Future operating results may fluctuate as a result of changes in sales volumes to our largest customers, weather patterns, increased competition, increased
materials, nutrient and energy costs, foreign currency exchange fluctuations, governmental regulations and other factors beyond our control. In addition, the Company maintains product liability
insurance only in limited amounts for products involving human consumption because broader product liability coverage is cost prohibitive.

A
significant portion of the Company's expense levels are relatively fixed, so the timing of increases in expense levels is based in large part on forecasts of future sales. If net sales
are below expectations in any given period, the adverse impact on results of operations may be magnified by our inability to adjust spending quickly enough to compensate for the sales shortfall. We
may also choose to reduce prices or increase spending in response to market conditions, which may have a material adverse effect on financial condition and results of operations.

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Effect of Recently Issued Accounting Standards and Estimates

In January 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")
No. 2010-06, "Improving Disclosures about Fair Value Measurements," an amendment to Accounting Standards Codification ("ASC") No. 820, "Fair Value Measurements and
Disclosures." The standard requires disclosure for transfers in and out of Level 1 and Level 2, as well as the disclosure of Level 3 activity on a gross, rather than net, basis.
The guidance also requires enhancements to certain existing disclosures. The amendments will be effective as of the beginning of fiscal 2011, except for the new requirements around Level 3
activity, which is deferred until the beginning of fiscal 2012. The guidance is not expected to have an impact on the Company's consolidated financial statements.

In
May 2009, the FASB issued ASC No. 855, "Subsequent events," and updated this guidance in February 2010. The objective of this Statement is to establish general standards of
accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth: 1.
the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial
statements, 2. the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and 3. the disclosures that an entity
should make about events or transactions that occurred after the balance sheet date. In accordance with this Statement, an entity should apply the requirements to interim or annual financial periods
ending after June 15, 2009. The Company adopted ASC No. 855 during the second quarter of 2009. The adoption of ASC No. 855 did not have a material impact on the Company's
financial statements or condition. In accordance with ASC No. 855, management has evaluated subsequent events through the date the financial statements are filed with the SEC and is not aware
of any subsequent events which would require recognition or disclosure in the financial statements.

On
October 1, 2009, we adopted ASU No. 2010-02, "Consolidation (Topic 810) Accounting and Reporting for Decreases in Ownership of a Subsidiarya
Scope Clarification," as codified in ASC No. 810, "Consolidation." ASU No. 2010-02 applies retrospectively to April 1, 2009, our adoption date for ASC
810-10-65-1. This ASU clarifies the applicable scope of ASC No. 810 for a decrease in ownership in a subsidiary or an exchange of a group of assets that is a
business or nonprofit activity. The ASU also requires expanded disclosures. The adoption of this ASU did not have a material impact on our consolidated financial statements; however, it may affect
future divestitures of subsidiaries or groups of assets within its scope.

On
October 1, 2009, we adopted ASU No. 2010-01, "Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and
Casha consensus of the FASB Emerging Issues Task Force," as codified in ASC No. 505, "Equity." ASU No. 2010-01 clarifies the treatment of certain distributions
to shareholders that have both stock and cash components. The stock portion of such distributions is considered a share issuance that is reflected in earnings per share prospectively and is not a
stock dividend. The adoption of this ASU did not have a material impact on our consolidated financial statements; however, it may affect any future stock distributions.

On
October 1, 2009, we adopted ASU No. 2009-12, "Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent)," as codified in ASC No. 820-10, "Fair Value Measurements and DisclosuresOverall." ASU No. 2009-12 permits a
reporting entity to measure the fair value of certain alternative investments that do not have a readily determinable fair value on the basis of the investments' net asset value per share or its
equivalent. This ASU also requires expanded disclosures. The adoption of this ASU did not have a material impact on our consolidated financial statements; however, it may impact the valuation of our
future investments.

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Application of Critical Accounting Policies and Estimates

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with those
accounting principles requires management to make judgments and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ
from those estimates. Management regularly re-evaluates its judgments and estimates which are based upon historical
experience and on various other assumptions that are believed to be reasonable under the circumstances. Management believes that of its significant accounting policies, policies that may involve a
higher degree of judgment and complexity are inventory valuations, valuation of equipment and leasehold improvements and long-lived assets, and income taxes.

The
Company records inventories at the lower of cost or market. Cost is defined as the sum of the applicable expenditures and charges directly or indirectly incurred in bringing
inventories to their existing condition and location. Cost for inventory purposes may be determined under any one of several assumptions as to the flow of cost factors, such as first-in,
first-out; average cost; and last-in, first-out. Our inventories are stated using the first-in, first-out method. Inventory values are
subject to many critical estimates, and unforeseen changes in any of the factors surrounding the estimates imbedded in the determination of inventory values and cost of sales could have a material
impact on the Company's results. Such changes in factors and estimates include but are not limited to production levels and capacity, changes in the prices paid for raw materials, supplies, and labor,
changes in yield, potency, and quality of biomass, changes in processing or production methods, and changes in the carrying value of our inventories resulting from the prices our customers are willing
to pay for our products. Such estimates are revised on a quarterly based on information available at that time.

Management
reviews inventory levels, inventory turnover, product age and product marketability quarterly to evaluate recoverability and determine if a reserve for inventory is deemed
necessary. At March 31, 2010 an inventory reserve in the amount of $54,000 has been recognized. An inventory reserve was not deemed necessary in the prior fiscal year.

Equipment
and leasehold improvements are reported at cost less accumulated depreciation and amortization. Self-constructed leasehold improvements include design, construction
and supervision costs. These costs are recorded in construction in progress and are transferred to equipment and leasehold improvements when construction is completed and the facilities are placed in
service. Long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized to the extent that
the carrying amount exceeds the asset's fair value.

Income
taxes are accounted for under the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be recovered or
settled. The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. Judgment is required in assessing the need
for the valuation allowance. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become
deductible. Should the Company generate sustained taxable income in the future, management may conclude that a portion or all of the existing valuation allowance is no longer required.

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Due
to the Company's history of losses, a full valuation allowance has been recorded against net deferred tax assets. Management has assessed the impact of uncertain tax positions to be immaterial.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

We do not enter into any transactions using derivative financial instruments or derivative commodity instruments and believe that our
exposure to market risk associated with other financial instruments is not material.

We
have two term loans with interest rates that adjust quarterly based on the prime rate. As such, we are exposed to the interest rate risk whereby a 1% increase in the prime rate would
lead to an increase of approximately $9,000 in interest expense for the year ending March 31, 2011 (based on March 31, 2010 amounts outstanding).

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Item 8.    Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders
Cyanotech Corporation:

We
have audited the accompanying consolidated balance sheets of Cyanotech Corporation and subsidiary (the Company) as of March 31, 2010 and 2009, and the related consolidated
statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the two years in the period ended March 31, 2010. Our audits of the basic consolidated
financial statements included the financial statement schedule listed in the index appearing under item 15(a)(2). These consolidated financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cyanotech Corporation and subsidiary as of
March 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

/s/
Grant Thornton LLP
Honolulu, Hawaii
June 24, 2010

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Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders
Cyanotech Corporation:

We
have audited the consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows of Cyanotech Corporation for the year ended
March 31, 2008. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of their operations and their cash flows for the year ended
March 31, 2008, in conformity with U.S. generally accepted accounting principles.

