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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, 2003 |  | Commission file 0-146-02
|---------------------------------------- |  | ------------------------

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

|Nevada(State or other jurisdiction of
incorporation or organization) |  | 91-1206026(I.R.S. Employer
Identification No.)
|-------------------------------------------------------------------- |  | ----------------------------------------------

73-4460 Queen Kaahumanu Hwy., Suite 102, Kailua-Kona, HI 96740(Address of principal executive offices)

(808) 326-1353(Registrant's telephone number)

Securities registered pursuant to Section 12(b) of the Exchange Act:NONE

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

Title of classCommon Stock, Par value $.005 per share

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. Yes o    No ý

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the
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.    ý

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). Yes o    No ý

At
September 30, 2002, the aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant was approximately $9,557,000.

At
June 26, 2003, the number of shares outstanding of Registrant's Common Stock was 18,316,701.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Definitive Proxy Statement for its 2003 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission on or
prior to July 18, 2003 and to be used in connection with the Annual Meeting of Stockholders expected to be held on August 21, 2003, are incorporated by reference in Part III of
this Form 10-K.

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Cyanotech Corporation  Annual Report on Form 10-K for the Fiscal Year Ended March 31, 2003        TABLE OF CONTENTS

|         |  |                                                                                                |  | Page
|-------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|PART I   |  |                                                                                               
|Item 1.  |  | Business                                                                                       |  | 3   
|Item 2.  |  | Properties                                                                                     |  | 15  
|Item 3.  |  | Legal Proceedings                                                                              |  | 16  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 16  
|PART II  |  |                                                                                               
|Item 5.  |  | Market for Common Equity and Related Stockholder Matters                                       |  | 16  
|Item 6.  |  | Selected Financial Data                                                                        |  | 17  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations          |  | 18  
|Item 7a. |  | Quantitative and Qualitative Disclosures about Market Risk                                     |  | 27  
|Item 8.  |  | Consolidated Financial Statements and Supplementary Data                                       |  | 28  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 47  
|PART III |  |                                                                                               
|Item 10. |  | Directors and Executive Officers; Compliance with Section 16(a) of the Exchange Act            |  | 48  
|Item 11. |  | Executive Compensation                                                                         |  | 49  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 49  
|Item 13. |  | Certain Relationships and Related Transactions                                                 |  | 49  
|Item 14. |  | Controls and Procedures                                                                        |  | 49  
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  | 50  

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PART I

Item 1. Business

Except for historical information contained in this document, the matters discussed in this report contain forward-looking statements that involve risks and
uncertainties. These future risks and uncertainties could cause actual results to differ materially.

General

Cyanotech Corporation is a worldwide leader in the development and commercialization of high value natural products derived from microalgae. Microalgae are a
diverse group of over 30,000 species of microscopic plants which have a wide range of physiological and biochemical characteristics and naturally contain high levels of proteins, amino acids,
vitamins, pigments and enzymes. Since 1983, we have designed, developed and implemented proprietary production and harvesting technologies, systems and processes which eliminate many of the stability
and contamination problems frequently encountered in the production of microalgae. We believe that our technology, systems, processes and favorable growing location permit year-round
harvesting of our microalgal products in a cost-effective manner. We currently produce natural products from microalgae for the nutritional supplement, aquaculture feed, animal nutrition,
and immunological diagnostics markets.

Since
1985, Cyanotech has been producing microalgae-based "spirulina" products for the vitamin and supplement market.Spirulina
Pacifica®, which is our principal source of revenue, is a unique strain of spirulina microalga developed by us which provides a vegetable-based, highly absorbable
source of natural beta-carotene, mixed carotenoids, B vitamins, gamma linolenic acid ("GLA"), protein, essential amino acids and other phytonutrients. We currently market our spirulina
products in more than eighteen countries through a combination of retail, wholesale, and private label channels.

In
early 1997, we introducedNatuRose® to the worldwide aquaculture industry. NatuRoseis the brand name of our natural astaxanthin (pronounced
"as-tah-zan-thin") product for the animal
nutrition market which we produce from the microalga,Haematococcus pluvialis("Haematococcus"). Astaxanthin is a red pigment used in aquaculture to
impart a pink to red color to pen-raised fish and shrimp. The worldwide astaxanthin market for animal pigmentation is estimated at more than $200 million in annual sales. NatuRosecompetes in this
marketplace with astaxanthin synthesized from petrochemicals and derived from other sources.

In
March of 1999, we announced the development ofBioAstin®, our natural astaxanthin product for the human nutrition market. A
growing body of scientific literature is demonstrating that the beneficial antioxidant properties of natural astaxanthin surpass many of the antioxidant properties of vitamin C, vitamin E,
beta-carotene and other carotenoids. In August 1999, the United States Food and Drug Administration ("FDA"), completed its review of our application to sell BioAstinwithout objection, allowing us
to offer our new product for sale and use as a human nutritional supplement in the United States. The total
market that human astaxanthin products potentially could address is estimated to exceed $5 billion annually.

Cyanotech
Corporation was incorporated in Nevada in 1983. Our principal executive offices are located at 73-4460 Queen Kaahumanu Highway, Suite 102, Kailua-Kona,
Hawaii 96740, and our telephone number is (808) 326-1353. Unless otherwise indicated, all references in this report to the "Company," "we," "us," "our," and "Cyanotech" refer to
Cyanotech Corporation, a Nevada corporation, and its wholly owned subsidiaries, Nutrex Hawaii, Inc. ("Nutrex Hawaii", "Nutrex"), a Hawaii corporation and Cyanotech Japan YK ("Cyanotech Japan",
"CJYK"), a Japan corporation.

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Industry Background

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 proteins, 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 a uniform cell structure with no bark, stems, branches or leaves, permitting easier extraction of products and higher
utilization of the microalgae cells; (3) the cellular uniformity of microalgae makes it practical to manipulate and control growing conditions in order to optimize a particular cell
characteristic; (4) microalgae contain a wide array of vitamins and other important nutrients; (5) microalgae contain natural pigments; and (6) microalgae are a potential source
of medical products.

Current
commercial applications for these microscopic plants include nutritional products, diagnostic products, aquaculture feed and pigments, natural food colorings and research grade
chemicals. We believe that microalgae could potentially be used for other commercial applications, including nutraceuticals, polyunsaturated fatty acids, and pharmaceuticals. The most significant
microalgae products produced today are algae utilized as food supplements.

While
many unique compounds have been identified in microalgae, the efficient and cost-effective commercial production of microalgae is elusive. Many microalgae culture
systems over the last 25 years have failed. Because microalgae produced for food supplements are typically cultivated and harvested outdoors, production is significantly affected by climate,
weather conditions and the chemical composition of the culture media. Without consistent sunlight, warm temperature, low rainfall and proper chemical balance, microalgae will not grow quickly,
resulting in longer harvesting cycles, decreased pond utilization and increased cost. Furthermore, microalgal growth requires a very nutrient rich environment. The high nutrient levels in the ponds
promote the growth of unwanted organisms, or "weeds," when the chemical composition of the ponds changes from its required balance. Once contamination occurs, a pond must be emptied, cleaned and
refilled, a process that further decreases pond utilization and increases production costs.

Cyanotech's Technology

Since 1983, our scientists have designed, developed and implemented proprietary production and harvesting technologies, systems and processes which reduce many of
the stability and contamination problems frequently encountered in the production of microalgae. We believe we were the first spirulina producer to have its products and processes certified organic
and we were the first microalgae producer to have its quality system registered under the ISO 9002-94 standards. Our proprietary production system is known as Integrated Culture Biology Management("ICBM"). Through the application of this technology, our spirulina culture ponds can be productive
year-round without any significant loss in productivity due to contamination. We believe that such an accomplishment remains unique to Cyanotech.

In
addition to the advantages of our ICBM technology, we have developed a patented system for the recovery of carbon dioxide from our drying system exhaust gas, called Ocean-Chill Drying.Since
microalgae are essentially microscopic plants, they require sunlight, water, carbon dioxide and nutrients for
optimal growth. By recovering carbon dioxide from the drying system that would otherwise be released into the atmosphere, we can divert the recovered carbon dioxide back to the algae cultures. This
process provides us with another significant cost advantage over other microalgae producers who must purchase carbon dioxide. Moreover,Ocean-Chill
Dryingdries microalgal products in a low oxygen environment, which protects oxygen sensitive nutrients. In addition, we have developed an automated spirulina processing
system, which enables a single operator to harvest and dry the spirulina powder.

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Our
efforts in commercial production of our natural astaxanthin products have resulted in an improved, large-scale photobioreactor system referred to as the PhytoDome Closed Culture System, orPhytoDome CCS. To date, this improved technology has
resulted in reduced production costs, increased control of product purity and has had a positive effect on production yield compared to other photobioreactor systems previously employed.

Another
major advantage for us is the location of our production facility at the Hawaii Ocean Science and Technology ("HOST") Park at Keahole Point, Hawaii. We believe that the
combination of consistent warm temperature, abundant sunlight, and low rainfall at this facility makes this a highly favorable location for the economical, large-scale cultivation of microalgae. In
contrast to our facility, microalgae producers in other regions of the world lacking these favorable characteristics stop producing for up to four months a year because of less favorable climate or
weather conditions. At the HOST Park, we have access to cold, clean, deep sea water that is pumped from a depth of 2,000 feet. This sea water is used both as a source of nutrients for microalga
culture and as a cooling agent in theOcean-Chill Dryingprocess. Additionally, our facility has access to a complete industrial infrastructure and is
located 30 miles from a deep water port and is adjacent to an international airport.

Applying
our experience in cultivating and harvesting spirulina, we began commercial production of our first natural astaxanthin product, NatuRose, during the fourth quarter of fiscal 1997. By the end of fiscal
1999, our experience with NatuRoseprocessing resulted in the development of its companion product,BioAstin.

