Cyanotech develops and commercializes natural products from microalgae.

          The Company produces microalgae products for thenutritional supplement and immunological diagnostics markets in addition to microalgae-based products for the aquaculturefeed/pigments markets.

          Microalgae form a diverse group of over 30,000 speciesof microscopic plants, which have a wide range of physiological and biochemical characteristics and may naturally contain high levelsof proteins, amino acids, vitamins, phytonutrients and enzymes.  Microalgae represent a largely unexplored and unexploited renewablenatural resource, which grow much faster than land-based plants. Under favorable growing conditions, certain microalgae produce anew crop every week.

          Spirulina is a lifestyle enhancing nutraceutical used widely by persons seeking extra energy and a strengthened immune system.  Itis a concentrated source of vegetable-based, highly absorbable natural beta carotene, mixed carotenoids and other phytonutrients,B vitamins, gamma linolenic acid (GLA), protein and essential amino acids.  Spirulina is also a rich source of zeaxanthin, a compoundimportant to human eye health.  Cyanotech’s product, Spirulina Pacifica®, is widely regarded as the industry standard of qualityand is distributed worldwide through wholesale, retail and private label channels. 

          NatuRose® is the Company’s astaxanthin productfor the aquaculture industry.  It acts as a natural pigment to color the flesh of farm-raised fish, principally salmon, a multi-billion-dollar industry.  Currently, sales of synthetic astaxanthin made from petrochemicals exceed $200 million a year.  TheCompany sellsNatuRose to feed producers in Canada, Chile and Japan, among other countries.  NatuRose promises to increase in demand as more aquacultureproducers seek an all-natural fish product. 

          BioAstin® is Cyanotech’s astaxanthin product for human nutrition.  What BioAstin can provide by way of health benefits is justbecoming clear. There are indications that it can help limit or prevent sunburn as a systemic sunscreen; alleviate the effects of carpaltunnel syndrome; positively affect cholesterol levels; promote stomach health by inhibiting Gastroesophageal Reflux Disease (GERD); amelioratefever blisters (cold sores) and canker sores; and reduce muscle soreness after strenuous exercise.  Not all of these benefits may proveout, but the evidence to date indicates that BioAstin has the potential of being an amazing nutritional supplement with a wide range ofhealth benefits.  Laboratory comparisons of free radical absorption show astaxanthin, contained in BioAstin, to be 550 times stronger thanvitamin E and 10 times stronger than beta-carotene.

          Cyanotech has designed, developed and implemented proprietary production and harvesting technologies, systems and processes which eliminatemany of the stability and contamination problems frequently encountered in the production of microalgae.  The Company’stechnologies, systems, processes and favorable growing location permit year-round harvesting of its microalgae products in a cost-effective manner.

          Cyanotech maintains an environmentally responsible philosophy in the development and production of its products, using natural productionmethods and resources which employ extensive recycling of raw materials and nutrients.  The Company believes that these recycling methodsresult in substantially lower operating costs.  The production system operates without the use of pesticides and herbicides, and doesnot create erosion, fertilizer runoff or water pollution.  Cyanotech was the first producer of microalgae to receive third­partyorganic certification and also the first microalgae company in the world to have an ISO 9002 Registered Quality System.

Cyanotech in 2001 is at the threshold of scientific validation of potentially significant health benefits for consumers, as well asconsumer discovery, of it products.  It has diverse products, important proprietary technology, a range of customers, worldwide marketreach, large production capacity, expansion space secured, improved financial condition, and a lean cost structure leveraged for profitability.

To Our Stockholders

Fiscal 2001 was a challenging year for Cyanotech from a financial perspective as increased sales from our new natural astaxanthin productsdid not meet our expectations.  However, the Company ended the fiscal year with higher gross profit and a reduced net loss compared tofiscal 2000, with gross profit margins improving to 29%, from 20% in the prior year.  From this standpoint, Cyanotech is well-positionedto profit from the increase in sales that may occur as we anticipate a solid pickup in demand for our products, particularly BioAstin®with its large market potential.

Our optimism derives from the varied scientific studies underway and contemplated for BioAstin that should, if successful, provide theevidence needed to allow Cyanotech and our product distributors to make certain health claims that should, in turn, create substantialconsumer demand.  Other companies are making additional health claims for natural astaxanthin as a human nutritional supplement.  Ifthese are confirmed, Cyanotech may participate in their success as well, since we are the world’s largest producer of natural astaxanthinfor human nutrition.

**BIOASTIN: WIDE HEALTH BENEFIT POTENTIAL**