/s/
KPMG LLP
Honolulu, Hawaii
June 26, 2008

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CYANOTECH CORPORATION AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        March 31,

2010

2009(in thousands, except
share data)ASSETSCurrent assets:Cash and cash equivalents

$
817

$
977Accounts receivable, net of allowance for doubtful accounts of $10 in 2010 and $14 in 2009


2,064


1,785Inventories, net


3,933


3,124Prepaid expenses and other current assets


400


110Total current assets


7,214


5,996Equipment and leasehold improvements, net


4,681


4,316Other assets


253


475Total assets

$
12,148

$
10,787LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Current maturities of long-term debt

$
276

$
620Line of credit


150


Accounts payable


1,125


1,040Accrued expenses


721


444Total current liabilities


2,272


2,104Long-term debt, excluding current maturities


756


909Total liabilities


3,028


3,013Stockholders' equity:Common stock of $.02 par value, authorized 7,500,000 shares; issued and outstanding 5,252,572 shares at 2010 and 5,245,770 shares at 2009


105


105Additional paid-in capital


27,545


27,590Accumulated deficit


(18,530
)

(19,921
)Total stockholders' equity


9,120


7,774Total liabilities and stockholders' equity

$
12,148

$
10,787


See
accompanying notes to consolidated financial statements

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CYANOTECH CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        Year ended March 31,

2010

2009

2008(in thousands, except
per share data)Net sales

$
15,742

$
13,950

$
11,364Cost of sales


9,109


8,438


8,293Gross profit


6,633


5,512


3,071Operating expenses:General and administrative


3,311


2,873


2,478Sales and marketing


1,402


1,125


1,355Research and development


264


206


143Loss on disposal of equipment and leasehold improvements


155





Total operating expense


5,132


4,204


3,976Income (loss) from operations


1,501


1,308


(905
)Other income (expense):Interest income


4


8


24Interest expense


(113
)

(162
)

(164
)Other income (expense), net


23


10


(65
)Total other expense, net


(86
)

(144
)

(205
)Income (loss) before income tax expense


1,415


1,164


(1,110
)Income tax expense


24


22


29Net income (loss)

$
1,391

$
1,142

$
(1,139
)Net income (loss) per share:Basic

$
.26

$
.22

$
(.22
)Diluted

$
.26

$
.22

$
(.22
)Shares used in calculation of net income (loss) per share:Basic


5,251


5,244


5,242Diluted


5,346


5,248


5,242


See
accompanying notes to consolidated financial statements

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CYANOTECH CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND  COMPREHENSIVE INCOME (LOSS)        Years ended March 31,
2010, 2009 and 2008

Common
Stock
Shares

Common
Stock

Additional
Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income (Loss)

Total
Stockholders'
Equity

Comprehensive
Income (Loss)(in thousands, except share data)Balances at March 31, 2007


5,233,520

$
105

$
27,333

$
(19,920
)
$
(8
)
$
7,510Issuances of common stock for Director Stock Grants


8,750





4








4Comprehensive loss:Net loss











(1,139
)




(1,139
)
$
(1,139
)Other comprehensive lossforeign currency translation adjustments














4


4


4Comprehensive loss



















$
(1,135
)Balances at March 31, 2008


5,242,270


105


27,337


(21,059
)

(4
)

6,379Issuances of common stock for Director Stock Grants


3,500





7








7Compensation expense related to stock options








246








246Comprehensive income:Net Income











1,142





1,142

$
1,142Other comprehensive lossforeign currency translation adjustments











(4
)

4





Comprehensive income



















$
1,142Balances at March 31, 2009


5,245,770


105


27,590


(19,921
)




7,774Issuances of common stock for Director Stock Grants


6,752





20








20Issuance of common stock for exercise of stock options for cash


50














Compensation expense related to stock options








(65
)







(65
)Comprehensive income:Net Income











1,391





1,391

$
1,391Comprehensive income



















$
1,391Balances at March 31, 2010


5,252,572

$
105

$
27,545

$
(18,530
)
$


$
9,120


See accompanying notes to consolidated financial statements

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Table of Contents



CYANOTECH CORPORATION AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        Years ended March 31,

2010

2009

2008(in thousands)CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)

$
1,391

$
1,142

$
(1,139
)Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:Loss on disposal of equipment and leasehold improvements


155





73Depreciation and amortization


512


431


490Amortization of debt issue costs and other assets


58


56


42Issuance of common stock for services


20


7


4Stock based compensation expense


(65
)

246


Provision for reduction of allowance for doubtful accounts


(4
)

(9
)

Net (increase) decrease in assets:Accounts receivable


(275
)

158


(347
)Inventories


(809
)

(1,523
)

(8
)Prepaid expenses and other assets


(125
)

245


(220
)Net increase (decrease) in liabilities:Customer deposits





(204
)

204Accounts payable


84


235


189Accrued expenses


278


124


(70
)Net cash provided by (used in) operating activities


1,219


908


(782
)CASH FLOWS FROM INVESTING ACTIVITIES:Investment in equipment and leasehold improvements


(1,032
)

(449
)

(131
)Net cash used in investing activities


(1,032
)

(449
)

(131
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from line of credit


150





Proceeds from long-term debt








1,078Principal payments on long-term debt


(497
)

(572
)

(396
)Payments for debt issuance costs








(123
)Net cash (used in) provided by financing activities


(347
)

(572
)

559Net decrease in cash and cash equivalents


(160
)

(113
)

(354
)Cash and cash equivalents at beginning of year


977


1,090


1,444Cash and cash equivalents at end of year

$
817

$
977

$
1,090SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the year for:Interest

$
62

$
132

$
130Income taxes

$
35

$
7

$
2NON-CASH FINANCING AND INVESTING ACTIVITIES:Additions to equipment

$
124

$
29

$



See accompanying notes to consolidated financial statements

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Table of Contents

CYANOTECH CORPORATION        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 Description of Business and Summary of Accounting Policies

Description of Business

Cyanotech Corporation (the Company) cultivates and produces high-value, high-quality natural products derived
from microalgae. The Company currently cultivates, on a large-scale basis, two microalgal species from which its two major product lines are derived. The Company is currently producing microalgal
products for nutritional supplement markets, having discontinued production for animal feed/pigments and immunological diagnostics markets. The Company manufactures all of its products in the United
States and sells its products worldwide. As the Company's operations are solely related to microalgae-based products, management of the Company considers its operations to be in one industry segment.
Correspondingly, the Company records revenue and cost of sales information by product category.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America. The accompanying consolidated financial statements include the accounts of Cyanotech Corporation and its wholly owned subsidiaries, Nutrex Hawaii, Inc. ("Nutrex
Hawaii" or "Nutrex") and Cyanotech Japan YK ("Cyanotech Japan" or "CJYK"). Beginning in the second quarter of the fiscal year ended March 31, 2008, all business formerly conducted through
Cyanotech Japan was absorbed by Cyanotech Corporation headquarters operations, and Cyanotech Japan was dissolved November 30, 2007. The dissolution of CJYK did not have a material impact on the
Company's financial results. All significant intercompany balances and transactions have been eliminated in consolidation.

Estimates and Assumptions

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of any contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the period reported. Management reviews these estimates and assumptions periodically and reflects the effect of revisions in the
period that they are determined to be necessary. Actual results could differ significantly from those estimates and assumptions.

Foreign Currency Translation and Risk

The Japanese Yen was the functional currency for Cyanotech Japan. As such, Cyanotech Japan's revenues and expenses were translated at
average rates of exchange prevailing during 2008. Due to the dissolution of Cyanotech Japan in the third quarter of fiscal 2008, no Cyanotech Japan assets and liabilities remained as of
March 31, 2010 and 2009. Translation adjustments for Cyanotech Japan during the year ended March 31, 2008 have been charged or credited to accumulated other comprehensive income (loss)
in stockholders' equity. Currently Cyanotech Corporation transacts entirely in US dollars and does not hedge any foreign currency risk through the use of derivative financial instruments.