Our
primary business objective is to be the leading developer and producer of high-value microalgal products in our existing and future markets. We believe that the
combination of our ICBM technology, ourPhytoDome CCStechnology, ourOcean-Chill Dryingprocess, our
automated processing system and a favorable growing location with year-round production capabilities, can be successfully applied to the commercial cultivation of many other species of
microalgae.

Products



Our principal product, accounting for 67% and 74% of net sales for the years ended March 31, 2003 and 2002, respectively, is a nutritional microalgae
marketed asSpirulina Pacifica.Developed by us and sold worldwide to the health and natural foods market,Spirulina
Pacificais a unique strain of microalgae that is a highly absorbable source of natural beta carotene, mixed carotenoids, B vitamins,
GLA, protein, essential amino acids and other phytonutrients. Since 1994, we have produced two grades ofSpirulina Pacifica; an all-natural
grade cultivated by using conventional agricultural fertilizers and an organic grade that is cultivated using only organic fertilizers. Although this product constitutes a substantial portion of our
net sales, we have concluded that the market for spirulina is mature with slow growth expected in future periods. As one of the world's largest producers of spirulina, our challenge is to increase our
market share among customers who seek the high-quality product we produce while concurrently adjusting our product mix to meet our revenue targets.

Cyanotech
producesSpirulina Pacificain three forms: powder, flake and tablets. Powder is used as an ingredient in nutritional
supplements and health food drinks while flakes are used as a seasoning on various foods. Tablets are consumed as a daily dietary supplement. All three forms of ourSpirulina
Pacificaare sold in bulk quantities as a raw material to manufacturers and as a packaged consumer product through our wholly-owned subsidiary, Nutrex Hawaii, Inc. We
also produce and market a blended nutritional supplement product in packaged form under theHawaiian Energizername.Hawaiian
Energizertablets containSpirulina Pacifica,Bee Pollen and Siberian Ginseng.

We
anticipate that sales of ourSpirulina Pacificaproducts will continue to constitute a substantial portion of net sales during fiscal
2004. However, as mentioned earlier we believe that the market for

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this
product is essentially mature with slow growth expected in future periods. Any material decrease in the overall level of sales of, or the prices for, ourSpirulina
Pacificaproducts, whether as a result of competition, change in consumer demand, increased worldwide supply of spirulina or other factors beyond our control, would have a
material adverse effect on our business, financial condition and results of operations.



The year ended March 31, 2003 was the sixth year of commercial production ofNatuRose, our natural
astaxanthin product for the animal nutrition market, and the fourth year of commercial production ofBioAstin, our natural astaxanthin product for the
human nutrition market. Astaxanthin is a red pigment used primarily in the aquaculture industry to impart pink color to the flesh of pen-raised fish and shrimp. Since its introduction six
years ago, dozens of feeding trials have been performed by our customers and potential customers which prove the efficacy ofNatuRoseas an alternative
to the petrochemical-based synthetic astaxanthin presently used by most aquaculture companies. The appeal of our product is that it is derived from a natural source and produces results which are
comparable, or in some cases superior, to synthetic astaxanthin. As a result of continued growth in the world aquaculture industry, the world market for astaxanthin pigment is currently estimated to
exceed $200 million per year. We therefore believe that sales ofNatuRosemay increase in future periods.

BioAstin, our natural astaxanthin product for the human nutrition market has been in commercial production since March 1999 and has
been available for sale since we received notice from the FDA in August 1999 that it had completed review of our application to sellBioAstinwithout objection. In January 2000, our wholly-owned subsidiary, Nutrex Hawaii, Inc., began sellingBioAstingelcaps in packaged consumer
form. A growing body of scientific literature is demonstrating that the beneficial antioxidant properties of natural astaxanthin surpass many of the antioxidant properties of vitamin C, vitamin E,
beta-carotene and other carotenoids, with independent scientific studies indicating that natural astaxanthin has up to 550 times the antioxidant activity of vitamin E and 10 times the
antioxidant activity of beta-carotene. We believe that sales ofBioAstin, in bulk, packaged consumer form, or as a component of a formulated
product, may increase and may ultimately constitute a significant portion of total sales in future periods.

We
have sponsored several scientific clinical trials since introducing this product with results from some of these trials announced during fiscal 2002 and 2003. Among these results,
some of the more promising findings are:



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Cyanotech also produces phycobiliproteins which are sold to the medical and biotechnology research industry. Phycobiliproteins are highly fluorescent pigments
purified from microalgae. Their spectral properties make them useful as tags or markers in many kinds of biological assays, such as flow cytometry, fluorescence immunoassays and fluorescence
microscopy. We do not anticipate that phycobiliproteins will represent a significant component of total sales in future periods.

The
Company maintains product liability insurance in limited amounts for all of its products involving human consumption. In the opinion of management, broader product liability
insurance coverage is prohibitively expensive at this time.

Research & Development Expenses

Cyanotech Corporation's expertise is in the development of efficient, stable and cost-effective production systems for microalgal products. Our
researchers investigate specific microalga identified in scientific literature for potentially marketable products and then strive to develop the technology to grow such microalgae on a commercial
scale.

The
Company's current research and development efforts are primarily directed at validating the anecdotal indications ofBioAstinthrough
clinical evaluations and trials. In March 2002 we concluded a feeding trial aimed at further validation of the efficacy ofNatuRoseas an
alternative to synthetic pigments in both aquaculture and avian feed markets. We performed fewer scientific clinical trials during fiscal 2003 as part of our cost containment efforts. This reduction
resulted in research and development expenses of $217,000, down 37% from the prior fiscal year's expenditures of $343,000. Future expenditures for clinical trials area will depend on available
liquidity. The Company continues to investigate new products and prioritizes its research and development activities to focus on projects that we believe will have the greatest market acceptance and
achieve the highest return on the Company's investment. Successful microalgal product development is highly uncertain and is dependent on numerous factors, many of which are beyond the Company's
control. Products 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.

Manufacturing

Cyanotech cultivates and processes its microalgae products at a 90-acre production facility on the Kona coast of the island of Hawaii. We have a total
of 68 large oval culture ponds, 1 media recycling lake and 17 smaller auxiliary culture ponds totaling approximately 200,000 square meters, all of which are currently available for production. Each of
the large ponds has an average surface area of 30,408 square feet (2,825 square meters) and each contain approximately 132,000 gallons (500,000 liters) of culture media. In addition, we have in
production eight large-scale photobioreactors, each with a capacity of approximately 12,000 gallons (45,000 liters). Also located at this facility are two processing

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plants,
our spirulina tableting plant, our research and quality control laboratories and three administration buildings.



Cyanotech began culturingSpirulina Pacificain 1985 at its present facility at the HOST Park. Since 1994, we have
produced two grades ofSpirulina Pacifica; an all-natural grade cultivated by using conventional agricultural fertilizers and an organic
grade that is cultivated using only organic fertilizers. Our organicSpirulina Pacificais grown and processed in accordance with the National Organic
Program ("NOP") of the United States Department of Agriculture ("USDA") which came into effect in October 2002. Previously our organicSpirulina
Pacificawas grown and processed in compliance with the California Organic Food Act of 1990. The organic cultivation and processing methods we use are certified annually by
Quality Assurance International, a leading third-party agency. Both grades ofSpirulina Pacificaare certified Kosher and are cultivated without the use
of herbicides or pesticides. Since 1996, our Company's spirulina process has also been certified under the ISO 9002-94 international quality standards.

OurSpirulina Pacificais cultivated in a combination of fresh water and a metered amount of nutrient-rich deep ocean water
(containing ninety-six trace elements), drawn from a depth of 2,000 feet below sea level. This water is supplemented with the other major required nutrients such as sodium bicarbonate
(baking soda) and infused with carbon dioxide. 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, the other major component of cultivation. Our ponds are engineered to maintain the right media depth for sunlight to permeate each crop
completely, facilitating rapid growth. Our system promotes efficient growing conditions, allowing theSpirulina Pacificaalgae to reproduce rapidly.
Each pond can be harvested, on average, in six days.

Once
ready for harvest, 70% of the spirulina culture is pumped from a pond through underground pipes to our processing building where the crop is separated from the culture medium by
stainless steel screens. The remaining 30% serves as an innoculum for the next growth cycle. Harvested spirulina is washed with fresh water three times and vacuum filtered before moving to the drying
stage. Culture media removed in processing is recycled. Recycled media is treated, tested for nutrient content and, if necessary, fortified with nutrients before being returned to the culture ponds
for another cycle of cultivation. Our 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 algae and associated loss of productivity. We believe that such an accomplishment remains unique to Cyanotech.

Spirulina Pacificafor use in powder and tablets is dried by our patented low-oxygenOcean-Chill
Dryingprocess which preserves high levels of antioxidant carotenoids. This provides a significant quality edge over competing products. The drying process takes about six
seconds and results in a dark green powder. We also employ an alternate proprietary drying method to produceSpirulina Pacificain the flake form. Bulk
spirulina powder, tablets and flakes are vacuum-sealed in oxygen-barrier foil laminate bags along with a packet of oxygen absorbent. This packaging ensures product freshness and extends the shelf life
of bulkSpirulina Pacificaproducts to three years. Another significant benefit of theOcean-Chill
Dryingsystem is our ability to recover the carbon dioxide produced in the drying process. The recovered carbon dioxide is a major required nutrient for algal culture growth.

Each
production lot of spirulina is sampled and subjected to thorough quality assurance which includes testing for bulk density, moisture, particulate matter, color and taste, among
others. In addition, each lot of ourSpirulina Pacificaundergoes a prescribed set of microbiological food product tests, including total aerobic
bacteria, coliform bacteria and E. coli. All of ourSpirulina Pacificapowder is certified free of pesticides and herbicides, and certified Kosher.

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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. The Company's packaged consumer products are
bottled and labeled by a subcontractor in California. This subcontractor is a current Good Manufacturing Practices ("cGMP") certified manufacturer with organic and Kosher certifications, subject to
regular government inspections.



TheHaematococcusmicroalgae which produce natural astaxanthin grow in fresh water supplemented with nutrients. As
such, it is extremely susceptible to contamination by unwanted algae, protozoa, and amoeba. Cyanotech has developed a proprietary system to overcome this problem known as our PhytoDome Closed Culture SystemorPhytoDome CCS. Using this large-scale photobioreactor, we are able to
consistently grow large volumes of contaminant-freeHaematococcuscultures.

For
the final stage of culture, theHaematococcusalgae is transferred to open ponds. There, an environmental stress is applied causing
spores to form which accumulate high levels of astaxanthin. 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 is tested and treated using a proprietary water treatment system. It is then recycled for use in the next production
cycle. The algal spores are dried to a fine powder using the low-oxygenOcean-Chill Dryingsystem. During processing, the spores are cracked
in a proprietary system to assure high bioavailability of astaxanthin. Finally the bulk powder in vacuum-sealed in oxygen-barrier foil laminate bags along with a packet of oxygen absorbent.

Unlike
spirulina, astaxanthin is produced in a batch-mode and each cultivation pond must be thoroughly cleaned between cycles. While the entire astaxanthin production cycle
takes a total of four weeks, each stage of the four-step process is staggered and continuously feeds the next stage of cultivation. As a result, we are able to produce a new crop of
astaxanthin from each of our fifteen 500,000 liter culture ponds approximately once a week.

Natural
astaxanthin for human consumption is processed further utilizing a high-pressure extraction process. Cyanotech utilizes the services of two contractors for this
process. The resulting product is a liquid lipid extract which is used by our customers for 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.

Distribution and International Sales

The majority of our bulk Spirulina sales are to health food manufacturers and health food formulators with their own spirulina product lines, many of whom
identify and promote Cyanotech's HawaiianSpirulina Pacificain their products. Our packaged consumer products are sold through an established health
food distribution network in the domestic market and shipped through one of our wholesale distributors under the Nutrex Hawaii label. In selected foreign markets, we have exclusive sales distributors
for both our bulk and packaged consumer products. During fiscal 2003, ourSpirulina Pacificaproducts were sold in 22 foreign countries and the United
States.

Our
natural astaxanthin product,NatuRose, is presently being sold through a network of agents and distributors directly to aquaculture
farmers, aquaculture feed manufacturers, poultry feed formulators, vitamin premix suppliers and other end users in 19 foreign countries and the United States

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for
use in aquaculture feed, poultry feed and pet feed industries. During fiscal 2002, Japan emerged as one of our primary markets for the application of NatuRosein aquaculture. Feeding trials in Japan
have proven thatNatuRoseproduces superior results in
pen-raised Sea Bream ("Tai") and Yellowtail; both major products in that market. UsingNatuRose, pen-raised Sea Bream and
Yellowtail develop an appearance closer to fish caught in the open ocean than cultivated fish fed synthetic astaxanthin. In addition to the more desirable natural coloration, a lower volume of NatuRoseis required compared to synthetic astaxanthin. The increased demand forNatuRosein Japan was a
major factor in our decision to establish Cyanotech Japan YK as a new channel of distribution in January 2002. At present, CJYK sells our feed spirulina and NatuRoseproducts to several large
Japanese aquaculture feed manufacturers.

In
addition to aquaculture,NatuRoseis also being used to pigment the yolk of chicken eggs in Scandinavia and Japan and is being used by
commercial tropical fish breeders to produce higher-value tropical fish with more desirable coloration. AsNatuRoseis one of the few
non-synthetic astaxanthin feed ingredients available, many feed formulators identifyNatuRoseand Cyanotech as the source of this component
in their feed to capitalize on the appeal of an all-natural feed/cultivation process.

We
began fiscal 2003 withBioAstinsales coming mostly from nutritional supplement manufacturers, health food formulators and sales of our
Nutrex Hawaii packaged product. During fiscal 2003, sales of ourBioAstinproducts improved by 45% compared to fiscal 2002, with increased interest from
supplement manufacturers and cosmetic formulators. The increase in sales is due primarily to higher sales of bulkBioAstinproducts. We expect interest
inBioAstinto continue to increase as more manufacturers begin using this powerful antioxidant in their new product offerings. In turn this will
support sales of our packaged consumer products as more consumers become aware of its benefits as a human dietary supplement. As part of our expansion of sales channels, several customers of bulk
quantities ofBioAstinhave introduced product formulations containing our natural astaxanthin. Such customers include Twin Laboratories ("Twinlab"),
Solgar Vitamins ("Solgar") and more recently, Rexall Sundown, the Capsugel division of Pfizer Pharmaceuticals and Mac Cosmetics, a division of Estee Lauder. During fiscal 2003 revenue from our
packagedBioAstingelcaps was slightly lower compared to the prior fiscal year due in large part to our Company's decision to reduce expenditures on
advertising. Revenue derived fromBioAstinpackaged product during fiscal 2003 was primarily from sales made to natural products distributors, to
retailers and directly to consumers using our toll-free order line (1-888-922-2107) and our internet e-commerce website, www.nutrex-hawaii.com.

In
October 2001, in our effort to increase the revenue potential of our packaged consumer product we began development of a national television marketing campaign to promote
Nutrex Hawaii'sBioAstinin
the mass market. This campaign revolved around a 30-minute television infomercial which was tested in several markets throughout fiscal 2003. Sales from the infomercial, however, were less
than anticipated and due to the high cost of television air time the Company decided to discontinue the effort. The Company retains all rights to the contents of the infomercial and has incorporated
portions of video footage into it's internet website,www.nutrex-hawaii.com. In accordance with accounting principles generally accepted in the United
States, all costs related to production and airing of this infomercial effort were fully expensed during fiscal 2003.

In
the years ended March 31, 2003, 2002 and 2001, international sales accounted for approximately 54%, 47% and 54%, respectively, of our net sales. We expect that international
sales will continue to represent a significant portion of our net sales in future periods. Our business, financial condition and results of operations may be materially adversely affected by any
difficulties associated with managing accounts receivable from international customers, tariff regulations, imposition of governmental controls, political and economic instability or other trade
restrictions. Through December 2001 all of our international sales were denominated in United States dollars which exposed us to a measure of risk resulting from fluctuations in currency
exchange rates. Such fluctuations could cause our products to become relatively more expensive to customers in the affected country, leading to a reduction in

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sales
in that country. To address this issue in one of our major markets, we formed the Japanese business unit, Cyanotech Japan in January 2002. Through this subsidiary, we are better able to
service our increasing customer base in Japan, economize on shipping costs, provide more timely delivery and can allow these customers to conduct transactions in Japanese Yen rather than US Dollars.
Assets and liabilities of this subsidiary are translated at the period-end exchange rate and resulting translation gains or losses are accounted for in a stockholder's equity account
entitled "accumulated other comprehensive lossforeign currency translation adjustments." Operating results of this subsidiary are translated at average exchange rates during the period.

Customers

Spirulina

We market and sell our spirulina products to a variety of customers, which range in size from manufacturers with $500 million in annual sales to small
retail stores. Several of our major customers are businesses that were established exclusively to market and sell spirulina products.

Approximately
$1,546,000, or 17% of our net sales for the year ended March 31, 2003 was to a single customer, Spirulina International B. V. ("Spirulina International"), a
spirulina marketing and
distribution company based in the Netherlands. Sales to this customer for fiscal 2002 and 2001 were $1,031,000 (13%) and $1,533,000 (19%), respectively. We believe that sales to this customer will
continue to represent a significant portion of total net sales in future periods. Any changes in demand from this customer could have a material adverse effect on our business, financial condition and
results of operations.

We
market and sell our spirulina products to a variety of other customers, including:

Health Food Manufacturers.Health food manufacturers often use Cyanotech'sSpirulina
Pacificaproducts as a key ingredient in their spirulina-based products, or as an ingredient in their health food formulations. These customers purchase bulk powder or bulk
tablets and package the products under their brand label for sale to the health and natural food markets. Many of the products produced by these customers are often marketed and sold domestically in
direct competition with our Nutrex Hawaii line of retail consumer products.

Private Label Customers.We currently provide private label retail consumer products to seven international customers.
Products for these customers are manufactured only upon receipt of an order and no finished product inventories are maintained.

Retail Distributors.Retail distributors act as product wholesalers to independent and chain retailers. The majority of
domestic Nutrex Hawaii sales in the year ended March 31, 2003 were to 29 distributors.

Raw Materials Suppliers.In the year ended March 31, 2003, we sold bulk spirulina products to fifteen domestic and ten
foreign customers engaged in the business of distributing natural raw materials to health and natural food manufacturers. These distributors provide their customers with standardized quality control,
warehousing and distribution services, and charge a mark up on the products for providing these services. These distributors may differentiate the products they sell, but they generally treat the
products as commodities, with price being the major determining factor in their purchasing decision.



NatuRoseis presently being sold through a network of agents and distributors directly to aquaculture farmers,
aquaculture feed manufacturers, poultry feed formulators, vitamin premix suppliers and other end users in the United states and in 19 foreign countries. As mentioned earlier, in

11

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fiscal
2002 and also in 2003 our major market forNatuRosewas aquaculture customers in Japan. In addition to our aquaculture customers, NatuRoseis also being
sold to poultry feed formulators to naturally pigment the yolk of chicken eggs and to pet feed formulators for commercial
breeders of high-value tropical fish. As our product is a natural astaxanthin derived from microalgae, many of these formulators identify NatuRoseand Cyanotech as the source of this component in their
feed.