Financial Instruments

Cash and cash equivalents consist of cash and highly liquid debt instruments such as commercial paper and certificates of deposit with
maturities of three months or less at the date of purchase. Short-term investments are certificates of deposits maturing between three and nine months from the purchase date and are stated
at cost. Interest earned on short-term investments is deposited monthly into an accessible

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cash
account and is therefore classified as cash and cash equivalents. The Company's practice is to invest cash with financial institutions that have acceptable credit ratings and to limit the amount
of credit exposure to any one financial institution.

Management
applies the following methods and assumptions in estimating the fair value of each class of financial instruments for all periods presented.

GAAP
establishes a framework for measuring fair value which the Company adopted in 2008. That framework provides a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are
described below:

Level 1Inputs
to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to
access.

Level 2Inputs
to the valuation methodology include:



If
the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3Inputs
to the valuation methodology are unobservable and significant to the fair value

Cash and Cash Equivalents, Short-Term Investments, Accounts Receivable and Accounts PayableDue to the short-term nature of
these instruments, management believes that the carrying amounts approximate fair value.

Long-Term DebtThe carrying amount of long-term debt approximates fair value as interest rates applied to the underlying debt
are adjusted quarterly to market interest rates, which approximate current interest rates for similar debt instruments of comparable maturities.

The
Company maintains its cash accounts with banks located in Hawaii. The total cash balances are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000 per bank.
The Company has cash balances on deposit with a Hawaii bank at March 31, 2010 that exceeded the balance insured by the FDIC by $535,000.

Trade Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not accrue interest. The allowance for doubtful accounts reflects
management's best estimate of probable credit losses inherent in the accounts receivable balance. The Company determines the allowance based on historical experience, specifically identified nonpaying
accounts and other currently available evidence. Management reviews its allowance for doubtful accounts monthly with focus on significant individual past due balances over 90 days. All other
balances are reviewed on a pooled basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
The Company does not have any off-balance sheet credit exposure related to its customers.

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Table of Contents

Inventories, net

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO)
method. Market is defined as sales price less cost to dispose and a normal profit margin. Inventory costs include materials, labor and overhead.

A
reserve against inventory is established and netted against inventory for known or expected inventory obsolescence. At March 31, 2010 the inventory reserve was $54,000. There
was no reserve against inventory at March 31, 2009.

The
Company recognizes abnormal production costs including fixed cost variances from normal production capacity as an expense in the period incurred. Abnormal amounts of freight,
handling costs and wasted material (spoilage) are recognized as current-period charges and fixed production overhead costs are allocated to inventory based on the normal capacity of production
facilities. Normal capacity is defined as "the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting
from planned maintenance." These amounts were $0, $136,000 and $1,298,000 for fiscal years ended March 31, 2010, 2009 and 2008, respectively.

Equipment and Leasehold Improvements, net

Equipment and leasehold improvements are stated at cost. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives for equipment and furniture and fixtures, or the shorter of the land lease term (see Notes 3 and 6) or estimated useful lives for leasehold
improvements as follows:

Equipment

3 to 10 yearsFurniture and fixtures

7 yearsLeasehold improvements

10 to 20 years


Capital
project costs are accumulated in construction in-progress until completed. Repair and maintenance cost are expensed in the period incurred. Repairs and maintenance
that significantly increase the useful life or value of the asset are capitalized and depreciated over the remaining life of the asset.

Impairment of Long-Lived Assets

Management reviews long-lived assets, such as equipment, leasehold improvements and purchased intangibles subject to
amortization for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized to the extent that the carrying amount exceeds the asset's fair value. Assets to be disposed of and related liabilities would be separately
presented in the consolidated balance sheet. Assets to be disposed of would be reported at the lower of the carrying value or fair value less costs to sell and would not be depreciated.

Accounting for Assets Retirement Obligations

Management evaluates quarterly the potential liability for asset retirement obligations under the Company's lease for its principal
facility and corporate headquarters. No liability has been recognized as of March 31, 2010 (see Note 6).

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Table of Contents

Revenue Recognition

The Company recognizes revenues as goods are shipped to customers (FOB shipping point). The criteria for recognition of revenue are
when persuasive evidence that an arrangement exists and both title and risk of loss have passed to the customer, the price is fixed or determinable, and collectability is reasonably assured.

The
Company records shipping charges and sales tax in cost of sales.

Research and Development and Advertising

Research and development and advertising costs are expensed as incurred.

Income Taxes

Income taxes are accounted for under the asset and liability method. The asset and liability method requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted income tax rates applicable to the period that includes the enactment date.

As
a result of the implementation of accounting for uncertain tax positions effective April 1, 2008, the Company did not recognize a liability for unrecognized tax benefits and,
accordingly, was not required to record any cumulative effect adjustment to beginning of year retained earnings. As of both the date of adoption and March 31, 2010, there was no significant
liability for income tax associated with unrecognized tax benefits.

In
evaluating a tax position for recognition, management evaluates whether it is more-likely-than-not that a position will be sustained upon
examination, including resolution of related appeals or litigation processes, based on technical merits of
the position. If the tax position meets the more-likely-than-not recognition threshold, the tax position is measured and recognized in the Company's financial
statements as the largest amount of tax benefit that, in management's judgment, is greater than 50% likely of being realized upon settlement.

The
Company recognizes accrued interest related to unrecognized tax benefits as well as any related penalties in interest expense in its condensed consolidated statements of operations.
As of the date of adoption and during the years ended March 31, 2010, and 2009, there was no accrual for the payment of interest and penalties related to uncertain tax positions.

Share-Based Compensation

The Company accounts for share based payment arrangements with employees based on fair value. If an award vests or becomes exercisable
based on the achievement of a condition other than service, such as for meeting certain performance or market condition, the award is classified as a liability. Liability-classified awards are
remeasured to fair value at each balance sheet date until the award is settled. The Company currently has no liability-classified awards. Equity-classified awards, including grants of employee stock
options, are measured at the grant-date fair value of the award and are not subsequently remeasured unless an award is modified. The cost of equity-classified awards is recognized in the
income statement over the period during which an employee is required to provide the service in exchange for the award. All of the Company's stock options are service-based awards, and because the
Company's stock options are "plain vanilla," as defined by the U.S. Securities and Exchange Commission in Staff Accounting Bulletin No. 107, they are reflected only in Equity and Compensation
Expense accounts

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Table of Contents

The
Company utilizes the Black-Scholes option pricing model to determine the fair value of each option award. Expected volatilities are based on the historical volatility of the
Company's common stock over a period consistent with that of the expected term of the options. The expected term of the options are estimated based on factors such as vesting periods, contractual
expiration dates, historical trends in Cyanotech's stock price, and historical exercise behavior. The risk-free rates for periods within the contractual life of the options are based on
the yields of U.S. Treasury instruments with terms comparable to the estimated option terms.

Per Share Amounts

Basic earnings per common share is calculated by dividing net income (loss) for the year by the weighted-average number of common
shares outstanding during the year. Diluted earnings per common share is calculated by dividing net income for the year by the sum of the weighted-average number of common shares outstanding during
the year plus the number of potentially dilutive common shares ("dilutive securities") that were outstanding during the year. Dilutive securities include options granted pursuant to the Company's
stock option plans, potential shares related to the Employee Stock Purchase Plan and Restricted Stock grants to employees and non-employees. Dilutive securities related to the Company's
stock option plans are included in the calculation of diluted earnings per common share using the treasury stock method. Potentially dilutive securities are excluded from the computation of earnings
per share in periods in which a net loss is reported, as their effect would be antidilutive. A reconciliation of the numerators and denominators of the basic and diluted earnings per common share
calculations for the years ended March 31, 2010, 2009 and 2008 is presented in Note 7. There were 8,000, 384,000 and 116,000 potentially dilutive shares excluded from income (loss) per
share during 2010, 2009 and 2008, respectively, as they were anti dilutive.

New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")
No. 2010-06, "Improving Disclosures about Fair Value Measurements," an amendment to Accounting Standards Codification ("ASC") 820, "Fair Value Measurements and Disclosures." The
standard requires disclosure for transfers in and out of Level 1 and Level 2, as well as the disclosure of Level 3 activity on a gross, rather than net, basis. The guidance also
requires enhancements to certain existing disclosures. The amendments will be effective as of the beginning of fiscal 2011, except for the new requirements regarding Level 3 activity, which is
deferred until the beginning of fiscal 2012. The guidance is not expected to have an impact on the Company's consolidated financial statements.

On
October 1, 2009, we adopted ASU No. 2010-02, "Consolidation (Topic 810) Accounting and Reporting for Decreases in Ownership of a Subsidiarya
Scope Clarification," as codified in ASC No. 810, "Consolidation." ASU No. 2010-02 applies retrospectively to April 1, 2009, our adoption date for ASC No. 810.
This ASU clarifies the applicable scope of ASC No. 810 for a decrease in ownership in a subsidiary or an exchange of a group of assets that is a business or nonprofit activity. The ASU also
requires expanded disclosures. The adoption of this ASU did not have a material impact on our consolidated financial statements; however, it may affect future divestitures of subsidiaries or groups of
assets within its scope.

On
October 1, 2009, we adopted ASU No. 2010-01, "Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and
Casha consensus of the FASB Emerging Issues Task Force," as codified in ASC No. 505, "Equity." ASU No. 2010-01 clarifies the treatment of certain distributions
to shareholders that have both stock and cash components. The stock portion of such distributions is considered a share issuance that is reflected in earnings per share prospectively and is not a
stock dividend. The adoption of this ASU did not have a material impact on our consolidated financial statements; however, it may affect any future stock distributions.

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Table of Contents

On
October 1, 2009, we adopted ASU No. 2009-12, "Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent)," as codified in ASC No. 820-10, "Fair Value Measurements and DisclosuresOverall." ASU No. 2009-12 permits a
reporting entity to measure the fair value of certain alternative investments that do not have a readily determinable fair value on the basis of the investments' net asset value per share or its
equivalent. This ASU also requires expanded disclosures. The adoption of this ASU did not have a material impact on our consolidated financial statements; however, it may impact the valuation of our
future investments.

In
May 2009, the FASB issued ASC No. 855, "Subsequent events." The objective of this Statement is to establish general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth: 1. the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, 2. the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet date in its financial statements and 3. the disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. Management has evaluated subsequent events through the date the financial statements are filed with the SEC and is not aware of any subsequent events which would
require recognition or disclosure in the financial statements.

Note 2 Inventories, net

Inventories consist of the following as of March 31, 2010 and 2009:

2010

2009(in thousands)Raw materials

$
392

$
323Work in process


303


329Finished goods(1)


3,062


2,315Supplies


176


157$
3,933

$
3,124


---

Note 3 Equipment and Leasehold Improvements, net

Equipment and leasehold improvements consists of the following as of March 31, 2010 and 2009:

2010

2009(in thousands)Equipment(1)

$
6,350

$
6,526Leasehold improvements


7,298


7,580Furniture and fixtures


88


11713,736


14,223Less accumulated depreciation and amortization


(9,243
)

(10,031
)Construction in-progress


188


124$
4,681

$
4,316


---

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The
Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. No
such event occurred during the fiscal years ended March 31, 2010, 2009 and 2008. The Company recognized a loss on disposal of equipment and leasehold improvements in the amount of $155,000 in
fiscal 2010.

Note 4 Accrued Expenses

Components of accrued expenses as of March 31, 2010 and 2009 are as follows:

2010

2009(in thousands)Wages, commissions and royalties

$
334

$
257Professional fees


34


11Bonuses


140


Other accrued expenses


213


176$
721

$
444


Note 5 Line of Credit

On April 24, 2009, the Company entered into an agreement with First Hawaiian Bank for a Line of Credit in the amount of $150,000
for a term of one year. Upon renewal on March 25, 2010, the credit limit was increased to $350,000. The obligation is secured by the Company's U.S. accounts receivable and bears a variable
interest rate based on prime plus 2%. The outstanding balance as of March 31, 2010 was $150,000. The credit agreement requires the Company to meet certain financial covenants. The Company was
in compliance with these financial covenants at March 31, 2010.

Note 6 Long-Term Debt

Long-term debt consists of the following as of March 31, 2010 and 2009 as follows:

2010

2009(in thousands)Term loans

$
1,032

$
1,529Less current maturities


(276
)

(620
)Long-term debt, excluding current maturities

$
756

$
909


In
April 2000, the Company executed a Term Loan Agreement ("Term Loan A") with a lender providing for $3.5 million in aggregate credit facilities, secured by the Company's assets.
Term Loan A has a maturity date of May 1, 2010 and is payable in 120 equal monthly principal payments plus interest. The interest rate under Term Loan A, in the absence of a default under the
agreement, is the prime rate, in effect as of the close of business on the first day of each calendar quarter, plus 1%. As of March 31, 2010, the prime rate was 3.25%. The balance under this
loan was $80,000 and $551,000 at March 31, 2010 and 2009, respectively. The Company is prohibited from declaring any common stock dividends without the lender's prior written consent. A warrant
to purchase 5,000 shares of the Company's common stock was issued in conjunction with this Term Loan. The warrant expires in April 2011 and has an exercise price of $10.20 per share. The warrant may
only be exercised after the Company has repaid the Term Loan in full. The credit agreement requires the Company to meet certain financial covenants. The Company was in compliance with these financial
covenants at March 31, 2010 and 2009. The note was paid in full at maturity in May 2010.

In
February 2008, the Company executed another Term Loan Agreement ("Term Loan B") with the same lender providing for $1.1 million in aggregate credit facilities, secured by the
Company's assets. Term

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Loan
B has a maturity date of March 1, 2015 and is payable in 84 equal monthly principal payments plus interest. The interest rate under Term Loan B, in the absence of a default under the
agreement, is the prime rate, in effect as of the close of business on the first day of each calendar quarter, plus 1%. As of March 31, 2010 and 2009, the prime rate was 3.25% and 3.25%,
respectively. The balance under
this loan was $808,000 and $950,000 at March 31, 2010 and 2009, respectively. The Company is prohibited from declaring any common stock dividends without the lender's prior written consent.

A
$250,000 restricted cash deposit continues to be held to secure these loans and is included in Prepaid expenses and other current assets in the accompanying consolidated Balance Sheet
at March 31, 2010. The $250,000 restricted cash deposit was included in Other assets at March 31, 2009. The restricted cash was released in May 2010 upon the maturity of Term Loan A.

In
March 2009, the Company executed a Term Loan Agreement with John Deere credit providing for $29,340 in equipment, secured by the equipment financed. The Term Loan has a maturity date
of March 25, 2013 and is payable in 48 equal monthly principal payments. The interest rate under this Term Loan is 0%. Imputed interest at a rate of 2% (cash discount offered by seller) has
been recorded and will be amortized as interest over the term of the loan. The face value of the term loan is reported in the balance sheet at $22,000, less the unamortized discount of $2,053 at
March 31, 2010. Amortization of discount for the year ended March 31, 2010 was $546. There was no amortization of discount as of March 31, 2009.