BioAstinis presently being sold as a raw ingredient to dietary supplement manufacturers, health food formulators and cosmetic
manufacturers, as well as a packaged consumer product through our wholly-owned subsidiary, Nutrex Hawaii, Inc. During fiscal 2003,BioAstinproduct revenues were derived primarily from increased sale of bulk product to manufacturers who are usingBioAstinin their own product formulations
and sales of our packaged consumer product made directly to natural product distributors, retailers and consumers using our toll-free order line
(1-888-922-2107) and our internet e-commerce website,www.nutrex-hawaii.com.

Competition



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. It 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 and several farms in China. To a lesser extent, we compete with numerous smaller farms in China, India, Thailand, Taiwan, Cuba and South Africa. Packaged consumer
products marketed under our Nutrex Hawaii brand also compete with products marketed by health food manufacturing customers of Cyanotech who purchase bulk spirulina from us and package it
for retail sales. A decision by another company to focus on Cyanotech's existing or target markets or a substantial increase in the overall supply of spirulina could have a material adverse effect on
our business, financial condition and results of operations. There can be no assurance that we will not experience competitive pressure, particularly with respect to pricing, that could adversely
affect us.



Our natural astaxanthin product for the animal nutrition market,NatuRose, competes directly with the synthetic
astaxanthin products produced and marketed for the commercial feed and aquaculture industry worldwide by Hoffmann-LaRoche and BASF. The animal nutrition market for astaxanthin is currently dominated
by a single producer, Hoffmann-LaRoche, who produces synthetic astaxanthin from petrochemicals. Hoffmann-LaRoche currently sells astaxanthin synthesized from petrochemicals to the aquaculture industry
at approximately $2,400 per pure kilogram, on average. To a lesser extent, ourNatuRosealso competes in the marketplace with natural astaxanthin
derived from other natural sources.

In
August 2000, the FDA affirmed our development work by approvingNatuRosefor use as a color additive in the feed of salmon and
trout grown worldwide and sold in the United States. During fiscal 2001, two additional producers, Archer Daniels Midland and Igene Biotechnology, Inc., entered the market with natural
astaxanthin products derived fromPhaffiayeast. Several other companies have announced plans to produce commercial quantities of natural astaxanthin
but we believe that these companies are presently producing only small quantities for test purposes.

Although
synthetic astaxanthin has widespread use as a pigmentation source in commercial aquaculture, independent scientific analysis has shown that the molecular structure of the
astaxanthin derived from theHaematococcusmicroalga more closely resembles the astaxanthin obtained naturally by fish in the wild. As mentioned earlier
in this report, this characteristic has shown significant positive

12

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results
in feeding trials done in Japan on Sea Bream. The results from these feeding trials affirm our belief that there is an international market demand for pen raised seafood whose diet consists of
nutrients derived from natural sources. We believe there is commercial demand for a natural astaxanthin pigment for animal feed and that ourNatuRoseproduct can compete against such other products on the basis of performance and price.

BioAstin, our natural astaxanthin product for the human nutrition market, was the first natural astaxanthin product for human consumption
to be reviewed without exception by the FDA. Presently,BioAstincompetes directly with similar products marketed by other manufacturers which include
Mera Pharmaceuticals ("Mera" formerly "Aquasearch") in the United States, Fuji Chemicals in Japan and AstaCarotene AB in certain portions of the European market. 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. It 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.



Three major competitors manufacture phycobiliprotein products for sale, including Molecular Probes, Inc., Prozyme, Inc. and
Serologicals, Inc. (formerly Intergen). Cyanotech competes with these companies on the basis of price and quality. New synthetic fluorescent compounds have been developed which are superior to
phycobiliproteins in some applications. The advantage of the synthetic compounds is their lower molecular weight and, in some cases, their lower cost. While our phycobiliprotein products may not be
able to compete effectively against synthetic compounds in some applications, Cyanotech's phycobiliproteins have gained a reputation for high quality at a competitive price.

Government Regulation

Cyanotech's products, potential products and its manufacturing and research activities are subject to varying degrees of regulation by a number of government
authorities in the United States and in other countries, including the United States Food and Drug Administration pursuant to the Federal Food, Drug and Cosmetic Act. The FDA regulates, to varying
degrees and in different ways, dietary supplements, other food products, diagnostic medical devices and pharmaceutical products, including their manufacture, testing, exportation, labeling, and, in
some cases, advertising.

Cyanotech
is also subject to other federal, state and foreign laws, regulations and policies with respect to labeling of its products, importation of organisms, environmental protection,
and occupational safety laws, among others. Federal, state and foreign laws, regulations and policies are always subject to change and depend heavily on administrative policies and interpretations. We
work with foreign distributors to ensure our compliance with foreign laws, regulations and policies. There can be no assurance that any changes with respect to federal, state and foreign laws,
regulations and policies, and, particularly with respect to the FDA or other such regulatory bodies, with possible retroactive effect, will not have a material adverse effect on our business,
financial condition and results of operations. There can be no assurance that any of our potential products will satisfy applicable regulatory requirements.

The
Federal Dietary Supplement Health and Education Act ("DSHEA") regulates the use and marketing of dietary supplements, including vitamin products. The DSHEA covers only dietary
supplements and contains a number of provisions that differentiate dietary supplements from other foods. The DSHEA also sets forth standards for adulteration of dietary supplements or ingredients and
provides detailed requirements for the labeling of dietary supplements, including nutrition and ingredient labeling. Compliance with relevant requirements can be onerous and time consuming, and

13

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there
can be no assurance that Cyanotech can continue to meet relevant FDA manufacturing requirements for existing products or meet such requirements for any future products. Ongoing compliance with
applicable regulatory requirements are monitored through periodic inspections by state and federal agencies, including the FDA, the Hawaii Department of Health and comparable agencies in other
countries. Our processing facility is also inspected annually for organic certification by Quality Assurance International and for Kosher certification by Organized Kashrus Laboratories.

In
October 2002, all United States products labeled "Organic" became subject to guidelines promulgated under the United States Department of Agriculture's ("USDA") National
Organic Program ("NOP"). These regulations are primarily directed at soil-based agriculture, a method of cultivation quite different from the aquaculture methodology used to produce
microalgae. We petitioned the USDA National Organic Standards Board to amend their proposed regulations to include exemptions based on the unique aspects of spirulina cultivation. As a result, our
Company received an extension of time to comply fully with the USDA regulations until October 21, 2005. In order to comply with the proposed regulations we may encounter significant increases
in organic spirulina production costs which in turn may affect our decision to produce "Certified Organic" spirulina for sale in large quantities.

In
August 2000, we received notice that our natural astaxanthin product for the animal nutrition market,NatuRose, had been
approved by the FDA for use as a color additive in the feed of salmon and trout. The FDA approval ofNatuRoseadds to the clearances we had already
received in Japan and Canada and organic registration for use in feed in New Zealand. With FDA approval, we are able to sellNatuRoseto US salmon and
trout producers as well as to foreign producers whose products are destined for the US market. The process of obtaining clearances for a new color additive is expensive and time consuming. Extensive
information is required on the toxicity of the additive, including carcinogenicity studies and other animal testing. No assurances can be given that any of our proposed products intended for use as
feed additives will be approved on a timely basis for use in countries other than those mentioned above, if at all.

Asin vitrodiagnostic medical device components, phycobiliprotein products do not currently require pre-market clearances by
the FDA. However, as a component of a medical device, they can be subject to other various medical device requirements, including cGMP requirements.

Patents, Licenses and Trademarks

Cyanotech has received five United States patents; two on aspects of our production methods and three for use of our BioAstinproducts;
a) in treatment of Carpal Tunnel Syndrome ("CTS"), b) in treatment of Canker/Cold sores, and c) for use as a
topical and oral sun screen. Although we regard our proprietary technology, trade secrets, trademarks and similar intellectual property as critical to our success, 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.

14

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Associates

Cyanotech employed 60 full-time associates as of March 31, 2003 Approximately 39 associates are involved in the harvesting and production
process, 3 are involved in research and product development, and the remainder are involved in sales, administration and support. Management believes that its relations with its associates are good.
We have not experienced difficulty in attracting personnel and none of our associates are represented by a labor union.

Industry Segments and Export Sales

The Company's business consists of one industry segment, the production of microalgae products, and is grouped into six geographic areas: United States,
Canada/South America, the Netherlands, Europe, excluding the Netherlands, Japan, and Asia/Pacific, excluding Japan. In January 2002, the Company established Cyanotech Japan, a new subsidiary
with an office in Tokyo. The following table (dollars in thousands) summarizes the product sales revenues from unaffiliated customers in each of the six geographic regions:

|                                  |  | 2003 |       | 2002 |     | 2001 |  
|--------------------------------- |  | ---- | ----- | ---- | --- | ---- | -
|United States                     |  | $    | 4,149 |      | 46  | %    | $
|Canada/South America              |  |      | 268   |      | 3   | %    |  
|The Netherlands                   |  |      | 1,550 |      | 17  | %    |  
|Europe, excluding the Netherlands |  |      | 977   |      | 11  | %    |  
|Japan                             |  |      | 1,043 |      | 12  | %    |  
|Asia/Pacific, excluding Japan     |  |      | 964   |      | 11  | %    |  
|                                  |  |      |       |      |     |      |  
|Total Product Sales Revenues      |  | $    | 8,951 |      | 100 | %    | $
|                                  |  |      |       |      |     |      |  

The
Company believes that its profit margin on export sales is not significantly different from that realized on sales in the United States. For the purposes of our consolidated
financial reports, sales made through Cyanotech Japan are denominated in Japanese Yen and converted to US Dollars at an average exchange rate in effect during the period in which the sales were
recorded.