In
January 2010, the Company executed a Term Loan Agreement with John Deere credit providing for $27,217 in equipment, secured by the equipment financed. The Term Loan has a maturity
date of December 28, 2012 and is payable in 36 equal monthly principal payments. The interest rate under this Term Loan is 0%. Imputed interest at a rate of 2% (cash discount offered by seller)
has been recorded and will be amortized as interest over the term of the loan. The face value of the term loan is reported in the balance sheet at $27,217, less the unamortized discount of $1,552 at
March 31, 2010. Amortization of discount for the year ended March 31, 2010 was $140.

In
March 2010, the Company executed a capital lease agreement with Thermo Fisher Financial providing for $97,000 in equipment, secured by the equipment financed. The capital lease has a
maturity date of March 2013 and is payable in 36 equal monthly payments. The interest rate under this Capital Lease is 6.6%. The balance under this lease was $97,000 at March 31, 2010.

Future
principal payments under the loan agreements and capital lease as of March 31, 2010 are as follows:

Year ending March 31

(in thousands)2011

$
2762012


2032013


2102014


1682015


175Thereafter through 2015


Total principal payments

$
1,032


Note 7 Leases

The Company's principal facility and its corporate headquarters are located at the Natural Energy Laboratory of Hawaii Authority
("NELHA") at Keahole Point in Kailua-Kona, Hawaii. The property is leased from the State of Hawaii under a 30-year commercial lease expiring in 2025. Under the terms of the
existing NELHA lease, the Company could be required to remove improvements at the end of the lease term. Based upon communications with NELHA and an analysis pursuant to ASC 410-20, we do
not

42

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believe
the projected cost for such removal to be material to the consolidated financial statements, or likely, given historical practices. However, conditions could change in the future. It is not
possible to predict such changes or estimate any impact thereof.

The
Company leases facilities, equipment and land under operating leases expiring between 2010 and 2025. The land lease provides for contingent rentals in excess of minimum rental
commitments based on a percentage of the Company's sales. Contingent rental for the years ended March 31, 2010, 2009 and 2008 was $81,000, $13,000 and $46,000, respectively.

Future
minimum lease payments under non-cancelable operating leases at March 31, 2010 are as follows:

Year ending March 31

(in thousands)2011

$
1672012


1582013


1572014


1572015


157Thereafter through 2026


1,591Total minimum lease payments

$
2,387


Rent
expense, including contingent rent, under operating leases amounted to $337,000, $249,000 and $268,000 for the years ended March 31, 2010, 2009 and 2008, respectively.

Note 8 Share-Based Compensation

Stock Options

As of March 31, 2010, the Company had the following two shareholder approved stock plans under which shares were available for
equity-based awards: The 2005 Stock Option Plan (the "2005 Plan") wherein 700,000 shares of common stock are reserved for issuance until the Plan terminates on August 21, 2015, which includes
500,000 additional shares of common stock pursuant to a vote of the Company's stockholders on September 9, 2008, and; The Independent Director Stock Option and Stock Grant Plan (the "2004
Directors Plan") wherein 75,000 shares of common stock are reserved for issuance until the Plan terminates in 2014.

Under
the 2005 Plan, eligible employees and certain independent consultants may be granted options to purchase shares of the Company's common stock. The shares issuable under the 2005
Plan will either be shares of the Company's authorized but previously unissued common stock or shares reacquired by the Company, including shares purchased on the open market. As of March 31,
2010, 369,644 options remain available for grant under the 2005 Plan.

Under
the 2004 Directors Plan, upon election to the Board of Directors, a newly elected non-employee director is granted a ten-year option to purchase 1,000
shares of the Company's common stock. Options granted vest and become exercisable six months from the date of grant. In addition, on the date of each Annual Meeting of Stockholders, each
non-employee director continuing in office is automatically issued 875 shares of common stock, non-transferable for nine months following the date of grant. The 2004 Directors
Plan was amended effective March 24, 2010, to increase the number of shares of common stock issued to each non-employee director to 2,000 shares and an additional 2,000 shares to
the director serving as Chairman of the Board. Compensation expense recognized for shares issued under the 2004 Plan was $20,000, $7,000 and $4,000 for the fiscal years ended March 31, 2010,
2009 and 2008, respectively. As of March 31, 2010, 47,123 options remain available for grant under the 2004 Plan.

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Concurrent
with the 2004 Plan approval on August 16, 2004, the 1994 Non-Employee Director Stock Option and Stock Grant Plan was terminated except for the outstanding options issued
thereunder.

The
following table presents shares authorized, available for future grant and outstanding under each of the Company's plans:

As of March 31, 2010Authorized

Available

Outstanding2005 Plan


700,000


369,644


330,3562004 Plan


75,000


47,123


1,0001994 Plan








2,250Total


775,000


416,767


333,606


All
stock option grants made under the 2005 Plan and the 2004 Directors Plan were at exercise prices no less than the Company's closing stock price on the date of grant.
Options under the 2005 Plan and 2004 Directors Plan were determined by the Board of Directors or the Stock Option and Compensation Committee of the Board in accordance with the provisions of the
respective plans. The terms of each option grant include vesting, exercise, and other conditions are set forth in a Stock Option Agreement evidencing each grant. No option can have a life in excess of
ten (10) years. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing
model. The model requires various assumptions, including a risk-free interest rate, the expected term of the options, the expected stock price volatility over the expected term of the
options, and the expected dividend yield. Compensation expense for employee stock options is recognized ratably over the vesting term. Compensation expense recognized for options issued under the 2005
Plan was $(65,000) and $246,000 for the years ended March 31, 2010 and 2009, respectively and is classified as General and Administrative expense in the consolidated condensed statement of
operations. The negative compensation expense for fiscal 2010 was due to the forfeiture of 262,112 unvested options at $2.12 per share. There was no compensation expense recognized under the 2005 Plan
for the year ended March 31, 2008.

A
summary of option activity under the Company's stock plans for the fiscal years ended March 31, 2010, 2009 and 2008 is presented below:

Option Activity

Shares

Weighted
Average
Exercise Price

Weighted Average
Remaining
Contractual Term

Aggregate
Intrinsic
ValueOutstanding at March 31, 2007


84,172

$
3.86

1.77 years

$
(186,862
)Granted


47,350

$
1.60Exercised





Expired


(17,700
)
$
2.36Forfeited


(2,375
)
$
3.11Outstanding at March 31, 2008


111,447

$
3.15

4.9 years

$
(176,086
)Granted


443,168

$
1.84Exercised





Forfeited or expired


(44,894
)
$
4.05Outstanding at March 31, 2009


509,721

$
2.11

8.9 years

$
38,130Granted


113,000

$
2.08Exercised


(50
)
$
1.60Forfeited or Expired


(289,065
)
$
2.28Outstanding at March 31, 2010


333,606

$
1.69

8.4 years

$
555,281Exercisable at March 31, 2010


151,651

$
1.47

8.0 years

$
285,340


44

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Table of Contents

The aggregate intrinsic value in the tables above is before applicable income taxes and represents the amount optionees would have received if all options had
been exercised on the last business day of the period indicated, based on the Company's closing stock price of $3.35 per share for such day.