Item 2. Properties

Cyanotech Corporation's production facility, manufacturing plant and executive offices are located in Kailua-Kona, Hawaii, at the HOST Park. The HOST
Park facility consists of approximately 90 leased acres. All 90 acres have been fully developed and contain production ponds, a processing facility, a laboratory, and administrative offices. All
products are produced at this facility. The property is leased from the State of Hawaii under a 30-year commercial lease expiring in 2025. The Company also rents 3,200 square feet of
warehouse space in a light industrial area located approximately four miles from the HOST Park.

During
1997, we reached a preliminary agreement with the State of Hawaii to lease an additional 93 acres at the HOST Park, which would increase the total acreage under lease to 183
acres. The State of Hawaii agreed to allow the Company to lease this additional 93 acres on a year-to-year basis, until such time that the Company determined the need for a
longer lease term. The construction work performed on this expansion acreage was the subject of the asset impairment charge of $2,796,000 recorded during fiscal 2000. Due, in large part, to
improvements made in our astaxanthin cultivation techniques during fiscal 2002 and 2003 we concluded that our existing 90 acre facility would be sufficient for near future projections and terminated
our lease on the entire 93 acre expansion parcel during the first quarter of fiscal 2003. In the event we need to expand beyond our current 90 acre facility there is sufficient available land at the
HOST Park to meet our currently planned needs.

15

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Item 3. Legal Proceedings

There were no material legal matters addressed during fiscal 2003.

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

No matters were submitted to a vote of the stockholders during the fourth quarter of fiscal 2003.

Part II

Item 5. Market for Common Equity and Related Stockholder Matters

During fiscal 2002, the Company's Common Stock was traded on the NASDAQ National Market. On June 17, 2002 the Company received a delisting warning letter
from NASDAQ for failure to comply with the $1.00 per share minimum bid price. Cyanotech had 90 calendar days, or until September 16, 2002, to regain compliance. The Company was unable to regain
compliance prior to September 16, 2002, and subsequently applied for, and received listing for its common stock on the NASDAQ SmallCap Market.

Listing
on the NASDAQ SmallCap market made available a 180 calendar day SmallCap Market grace period, or until December 16, 2002 to regain compliance. The Company failed to regain
compliance before the end of this grace period but was eligible for an additional 180 calendar day grace period, or until June 12, 2003 to demonstrate compliance, provided that it met NASDAQ
listing criteria for the SmallCap Market. The Company was unable to attain the $1.00 per share value prior to June 12, 2003 but met the other listing criteria for the SmallCap Market. However,
on June 13, 2003, the Company received notification from NASDAQ that under Marketplace Rule 4210(c)(2)(A), the compliance period for listing on the SmallCap Market was extended from 360
to 450 calendar days for companies which met certain heightened criteria. The Company met the initial listing requirements and in accordance with Marketplace Rule 4310(c)(8)(D), has been
provided an additional 90 calendar days, or until September 10, 2003 to regain compliance with the $1.00 per share minimum bid price requirement.

As
a result, as of the date of this report, the Company's common stock continues to be listed on the NASDAQ SmallCap Market under symbol "CYAN". If at anytime before September 10,
2003, the bid price of the Company's common stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days, NASDAQ Staff will provide written notification that the Company
complies with listing requirements under Marketplace Rule 4450(a)(5). Under certain circumstances, to ensure that Company can sustain long-term compliance, NASDAQ Staff may require
that the closing bid price equals $1.00 per share or greater for more than 10 consecutive business days, but, generally, not more than 20 consecutive business days before determining that the Company
complies. If compliance with this rule cannot be demonstrated by September 10, 2003, NASDAQ Staff will provide written notification that the Company's securities will be delisted from the
SmallCap Market and begin trading on the NASDAQ Over-The-Counter Bulletin Boards. In such case common stock of the Company will be traded on a less active market to the
possible detriment of the stockholders. At that time, the Company may appeal the NASDAQ Staff's determination to a Listing Qualifications Panel.

16

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The
following table sets forth the high and low selling prices as reported by the NASDAQ Stock Market for the periods indicated. Cyanotech's Common Stock is currently traded on the
NASDAQ SmallCap Market under the symbol "CYAN."

Three Months Ended

High

Low2003March 31, 2003(a)

$
0.60

$
0.35December 31, 2002(a)

$
0.63

$
0.26September 30, 2002(a)(b)

$
0.85

$
0.40June 30, 2002(b)

$
1.20

$
0.402002March 31, 2002(b)

$
1.43

$
0.96December 31, 2001(b)

$
1.16

$
0.55September 30, 2001(b)

$
1.50

$
0.48June 30, 2001(b)

$
1.75

$
0.87


---

Cyanotech
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 Common Stock in the foreseeable future.

The
approximate number of record holders of outstanding Common Stock of the Company as of June 26, 2003 was 1,360. On this date the reported closing bid price was $0.50 per share.

Item 6. Selected Financial Data

|                                                                           |                         | Years ended March 31, |       
|-------------------------------------------------------------------------- | ----------------------- | --------------------- | ------
|
|
|Results of Operations                                                      |                         |                       |       
|Net sales                                                                  |                         | $                     | 8,951 
|Gross profit(b)                                                            |                         |                       | 2,895 
|Impairment of long-lived assets                                            |                         |                       |      
|Loss from operations(a)(b)                                                 |                         |                       | (1,210
|Net loss(a)(b)                                                             |                         |                       | (1,775
|Net loss per common share                                                  |                         |                       |       
|                                                                           | Basic and Diluted(a)(b) |                       | $     
|Average Shares Outstanding                                                 |                         |                       |       
|                                                                           | Basic and Diluted       |                       |       
|Selected Balance Sheet Data                                                |                         |                       |       
|Cash and investment securities                                             |                         | $                     | 579   
|Working capital                                                            |                         |                       | 2,352 
|Total assets                                                               |                         |                       | 17,482
|Long-term debt and capital lease obligations, excluding current maturities |                         |                       | 3,694 
|Stockholders' equity                                                       |                         |                       | 12,273

---

17

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

The following discussion is intended to assist in the understanding of Cyanotech Corporation's financial position and results of its operations for the three
years ended March 31, 2003. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes To Consolidated Financial Statements included in this
report. The financial section of the Cyanotech 2003 Annual Report to Stockholders consisting of this Management's Discussion and Analysis of Financial Condition and Results of Operations, the
Consolidated Financial Statements have been prepared using accounting principles generally accepted in the United States of America ("GAAP").

The
Company's Consolidated Financial Statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liquidation of
liabilities in the ordinary course of business. During the years ended March 31, 2003, 2002 and 2001, the Company incurred losses of $1,775,000, $2,589,000 and $1,067,000, respectively. The
Company's working capital at March 31, 2003 was $2,352,000 with cash balances amounting to $579,000. Net cash and cash equivalents used in operating activities for the years ended
March 31, 2003 and 2002 amounted to $502,000 and $567,000, respectively. Accordingly this causes substantial doubt as to the ability of the Company to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms of its financing agreements, to
obtain additional financing or refinancing as may be required, to attain profitability, or a combination thereof. There can be no assurance that these efforts will be successful or that the Company
will return to generating profit on either a quarterly or annual basis.

Company Overview and Critical Accounting Policies and Estimates

Cyanotech Corporation is a worldwide leader in the development and commercialization of high value natural products derived from microalgae, a diverse group of
over 30,000 species of microscopic plants which have a wide range of physiological and biochemical characteristics and naturally contain high levels of proteins, amino acids, vitamins, pigments and
enzymes. Since 1983, we have designed, developed and implemented proprietary production and harvesting technologies, systems and processes which eliminate many of the stability and contamination
problems frequently encountered in the production of microalgae. We believe that our technology, systems, processes and favorable growing location permit year-round harvesting of our
microalgal products in a cost-effective manner. Currently, Cyanotech operates as a single segment, producing and selling natural products from microalgae for the nutritional supplement,
aquaculture feed, animal
nutrition, and immunological diagnostics markets. In response to SEC Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," the Company
has identified certain of its policies as being of particular importance to the understanding of its financial position and results of operations and which require the application of significant
judgement by Cyanotech management.

Inventory ValuationInventories are stated at the lower of cost (which approximates first-in,
first-out) or market. Market is determined by net realizable value.

Revenue RecognitionThe Company recognizes revenue when goods are shipped and when significant risks and benefits of ownership
are transferred. Amounts received in advance under sales and distribution agreements for the right to sell and distribute the Company's products are recognized as revenues on a
straight-line basis over the term of such agreements.

18

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Equipment and Leasehold Improvements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, and the shorter of the lease terms or estimated useful lives for
leasehold improvements as described in the section "Notes To Consolidated Financial Statements" included in this report.

Income TaxesIncome taxes are accounted for under the asset and liability method. Deferred tax assets are recognized for the
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
carryforwards. 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 effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Impairment of Long-Lived AssetsThe Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 144 provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an
asset as held for sale; and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations.
The Company adopted SFAS No. 144 on April 1, 2002. The adoption of SFAS No. 144 did not affect the Company's consolidated financial statements.

In
accordance with SFAS No. 144, 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 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 by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet
and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be
presented separately in the appropriate asset and liability sections of the balance sheet.

Goodwill
and intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value.

Prior
to the adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."

Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

19

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Contractual Obligations

The following table presents the Company's contractual obligations at March 31, 2003:

|                 |  | Payments due by period
|---------------- |  | ----------------------
|
|
|Long-term debt   |  | $                     
|Operating leases |  |                       
|                 |  |                       
|Total            |  | $                     
|                 |  |                       

RESULTS OF OPERATIONS

The following table sets forth certain consolidated statement of operations data as a percentage of net sales for the periods indicated.