A
summary of the Company's non-vested options for the year ended March 31, 2010 is presented below:

Nonvested Options

Shares

Weighted Average
Grant-Date
Fair ValueNonvested at March 31, 2009


481,463

$
1.82Granted


113,000


.65Vested


(144,286
)

1.05Forfeited or expired


(268,222
)

1.63Nonvested at March 31, 2010


181,955

$
.62


The
following table summarizes the weighted average characteristics of outstanding stock options as of March 31, 2010:

Outstanding Options

Exercisable OptionsRange of Exercise Prices

Number
of Shares

Remaining
Life (Years)

Weighted
Average Price

Number
of Shares

Weighted
Average Price$1.41-$2.60


331,856


8.5

$
1.67


149,901

$
1.44$4.20-$6.50


1,750


3.1


4.31


1,750


4.31Total stock options


333,606


8.4

$
1.69


151,651

$
1.47


There
were 113,000, 443,168 and 47,350 stock options granted during the fiscal years ended March 31, 2010, 2009, and 2008 respectively. The range of fair value assumptions related
to options granted during the years ended March 31 are:

2010

2009

2008Exercise Price:

$2.08

$1.41 - $2.12

1.60Volatility:

88.9%

101.9 - 103.6%

104%Risk Free Rate:

3.13%

4.0 - 4.7%

4.8%Vesting Period:

4 years

1 - 4 years

5 yearsForfeiture Rate:

20%

0 - 15%

24%Expected Life

6.25 years

5.0 - 6.5 years

7.6 yearsDividend Rate

0%

0%

0%


As
of March 31 2010, total unrecognized stock-based compensation expense related to unvested stock options was $87,620, which is expected to be expensed over a weighted-average
period of 2.7 years.

Warrants

The Company had outstanding at March 31, 2010 and 2009, a single warrant which allows the warrant holder rights to acquire 5,000
shares of the Company's common stock. The warrant was valued at the date of grant and was amortized as a premium, but was subsequently deemed to have no value as a result of a reverse split which
occurred in a prior year. Accordingly, no expense was recognized in 2010, 2009 or 2008. The warrant expires in April 2011and has an exercise price of $10.20 per share.

45

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Table of Contents

Note 9 Earnings Per Share

Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per
share is computed on the basis of the weighted average number of common shares outstanding plus the potentially dilutive effect of outstanding stock options and warrants using the treasury stock
method and convertible securities using the "if-converted" method.

Reconciliations
between the numerator and the denominator of the basic and diluted earnings per share computations for the years ended March 31, 2010, 2009 and 2008 are as
follows:

Net Income
(Loss)
(Numerator)

Shares
(Denominator)

Per Share
Amount(in thousands, except per share amounts)Year ended March 31, 2010:Basic income per share

$
1,391


5,251

$
0.26Effective dilutive securitiesCommon stock options





95


Diluted income per share

$
1,391


5,346

$
0.26Year ended March 31, 2009:Basic income per share

$
1,142


5,244

$
0.22Effective dilutive securitiesCommon stock options





4


Diluted income per share

$
1,142


5,248

$
0.22Year ended March 31, 2008:Basic and diluted loss per share

$
(1,139
)

5,242

$
(0.22
)


Note 10 Profit Sharing Plan

The Company sponsors a profit sharing plan for all employees not covered under a separate management incentive plan. Under the profit
sharing plan, a percentage determined by the Board of Directors of pre-tax profits on a quarterly basis may be allocated to non-management employees at management's discretion.
The profit sharing bonus may be distributed all in cash on an after-tax basis or distributed half in cash (on an after-tax basis) and the remainder deposited in an employee's
401(k) account on a pre-tax basis. Employees may also make voluntary pre-tax contributions to their 401(k) accounts. Compensation expense under this plan was approximately
$156,000 and $64,000 for the fiscal years ended March 31, 2010 and 2009, respectively. There was no such compensation expense for fiscal years 2008.

46

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Table of Contents

Note 11 Major Customers and Geographic Information

Net sales by product line for the years 2010, 2009 and 2008 are as follows:

2010

2009

2008(in thousands)Net sales:Spirulina products

$
7,744

$
6,835

$
5,980Natural astaxanthin productsNatuRose








443BioAstin


7,978


7,093


4,808Other products


20


22


133$
15,742

$
13,950

$
11,364


The
Company has two major European customers. Sales to a single spirulina customer were approximately $1,027,000, or 7% of our total net sales for the year ended March 31, 2010.
Sales to this customer for fiscal 2009 and 2008 were $1,521,000 (11% of net sales) and $1,149,000 (10% of net sales), respectively. Sales to a single astaxanthin customer were approximately $784,000
or 5% of sales for the year ended March 31, 2010. Sales to this customer were $1,806,000 (13% of net sales) and $495,000 (4% of net sales), for the fiscal years 2009 and 2008, respectively. The
Company has one major US customer, astaxanthin sales to this customer for the year ended March 31, 2010 were
approximately $1,653,000 or 10% of our total net sales. Sales to this customer were approximately $821,000 (6% of net sales) and $656,000 (6% of net sales), for the fiscal years 2009 and 2008,
respectively.

The
following table presents sales for the years 2010, 2009 and 2008 by geographic region:

2010

2009

2008(dollars in thousands)Net sales(1):United States

$
9,028


57
%
$
7,367


53
%
$
6,482


57
%Germany


1,601


10
%

2,029


14
%

650


6
%The Netherlands


1,033


7
%

1,527


11
%

1,152


10
%Other areas


4,080


26
%

3,027


22
%

3,080


27
%$
15,742


100
%
$
13,950


100
%
$
11,364


100
%


---

Note 12 Income Taxes

Income (loss) before income tax expense consisted of:

2010

2009

2008(in thousands)United States

$
1,415

$
1,164

$
(1,094
)Foreign








(45
)Income (loss) before income tax expense

$
1,415

$
1,164

$
(1,110
)


47

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Table of Contents

The
following table reconciles the amount of income taxes computed at the federal statutory rate of 34%, for all periods presented, to the amount reflected in the Company's consolidated
statements of operations for the years ended March 31, 2010, 2009 and 2008:

2010

2009

2008(in thousands)Tax provision (benefit) at federal statutory income tax rate

$
480

$
396

$
(377
)State income taxes (benefit), net of federal income tax effect


105


47


(47
)Increase (decrease) in valuation allowance for deferred tax assets


(530
)

(511
)

470Stock based compensation


(22
)

85


Other, net


(9
)

5


(17
)Income tax expense

$
24

$
22

$
29


Income
tax expense for the years ended March 31, 2010, 2009 and 2008 consisted of:

2010

2009

2008(in thousands)Current:Foreign

$


$


$
Federal


22


20


State


2


2


29Total current


24


22


29Deferred:Foreign








Federal








State








Total deferred








Income tax expense

$
24

$
22

$
29


The
tax effects of temporary differences related to various assets, liabilities and carry forwards that give rise to deferred tax assets and deferred tax liabilities as of
March 31, 2010 and 2009 are as follows:

2010

2009(in thousands)Deferred tax assets:Net operating loss carry forwards

$
5,614

$
6,180Impairment loss on equipment & leasehold improvements for financial reporting purposes


2,768


2,768Inventory differences


590


306Tax credit carry forwards


174


151Other


119


70Gross deferred tax assets


9,265


9,475Less valuation allowance


(7,284
)

(7,814
)Net deferred tax assets


1,981


1,661Deferred tax liability: Depreciation and amortization


(1,981
)

(1,661
)Net deferred tax assets

$


$



In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of

48

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Table of Contents

deferred
tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable
income over the periods in which net deferred tax assets are deductible, management does not believe it is more likely than not the Company will realize a portion of its gross deferred tax assets, and
has thus established a valuation allowance to reflect its estimated realizability. The amount of the deferred tax assets considered realizable, however, could change in the near term if estimates of
future taxable income during the carry forward period change.