Years Ended March 31,

2003

2002

2001Net sales

100.0
%
100.0
%
100.0
%Cost of sales

67.7

81.0

70.8Gross profit

32.3

19.0

29.2Operating expenses:Research and development

2.4

4.2

3.3General and administrative

23.0

20.1

21.2Sales and marketing

20.4

21.2

13.5Total operating expenses

45.8

45.5

38.0Loss from operations

(13.5
)
(26.5
)
(8.8
)Other income (expense):Interest income

0.4

0.8

1.5Interest expense

(4.7
)
(6.1
)
(7.7
)Other income (expense), net

(2.1
)
0.3

1.6Total other expense

(6.4
)
(5.0
)
(4.6
)Loss before income taxes

(19.9
)
(31.5
)
(13.4
)Income tax benefit

0.1

0.1

0.1Net loss

(19.8
)%
(31.4
)%
(13.3
)%


Fiscal 2003 Compared to Fiscal 2002

Net Sales

Net sales for the year ended March 31, 2003 amounted to $8,951,000, an increase of 8.7% from net sales reported for the prior fiscal year, primarily due to
increased sales of bulk and packagedBioAstin(up 45%), higher sales of bulkNatuRose(up 30%) and bulk Spirulina
Pacificatablets (up 33%), offset in part by decreased sales of bulkSpirulina Pacificapowder
(down 17%). Net sales for the prior fiscal year includes $204,000 of non-recurring product distribution license fees. If the effect of these fees are omitted for comparison purposes, net
sales for fiscal 2003 increased by $920,000 or 11.5% over the prior fiscal year.

International
sales increased slightly to 54% of total net sales for the year ended March 31, 2003, up from 47% reported for the prior fiscal year. This increase was primarily due
to increased sales in

20

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Japan
through our wholly-owned subsidiary Cyanotech Japan and higher sales to our largest customer, Spirulina International. Sales to this customer amounted to $1,546,000 or 17% of net sales for the
year ended March 31, 2003, an increase of $515,000 from this customer's purchases during the prior fiscal year.

Gross Profit

Gross profit represents net sales less the cost of goods sold, which includes the cost of materials, manufacturing overhead costs, direct labor expenses and
depreciation and amortization. Gross profit for the year ended March 31, 2003 improved significantly to $2,895,000, an increase of 85% from that reported for the prior fiscal year, with the
gross profit margin increasing to 32.3% from 19.0% of net sales. This increase in gross profit from the prior year is primarily attributable to operating at more optimal production levels and from
increased sales of higher profit natural astaxanthin products. Results for the prior fiscal year include the offsetting effect of finished goods inventory adjustments of $454,000, and income from a
non-recurring settlement related to product distribution license fees of $204,000. Our gross profit margin is dependent on multiple factors which include, but are not limited to, product
mix, production levels, weather-seasonality, raw material, supply and shipping costs, and other factors beyond our control. Changes in any combination of these factors may result in fluctuation in
gross profit in future periods.

Operating Expenses

Total operating expenses for the year ended March 31, 2003 amounted to $4,105,000, an increase of 9.6% from operating expenses reported for the prior
fiscal year primarily due to higher sales and marketing expenses and increased general and administrative expenses, offset in part by lower research and development expenses. In fiscal 2004 we expect
operating expenses to remain at, or below, that reported for fiscal 2003 due to continued cost containment and discontinuation of the television infomercial advertising campaign during fiscal 2003.

Research and DevelopmentFor the year ended March 31, 2003, expenditures for research and development amounted to
$217,000, a decrease of 36.7% from the $343,000 reported for the prior fiscal year. This decrease is primarily attributable to reduced outside service expenses related to scientific clinical studies
onBioAstin.

General and AdministrativeFor the year ended March 31, 2003, general and administrative expenses increased 24.7% to
$2,061,000 from the amount reported for the prior fiscal year. This increase is primarily due to writeoff of the discontinued television infomercial project, higher consulting service expense, higher
corporate insurance, write-down of a capital expenditure warehouse project, a one-time NASDAQ fee associated with the change in the trading of the Company's common stock on the
National Market to the Small Cap Market and increased bad debt expense.

Sales and MarketingFor the year ended March 31, 2003, sales and marketing expenses increased slightly to $1,827,000,
an increase of 4.3% from the amount reported for the prior fiscal year. This increase is primarily attributable to higher personnel and commission expense for all products.

Other Expense

Other expense for the year ended March 31, 2003 increased by 39.0% to $574,000. The increase from the prior year is due to decreased interest income on
lower cash balances and higher other expenses of approximately $236,000 related to extension of the convertible debentures which were retired in October 2002, partially offset by lower prime
rate interest expense on the Term Loan.

21

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Income Tax Benefit

The income tax benefit of $9,000 for each of the years ended March 31, 2003 and 2002 represents current state tax refunds.

Net Loss

The Company recorded a net loss of $1,775,000 for the year ended March 31, 2003, an improvement in result of $814,000 or 31% from that reported for the
prior fiscal year. This improvement can be primarily attributed to lower production costs and the subsequent effect on gross profit resulting from operating at more optimal levels, offset in part by
increased sales and marketing and general and administrative operating and other expenses.

Fiscal 2002 Compared to Fiscal 2001

Net Sales

Net sales for the year ended March 31, 2002 increased by 2.4% from net sales of $8,043,000 for the year ended March 31, 2001, primarily due to
increased sales of packaged spirulina consumer products (an increase of $417,000, or 35%) and higher sales of allBioAstinproducts (an increase of
$682,000, or 292%), offset in part by lower sales of bulkSpirulina Pacificaproducts (a decrease of $544,000, or 11%) and bulk NatuRoseproducts (a
decrease of $354,000, or 26%).

International
sales decreased slightly to 47% of total net sales for the year ended March 31, 2002, down from 54% for the year ended March 31, 2001. This decrease was
primarily due to increased domestic sales and lower international sales. Sales of bulk spirulina products to our largest customer, Spirulina International, amounted to $1,031,000 or 13% of net sales
for the year ended March 31, 2002, a decrease from $1,533,000 or 19% of net sales recorded for the year ended March 31, 2001.

Gross Profit

Gross profit for the year ended March 31, 2002 decreased $783,000 or 33% compared to the prior year, with the gross profit margin decreasing to 19.0% from
29.2% of net sales. This decrease in gross profit from the prior year is primarily attributable to higher production costs in all products resulting from operating at lower than optimal production
levels and the effects of inventory adjustments and a finished goods write off of $454,000 made during the third quarter of fiscal 2002, offset in part by increased sales of higher margin packaged
consumer products.

Operating Expenses

Total operating expenses for the year ended March 31, 2002 amounted to $3,747,000, an increase of 22.7% from the $3,053,000 of operating expenses reported
for the prior fiscal year primarily due to the significantly increased sales and marketing expenses attributable to expanded advertising and promotion costs. Also contributing to the increase in
operating costs were higher research and development expenses of approximately $78,000 related primarily to scientific clinical trials. Increases in both of these functional areas were slightly offset
by a 2.8% reduction in general and administrative expenses, primarily due to lower legal expenses.

Research and DevelopmentExpenditures for research and development increased 29.4% to $343,000 for the year ended
March 31, 2002, from $265,000 for the year ended March 31, 2001. The increase from the prior year resulted primarily from increased outside service expenses due to continuing clinical
studies forBioAstin.

22

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General and AdministrativeGeneral and administrative expenses decreased by $47,000 to $1,653,000 for the year ended
March 31, 2002, from $1,700,000 for the year ended March 31, 2001. The decrease from the prior year is primarily due to lower legal expenses.

Sales and MarketingSales and marketing expenses increased significantly due to expanded advertising and promotional expenses
for all products. Sales and marketing expenses for the year ended March 31, 2002, amounted to $1,751,000, an increase of 60.9% from $1,088,000 recorded for the prior year.

Other Expense

Other expense for the year ended March 31, 2002 increased by 12.5% to $413,000. The increase from the prior year is due to decreased other income and lower
interest income, partially offset by lower interest expense.

Income Tax Benefit

The income tax benefit of $9,000 and $8,000 for the years ended March 31, 2002 and 2001 respectively, represent current state tax refunds.

Net Loss

The Company recorded a net loss of $2,589,000 for the year ended March 31, 2002 compared to a loss of $1,067,000 for the year ended March 31, 2001.
This increased loss can be primarily attributed to higher production costs, inventory adjustments and the subsequent effect on gross profit resulting from operating at lower than optimal levels,
combined with increased operating expenses in research and development and sales and marketing and, to a lesser extent, lower other income.

VARIABILITY OF RESULTS

Cyanotech Corporation was formed in 1983 and did not become profitable on an annual basis until fiscal 1992 (the twelve month period ended December 31,
1992). From fiscal 1992 through fiscal 1997, the Company had total net sales of $29,401,000 and total net income of $7,931,000. From fiscal 1998 through fiscal 2003, the Company had total net sales of
$46,992,000 and net losses totaling $12,773,000. As of March 31, 2003, our accumulated deficit is $13,234,000. There can be no assurance that we will return to generating profits on either a
quarterly or an annual basis.

We
have experienced significant quarterly fluctuations in operating results and anticipate that these fluctuations may continue in future periods. Future operating results may fluctuate
as a result of changes in sales to our largest customers, new product introductions, production difficulties, weather patterns, the mix between sales of bulk products and packaged consumer products,
start-up costs associated with new facilities, expansion into new markets, sales promotions, competition, increased energy costs, foreign exchange fluctuations, the announcement or
introduction of new products by our competitors, changes in our customer mix, overall trends in the market for our products, government regulations and other factors beyond our control. While 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 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 the Company's financial condition, results of operations and liquidity. The
Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms of its financing
agreements, to obtain additional financing or refinancing as may be required, to attain

23

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profitability,
or a combination thereof. There can be no assurance that these efforts will be successful or that the Company will return to generating profit on either a quarterly or annual basis.