At
March 31, 2010, the Company has net operating loss carry forwards and tax credit carry forwards available to offset future federal income tax as follows (in thousands):

Expires March 31,

Net Operating
Losses

Research and
Experimentation
Tax Credits2011

$


$
232012





92018





2019


2,217


2020


2,051


72021


1,727


22022


3,161


2023


1,863


2026


159


2027


2,665


2028


1,612


$
15,455

$
41


In
addition, at March 31, 2010, the Company has alternative minimum tax credit carry forwards of approximately $133,000 available to reduce future federal regular income taxes
over an indefinite period.

At
March 31, 2010, the Company has state tax net operating loss carry forwards of $8,957,000 which expire in March 31, 2019 through 2026, available to offset future Hawaii
and California state taxable income.

The
following represents the open tax years and jurisdictions that the Company used in its evaluation of tax positions:

Open tax years ending March 31,

Jurisdiction2007 through 2010

U.S. federal2007 through 2010

State of Hawaii2006 through 2010

State of California


49

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Table of Contents

Note 13 Selected Quarterly Financial Data (Unaudited)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter(1)

Year(in thousands, except per share data)2010Net sales

$
4,021

$
3,925

$
3,982

$
3,814

$
15,742Gross profit


1,733


1,762


1,750


1,387


6,633Net income (loss)


413


599


605


(226
)

1,391Net income (loss) per shareBasic


0.08


0.11


0.12


(0.04
)

0.26Diluted


0.08


0.11


.011


(0.04
)

0.262009Net sales

$
3,701

$
3,274

$
3,553

$
3,422

$
13,950Gross profit


1,304


1,378


1,566


1,264


5,512Net income


271


163


514


194


1,142Net income per shareBasic and Diluted


0.05


0.03


0.10


0.04


0.22


---

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Table of Contents

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

On July 16, 2008, the Company announced the dismissal of its previous independent accountants, KPMG LLP (the "Previous
Accountants"), and on July 22, 2008, engaged Grant Thornton (the "New Accountants") as the Company's new principal independent registered public accounting firm to audit its financial
statements for the fiscal year ended March 31, 2009.

The
reports of the Previous Accountants on the Company's financial statements for each of the Company's fiscal years ended March 31, 2007 and 2008 did not contain an adverse
opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

The
decision to change independent accountants was approved by the Board of Directors of the Company.

During
the period from April 1, 2006 through July 16, 2008, no events described in Item 304(a)(1)(iv) of Regulation S-K occurred with respect to
the Company, however, there were reportable events as that term is described in Item 304(a)(1)(v) of Regulation S-K. The Previous Accountants, advised the Company of the
following material weaknesses:



The
Audit Committee discussed the reportable events with the Previous Accountants. The Company also authorized the Previous Accountants to respond fully to the inquiries of the New
Accountants concerning the subject matter of the reportable events.

During
the fiscal years ended March 31, 2008 and 2007, and through July 16, 2008, the Company had no disagreement with the Previous Accountants on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of the Previous Accountants, would have caused the
Previous Accountants to make reference to the subject matter of the disagreement in connection with its report on the Company's financial statements for such fiscal periods. The Company provided the
Previous Accountants with a copy of the necessary disclosures.

During
the period from April 1, 2006 through July 16, 2008, the Company did not consult with the New Accountants regarding (1) the application of accounting
principles to a specific completed or contemplated transaction, or the type of audit opinion that might be rendered with respect to the Company's financial statements for which advice was provided
that was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue or (2) any matter that was either the subject of a
"disagreement" or a response to Items 304(a)(l)(iv) of Regulation S-K.

Item 9A.    Controls and Procedures

Disclosure controls and procedures are processes and procedures that are designed to ensure that information required to be disclosed
by the company is recorded, processed, summarized and reported, within the time periods as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). As of the year ended March 31, 2010, management conducted an evaluation (under the supervision and with the participation of the chief executive officer
and the chief financial officer), pursuant to Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act, of the effectiveness of the company's disclosure controls
and procedures. As part of such evaluation, management considered the matters discussed below relating to internal control over financial reporting. Based on this evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have

51

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Table of Contents

concluded
that the Company's disclosure controls and procedures were not effective as of March 31, 2010 due to the material weakness in internal control over financial reporting described
below.

A
material weakness in internal control over financial reporting (as defined in Auditing Standard No. 5 of the Public Company Accounting Oversight Board) is a significant
deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented
or detected by the entity's internal control.

As
noted in prior years' Form 10-K, errors were identified in the calculations and applications of certain accounting practices relation to the carrying value of
inventory. Accordingly, the Company has taken measures over the past few years to correct the identified weakness: (1) The Company engaged the services of qualified independent consultants to
advise the Company on improvements to internal controls and procedures; (2) the Company added to its staff of educated and experienced accounting personnel; and (3) consultants
independent from those who assisted with improvements and procedures have tested the Company's internal controls over financial reporting concurrent with this Form 10-K. Based on
these measures, management believes systems and procedures are in place to reasonably ensure accurate financial data. However, these controls and procedures continue to rely heavily on manual
transfers of data, manual calculations and supervisory review of the work product. It is not practical to believe that such manual activities will eliminate the possibility of a material misstatement
of the annual or interim financial statements.

The
Company's Board of Directors approved and adopted a remediation plan for improving our internal controls and procedures. In accordance with this plan, management will ensure
compliance
with generally accepted accounting principles (GAAP), address key financial reporting risk elements, subject its disclosures to a rigorous review process prior to releasing financial statements,
update its inventory accounting systems and procedures to properly accommodate specific inventoriable fixed costs in accordance with GAAP and, apply resources with the critical skills necessary to
ensure full compliance with GAAP.



In order to address the material weakness identified in the prior years, we have continued to make changes in our internal controls
over financial reporting throughout the year ended March 31, 2010. These changes, designed to improve our internal controls and procedures, relate to proper accounting for inventory costs in
accordance with GAAP and with internal control over financial reporting. As discussed above, we believe systems and procedures are in place to reasonably ensure accurate financial data. However, these
controls and procedures continue to rely heavily on manual transfers of data, manual calculations and supervisory review of the work product. It is not practical to believe that such manual activities
will eliminate the possibility of a material misstatement of the annual or interim financial statements. Therefore, the Company has undertaken to upgrade our resource management software to provide a
single source for all financial data; full integration of activities to provide accounting control; establish access controls to data and transactions; and to automate allocations, calculations and
periodic reports. This process is ongoing and is expected to be completed in the next twelve months.



Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and
procedures or internal control over financial reporting will prevent all errors and all fraud. A control system no matter how well designed and implemented, can provide only reasonable, not absolute,
assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are
detected. The

52

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Table of Contents

inherent
limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistakes. Controls can also be circumvented by the
individual acts of some persons, or by collusion of two or more people. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected.

Item 9B.    Other Information



PART III

Item 10.    Directors, Executive Officers of the Registrant and Corporate Governance

Information with respect to Directors may be found under captions "Proposal One: Election of Directors," "Board Meetings and
Committees," "Director Compensation," "Security Ownership of Certain Beneficial Owners and Management: and "Compliance with Section 16(a) of the Exchange Act" contained in Cyanotech's
definitive 2010 proxy Statement. Information on Executive Officers may be found under the caption "Executive Officers" contained in Cyanotech's definitive 2009 Proxy Statement.

We
have adopted the Cyanotech Code of Ethics for Chief Executive Officer and Senior Financial Officers (the "Code of Ethics") included in our code of Conduct. Our Code of Conduct and
Ethics is publicly available on our website atwww.cyanotech.com. If we make any substantive amendments to or grant any waiver from such Code relating
to our Chief Executive Officer, Chief Financial Officer or Controller, we will disclose the nature of such amendment in a report on Form 8-K and amend the website disclosure.