NEW ACCOUNTING PRONOUNCEMENTS

Accounting for Asset Retirement ObligationsIn June 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs would be capitalized as a part of the carrying amount of the long-lived asset and depreciated over the life of the
asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will
recognize a
gain or loss on settlement. The provisions of SFAS No. 143 are effective for fiscal years beginning after June 15, 2002. Adoption of SFAS No. 143 is not expected to have a
material effect on the Company's financial condition, results of operations or liquidity.

Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and EquityIn May 2003, the FASB
issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 requires issuers to classify as liabilities (or
assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of SFAS No. 150 is not expected
to have a material effect on the Company's financial condition, results of operations or liquidity.

Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of OthersIn
November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition
and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN No. 45 did not
have a material effect on the Company's financial condition, results of operations or liquidity.

Consolidation of Variable Interest EntitiesIn January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities," which addresses the consolidation of variable interest entities ("VIE") as defined. FIN No. 46 applies immediately to variable interests in VIEs created after
January 31, 2003, and to variable interests in VIEs obtained after January 31, 2003. For a variable interest in a VIE acquired before February 1, 2003, FIN No. 46 is to be
applied no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The adoption of FIN No. 46 did not have a material effect on the
Company's financial condition, results of operations or liquidity.

LIQUIDITY AND CAPITAL RESOURCES

Cash FlowsFiscal 2003

Our working capital at March 31, 2003 amounted to $2,352,000, an increase of $1,344,000 from working capital at March 31, 2002, but cash and cash
equivalents decreased by $472,000 to $579,000. This decrease in cash and cash equivalents is primarily because of cash flows used in operating

24

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activities
and for investment in equipment and leasehold improvements totaling $752,000, offset in part by cash provided by financing activities of $280,000.

Cash
flows used in operating activities for the year ended March 31, 2003 amounted to $502,000, $67,000 less than cash flows used in operating activities reported for the prior
fiscal year. The cash flows used in operating activities for fiscal 2003 is primarily due to the net loss of $1,775,000 offset in part by depreciation and amortization charges of $1,324,000.

Cash
flows used in investing activities (capital equipment purchases and leasehold improvements) for the year ended March 31, 2003 decreased by $132,000 to $250,000 from the
amount recorded for the prior fiscal year. The Company expects to invest similar amounts in fiscal 2004 for capital equipment and leasehold improvements.

Cash
flows provided by financing activities amounted to $280,000, compared to cash flows used in financing activities of $269,000 for the prior fiscal year. This result is attributable
to net proceeds from the issuance of long-term debt of $1,250,000 and common stock of $630,000, offset in part by repayment of long-term debt of $1,541,000.

Cash FlowsFiscal 2002

Cash flows used in operating activities for the year ended March 31, 2002 amounted to $567,000, a decrease from cash flows provided by operating activities
of $243,000 for the year ended March 31, 2001. The decrease in cash flows from operating activities is due primarily to the net loss of $2,589,000 offset in part by depreciation and
amortization charges of $1,312,000 and reduction in inventories of $1,010,000.

Cash
flows used in investing activities for the year ended March 31, 2002 decreased slightly to $382,000 from $437,000 recorded for the prior fiscal year.

Cash
flows used in financing activities amounted to $269,000 compared to cash provided by financing activities of $2,058,000 for the prior fiscal year, primarily as a result of the prior
year's term loan and convertible debenture financings.

Term Loan Agreement

On April 21, 2000, the Company executed a Term Loan Agreement ("Term Loan") with a lender which provided for $3.5 million in aggregate credit
facilities, secured by substantially all the assets of the Company. The Term Loan has a maturity date of May 1, 2010 and is payable in 120 equal monthly principal and interest payments of
approximately $40,000, commencing June 1, 2000 ($39,000 at March 31, 2003 and 2002). The interest rate under this Term Loan, 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% (at March 31, 2003 and 2002, the prime rate was 4.25% and 4.75%, respectively). Interest is
calculated on the unpaid balance of principal based on a straight-line amortization schedule commencing May 1, 2000. Of the loan proceeds, $500,000 has been deposited in an
interest-bearing restricted cash account per the terms of the loan, with such amount included in other assets in the consolidated balance sheets at March 31, 2003 and 2002. A warrant to
purchase 20,000 shares of the Company's common stock was issued in conjunction with this Term Loan agreement. The warrant expires in April 2011 and has an exercise price of $2.55 per share. The
warrant may only be exercised after the Company has repaid the Term Loan in full.

The
Term Loan contains restrictive covenants which included, among others, maintenance of an annual minimum debt service coverage ratio. The Company failed to meet this covenant
requirement for the year ended March 31, 2002 but received from the lender a waiver of the covenant violation until the year ending March 31, 2003. In October 2002, this covenant
was deleted from the Term Loan

25

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by
the lender. At March 31, 2003 the Company was in compliance with all restrictive covenants of the Term Loan.

In
connection with the Term Loan, the Company is prohibited from declaring common stock dividends without the lender's prior written consent.

Convertible Debentures due April 30, 2002

On May 2, 2000, the Company completed a private placement of $1,250,000 principal amount 6% convertible subordinated debentures ("Debentures") due
April 30, 2002, with net proceeds to the Company of approximately $1.1 million. Interest on these Debentures was to be paid quarterly, in
arrears, at a rate of 6% per annum. The Debentures were convertible into shares of the Company's common stock at a conversion price of $1.50 per share, the market price of the Company's common stock
at the date of issuance. Warrants to purchase 83,334 shares of the Company's common stock were issued to the placement agent of the Debentures, exercisable for five years from the issue date, at $1.80
per share. At March 31, 2002 and 2001, the outstanding principal amount of these debentures were $1,238,000 and $1,250,000 respectively.

In
May 2002, the Company reached an agreement with the holders of the Debentures to extend the maturity date by six months to October 31, 2002. In exchange for the
extension, the Company agreed to: 1) reduce the conversion price from $1.50 per share to $1.00 per share (the approximate market value at date of issuance); 2) increase the interest rate
during the remaining period the Debentures are outstanding from 6% to 10%; 3) issue two-year warrants to the Debenture holders to purchase additional shares of common stock of
Cyanotech in an amount equal to thirty percent (30%) of the shares into which the Debentures are convertible at $1.10 per share; and 4) reduce the forced conversion price at which the Company
can require the conversion of the Debentures from $3.00 per share to $1.50 per share. The terms of the aforementioned warrant issued to the placement agent in conjunction with the initial placement
were also revised in this extension agreement. Under the terms of the extension, the warrant exercise price was reduced to $1.10 per share and the expiration date was accelerated to May 2004.
As a result of this renegotiation of debt, the Company recorded a charge of approximately $236,000 during the year ended March 31, 2003, of which approximately $223,000 was a
non-cash charge. These Debentures were retired in their entirety in October 2002.

Convertible Debentures due September 30, 2004

In October 2002, the Company issued in a private placement (a) $1,250,000 principal amount of 10% convertible subordinated debentures, due
September 30, 2004, convertible into shares of the Company's common stock at a price of $0.65 per share and (b) 750,000 shares of common stock with proceeds to the Company of $300,000.
Proceeds from the 10% convertible subordinated debentures issued in October were used to retire convertible debentures of $1,238,000 which were due to mature on October 31, 2002. The remaining
net proceeds from the issuance of common stock are to be used for working capital purposes. Subsequent to the transaction the investor was elected to the Company's Board of Directors.

Common Stock Listing

During fiscal 2002, the Company's Common Stock was traded on the NASDAQ National Market. On June 17, 2002 the Company received a delisting warning letter
from NASDAQ for failure to comply with the $1.00 per share minimum bid price. Cyanotech had 90 calendar days, or until September 16, 2002, to regain compliance. The Company was unable to regain
compliance prior to September 16, 2002, and subsequently applied for, and received listing for its common stock on the NASDAQ SmallCap Market.

26

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Listing
on the NASDAQ SmallCap market provided the Company a 180 calendar day grace period, or until December 16, 2002 to regain compliance. The Company failed to regain
compliance before the end of this grace period but was eligible for an additional 180 calendar day grace period, or until June 12, 2003 to demonstrate compliance, provided that it met NASDAQ
listing criteria for the SmallCap Market. The Company was unable to attain the $1.00 per share value prior to June 12, 2003 but met the other listing criteria for the SmallCap Market. However,
on June 13, 2003, the Company received notification from NASDAQ that under Marketplace Rule 4210(c)(2)(A), the compliance period for listing on the SmallCap Market was extended from 360
to 450 calendar days for companies which met certain heightened criteria. The Company met the initial listing requirements and in accordance with Marketplace Rule 4310(c)(8)(D), has been
provided an additional 90 calendar days, or until September 10, 2003 to regain compliance with the $1.00 per share minimum bid price requirement.

As
a result, as of the date of this report, the Company's common stock continues to be listed on the NASDAQ SmallCap Market under symbol "CYAN". If at anytime before September 10,
2003, the bid price of the Company's common stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days, NASDAQ Staff will provide written notification that the Company
complies with listing requirements under Marketplace Rule 4450(a)(5). Under certain circumstances, to ensure that Company can sustain long-term compliance, NASDAQ Staff may require
that the closing bid price equals $1.00 per share or greater for more than 10 consecutive business days, but, generally, not more than 20 consecutive business days before determining that the Company
complies. If compliance with this rule cannot be demonstrated by September 10, 2003, NASDAQ Staff will provide written notification that the Company's securities will be delisted from the
SmallCap Market and begin trading on the NASDAQ Over-The-Counter Bulletin Boards. In such case common stock of the Company will be traded on a less active market to the
possible detriment of the stockholders. At that time, the Company may appeal the NASDAQ Staff's determination to a Listing Qualifications Panel.