Item 11.    Executive Compensation

The information required by this Item is incorporated herein by reference from the sections captioned "Executive Compensation and Other
Information," "Equity Compensation Plan Information," "Option Grants in Last Fiscal Year," "Aggregated Options Exercises in Last Fiscal Year and Fiscal Year-End Option Values," and
"Stockholder Return Performance Graph" contained in Cyanotech's definitive 2009 Proxy Statement.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The security ownership information required by this Item is incorporated herein by reference from the sections captioned "Equity
Compensation Plan Information" and "Security Ownership of Certain Beneficial Owners and Management" contained in Cyanotech's definitive 2010 Proxy Statement.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated herein by reference from the sections captioned "Related Party Transactions"
contained in Cyanotech's definitive 2010 Proxy Statement.

Item 14.    Principal Accountant Fees and Services

Information concerning principal accountant fees and services appears under the heading "Independent Registered Public Accounting
Firm's Fees" in Cyanotech's definitive 2010 Proxy Statement.

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Table of Contents

PART IV

Item 15.    Exhibits and Financial Statement Schedules





 The following Financial Statements
of Cyanotech Corporation and subsidiaries and the Report of Independent Registered Public Accounting Firm are included in Item 8 of this report:Consolidated Balance Sheets as of March 31, 2010 and 2009


31Consolidated Statements of Operations for the years ended March 31, 2010, 2009 and
2008


32Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the years
ended March 31, 2010, 2009 and 2008


33Consolidated Statements of Cash Flows for the years ended March 31, 2010, 2009 and
2008


34Notes to Consolidated Financial Statements


35 The following
financial statement schedule is included in this report on the pages indicated below:Schedule IIValuation and Qualifying Accounts


57Report of Independent Registered Public Accounting Firm


58


Financial
statement schedules not listed above have been omitted since they are either not required, not applicable or the information is included in the consolidated financial
statements or notes thereto.

54

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Table of Contents



Exhibit
Number

Document Description3.1

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

Certificate of Amendment to Restated Articles of Incorporation effective September 1, 2004 (Incorporated by reference to Exhibit 3.1 to the Company's Report on Form 8-K filed April 2, 2007, File
No. 0-14602)3.3

Certificate of Change to Restated Articles of Incorporation effective November 3, 2006 (Incorporated by reference to Exhibit 3.1 to the Company's Report on Form 8-K filed March 20, 2007, File
No. 0-14602)3.4

Amended Bylaws (Incorporated by reference to Exhibit 3.2 to the Company's Report on Form 8-K filed January 13, 2010, File No. 0-14602)4.1

Specimen Common Stock (Incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended March 31, 2007, File No. 0-14602)4.2

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).4.3

Term Loan Agreement dated February 20, 2008 between the Company and B&I Lending, LLC. (Incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10K for the year ended
March 31, 2008, File No. 0-14602)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

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. 0-1460210.5

2004 Independent Director Stock Option and Restricted Stock Grant Plan for Cyanotech Corporation dated August 16, 2004 (Incorporated by reference as Exhibit D to the Company's definitive Proxy Statement filed
July 2, 2004, File No. 0-14602)10.6

Letter Agreement with Chief Executive Officer dated May 16, 2008 (Incorporated by reference as Exhibit 99.2 to the company's Report on Form 8-K filed on May 22, 2008, 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.)


55

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Table of Contents

Exhibit
Number

Document Description21.1

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 June 24, 2010Grant Thornton LLP23.2
*
Consent of Independent Registered Public Accounting Firm signed June 24, 2010KPMG LLP31.1
*
Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of June 24, 201031.2
*
Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of June 24 2010.32.1
*
Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of June 24, 2010.32.2
*
Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of June 24, 2010.


---

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Table of Contents

Schedule II

Cyanotech Corporation and Subsidiaries
Valuation and Qualifying Accounts

Years Ended March 31, 2010, 2009 and 2008
(In Thousands)

AdditionsDescription

Balance at
Beginning
of Year

Charged to
Costs and
Expense

Charged to
Other
Accounts

Deductions

Balance at
End of YearAllowance for Doubtful Receivables:2010

$
14








4

$
102009


23


5





14


142008


23











23Inventory Reserve2010

$
0


126





72

$
542009














2008

















57

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Table of Contents

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders
Cyanotech Corporation:

Under
date of June 26, 2008, we reported on the consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows of Cyanotech
Corporation and subsidiaries (the Company) for the year ended March 31, 2008. These consolidated financial statements and our report
thereon are included in the Company's 2010 annual report on Form 10-K. In connection with our audit of the aforementioned consolidated financial statements, we also audited the
related financial statement schedule as listed in Item 15(a). The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on
the financial statement schedule based on our audit.

In
our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects,
the information set forth therein.

/s/
KPMG LLP

Honolulu,
Hawaii
June 26, 2008

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 24th day of June, 2010

CYANOTECH CORPORATIONBy:

/s/ David I. Rosenthal David I. Rosenthal Interim President and Chief Executive Officer


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

Signatures

Title

Date/s/ David I. Rosenthal David I. Rosenthal

Interim President and Chief Executive Officer and
Director (Performing the Functions of Principal
Executive Officer)

June 24, 2010/s/ Deanna L. Spooner Deanna L. Spooner

Chief Financial Officer, Vice PresidentFinance
and Administration, Secretary and Treasurer
(Principal Financial and Accounting Officer)

June 24, 2010/s/ Gregg W. Robertson Gregg W. Robertson

Chairman of the Board

June 24, 2010/s/ Gerald R. Cysewski, PH.D. Gerald R. Cysewski

Director, Executive Vice President and Chief Scientific Officer

June 24, 2010/s/ Michael A. Davis Michael A. Davis

Director

June 24, 2010/s/ John T. Waldron John T. Waldron

Director

June 24, 2010


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Exhibit
Number

Document Description3.1

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

Certificate of Amendment to Restated Articles of Incorporation effective September 1, 2004 (Incorporated by reference to Exhibit 3.1 to the Company's Report on Form 8-K filed April 2, 2007, File
No. 0-14602)3.3

Certificate of Change to Restated Articles of Incorporation effective November 3, 2006 (Incorporated by reference to Exhibit 3.1 to the Company's Report on Form 8-K filed March 20, 2007, File
No. 0-14602)3.4

Amended Bylaws (Incorporated by reference to Exhibit 3.2 to the Company's Report on Form 8-K filed January 13, 2010, File No. 0-14602)4.1

Specimen Common Stock (Incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended March 31, 2007, File No. 0-14602)4.2

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).4.3

Term Loan Agreement dated February 20, 2008 between the Company and B&I Lending, LLC. (Incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10K for the year ended
March 31, 2008, File No. 0-14602)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

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. 0-1460210.5

2004 Independent Director Stock Option and Restricted Stock Grant Plan for Cyanotech Corporation dated August 16, 2004 (Incorporated by reference as Exhibit D to the Company's definitive Proxy Statement
filed July 2, 2004, File No. 0-14602)10.6

Letter Agreement with Chief Executive Officer dated May 16, 2008 (Incorporated by reference as Exhibit 99.2 to the company's Report on Form 8-K filed on May 22, 2008, 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.)


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Exhibit
Number

Document Description21.1

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 June 24, 2010Grant Thornton LLP23.2
*
Consent of Independent Registered Public Accounting Firm signed June 24, 2010KPMG LLP31.1
*
Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of June 24, 201031.2
*
Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of June 24 2010.32.1
*
Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of June 24, 2010.32.2
*
Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of June 24, 2010.


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


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