The
accompanying consolidated financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liquidation of
liabilities in the ordinary course of business. During the years ended March 31, 2003, 2002 and 2001, the Company incurred losses of $1,775,000, $2,589,000 and $1,067,000, respectively. The
Company's working capital at March 31, 2003 was $2,352,000 with cash balances amounting to $579,000. Net cash and cash equivalents
used in operating activities for the years ended March 31, 2003 and 2002 amounted to $502,000 and $567,000, respectively. Accordingly, this causes substantial doubt as to the ability of the
Company to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to
comply with the terms of its financing agreements, to obtain additional financing or refinancing as may be required, to attain profitability, or a combination thereof. The Company is pursuing several
sources of additional financing but there can be no assurance that these efforts will be successful or that the Company will return to generating profit on either a quarterly or annual basis.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

We have not entered 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.

27

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Item 8. Consolidated Financial Statements and Supplementary Data

Independent Auditor's Report

The
Board of Directors
Cyanotech Corporation:

We
have audited the accompanying consolidated balance sheets of Cyanotech Corporation and subsidiaries as of March 31, 2003 and 2002, and the related consolidated statements of
operations, stockholders' equity and comprehensive loss, and cash flows for the years in the three-year period ended March 31, 2003. 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 audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cyanotech Corporation and subsidiaries as of
March 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 15 to the consolidated
financial statements, the Company has suffered recurring losses from operations and has limited sources of additional liquidity to enable it to sufficiently liquidate its debts as they become due that
raise substantial doubt about its ability to continue as a going concern. Management's plans in regards to these matters are also described in note 15. The consolidated financial statements do
not include any adjustments that might result from the outcome of this uncertainty.

/s/
KPMG LLP
Honolulu, Hawaii
May 2, 2003

28

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CONSOLIDATED BALANCE SHEETS        March 31, 2003 and 2002

|                                                                                                                                                                                             |                                            | 2003 |         | 2002   |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---- | ------- | ------ | -
|
|ASSETS                                                                                                                                                                                       |                                            |      |         |        |  
|Current Assets:                                                                                                                                                                              |                                            |      |         |        |  
|Cash and cash equivalents                                                                                                                                                                    |                                            | $    | 579     |        | $
|Accounts receivable, net of allowance for doubtful receivables of $60 in 2003 and $40 in 2002                                                                                                |                                            |      | 1,839   |        |  
|Refundable income taxes                                                                                                                                                                      |                                            |      | 9       |        |  
|Inventories                                                                                                                                                                                  |                                            |      | 1,400   |        |  
|Prepaid expenses                                                                                                                                                                             |                                            |      | 40      |        |  
|                                                                                                                                                                                             |                                            |      |         |        |  
|                                                                                                                                                                                             | Total current assets                       |      |         | 3,867  |  
|Equipment and leasehold improvements, net                                                                                                                                                    |                                            |      | 12,777  |        |  
|Other assets                                                                                                                                                                                 |                                            |      | 838     |        |  
|                                                                                                                                                                                             |                                            |      |         |        |  
|                                                                                                                                                                                             | Total assets                               |      | $       | 17,482 |  
|                                                                                                                                                                                             |                                            |      |         |        |  
|LIABILITIES AND STOCKHOLDER'S EQUITY                                                                                                                                                         |                                            |      |         |        |  
|Current liabilities:                                                                                                                                                                         |                                            |      |         |        |  
|Current maturities of long-term debt                                                                                                                                                         |                                            | $    | 323     |        | $
|Accounts payable                                                                                                                                                                             |                                            |      | 803     |        |  
|Accrued expenses                                                                                                                                                                             |                                            |      | 389     |        |  
|                                                                                                                                                                                             |                                            |      |         |        |  
|                                                                                                                                                                                             | Total current liabilities                  |      |         | 1,515  |  
|Long-term debt, excluding current maturities                                                                                                                                                 |                                            |      | 3,694   |        |  
|                                                                                                                                                                                             |                                            |      |         |        |  
|                                                                                                                                                                                             | Total liabilities                          |      |         | 5,209  |  
|                                                                                                                                                                                             |                                            |      |         |        |  
|Stockholders' equity:                                                                                                                                                                        |                                            |      |         |        |  
|Common stock of $.005 par value, authorized 25,000,000 shares at March 31, 2003 and 2002; issued and outstanding 18,316,701 shares at March 31, 2003 and 17,043,701 shares at March 31, 2002 |                                            |      | 92      |        |  
|Additional paid-in capital                                                                                                                                                                   |                                            |      | 25,418  |        |  
|Accumulated other comprehensive lossforeign currency translation adjustments                                                                                                                |                                            |      | (3      | )      |  
|Accumulated deficit                                                                                                                                                                          |                                            |      | (13,234 | )      |  
|                                                                                                                                                                                             |                                            |      |         |        |  
|                                                                                                                                                                                             | Total stockholders' equity                 |      |         | 12,273 |  
|                                                                                                                                                                                             |                                            |      |         |        |  
|                                                                                                                                                                                             | Total liabilities and stockholders' equity |      | $       | 17,482 |  
|                                                                                                                                                                                             |                                            |      |         |        |  

See
accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS        Years ended March 31, 2003, 2002 and 2001

|                                                                       |                          | 2003 |        | 2002   |   | 2001   |       
|---------------------------------------------------------------------- | ------------------------ | ---- | ------ | ------ | - | ------ | ------
|
|Net sales                                                              |                          | $    | 8,951  |        | $ | 8,235  |       
|Cost of sales                                                          |                          |      | 6,056  |        |   | 6,673  |       
|                                                                       |                          |      |        |        |   |        |       
|                                                                       | Gross profit             |      |        | 2,895  |   |        | 1,562 
|                                                                       |                          |      |        |        |   |        |       
|OPERATING EXPENSES:                                                    |                          |      |        |        |   |        |       
|Research and development                                               |                          |      | 217    |        |   | 343    |       
|General and administrative                                             |                          |      | 2,061  |        |   | 1,653  |       
|Sales and marketing                                                    |                          |      | 1,827  |        |   | 1,751  |       
|                                                                       |                          |      |        |        |   |        |       
|                                                                       | Total operating expenses |      |        | 4,105  |   |        | 3,747 
|                                                                       |                          |      |        |        |   |        |       
|                                                                       | Loss from operations     |      |        | (1,210 | ) |        | (2,185
|                                                                       |                          |      |        |        |   |        |       
|OTHER INCOME (EXPENSE):                                                |                          |      |        |        |   |        |       
|Interest income                                                        |                          |      | 33     |        |   | 66     |       
|Interest expense                                                       |                          |      | (418   | )      |   | (499   | )     
|Other income (expense), net                                            |                          |      | (189   | )      |   | 20     |       
|                                                                       |                          |      |        |        |   |        |       
|                                                                       | Total other expense      |      |        | (574   | ) |        | (413  
|                                                                       |                          |      |        |        |   |        |       
|                                                                       | Loss before income taxes |      |        | (1,784 | ) |        | (2,598
|                                                                       | Income tax benefit       |      |        | 9      |   |        | 9     
|                                                                       |                          |      |        |        |   |        |       
|                                                                       | Net loss                 |      | $      | (1,775 | ) | $      | (2,589
|                                                                       |                          |      |        |        |   |        |       
|Net loss per Common shareBasic and Diluted                            |                          | $    | (0.10  | )      | $ | (0.15  | )     
|                                                                       |                          |      |        |        |   |        |       
|Weighted average number of common shares outstandingBasic and Diluted |                          |      | 17,840 |        |   | 17,033 |       
|                                                                       |                          |      |        |        |   |        |       

See
accompanying notes to consolidated financial statements.

30

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS

Years ended March 31, 2003, 2002 and 2001

|                                                                                                        |                                                                     | Preferred Stock |   | Common Stock |    |   |            |   |   |    |   |   |        |   |  
|------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | --------------- | - | ------------ | -- | - | ---------- | - | - | -- | - | - | ------ | - | -
|
|
|
|Balances at March 31, 2000                                                                              |                                                                     | 471,031         |   | $            | 1  |   | 14,582,297 |   | $ | 73 |   | $ | 24,374 |   | $
|Exercise of stock options for cash                                                                      |                                                                     |                |   |              |   |   | 6,250      |   |   |   |   |   | 6      |   |  
|Issuance of common stock warrants in connection with issuance of long-term debt, at fair value          |                                                                     |                |   |              |   |   |           |   |   |   |   |   | 121    |   |  
|Issuance of common stock to nonemployee director for services, at fair value                            |                                                                     |                |   |              |   |   | 6,000      |   |   |   |   |   | 10     |   |  
|Exchange of Series C preferred stock for common stock, net of costs of $20                              |                                                                     | (471,031        | ) |              | (1 | ) | 2,355,155  |   |   | 12 |   |   | (31    | ) |  
|Net loss                                                                                                |                                                                     |                |   |              |   |   |           |   |   |   |   |   |       |   |  
|                                                                                                        |                                                                     |                 |   |              |    |   |            |   |   |    |   |   |        |   |  
|Balances at March 31, 2001                                                                              |                                                                     |                |   |              |   |   | 16,949,702 |   |   | 85 |   |   | 24,480 |   |  
|Series C preferred stock conversion costs                                                               |                                                                     |                |   |              |   |   |           |   |   |   |   |   | (11    | ) |  
|Conversion of debentures to common stock                                                                |                                                                     |                |   |              |   |   | 7,999      |   |   |   |   |   | 12     |   |  
|Issuance of common stock to nonemployee director for services, at fair value                            |                                                                     |                |   |              |   |   | 6,000      |   |   |   |   |   | 6      |   |  
|Issuance of common stock for services, at fair value                                                    |                                                                     |                |   |              |   |   | 80,000     |   |   |   |   |   | 80     |   |  
|Comprehensive loss:                                                                                     |                                                                     |                 |   |              |    |   |            |   |   |    |   |   |        |   |  
|                                                                                                        | Net loss                                                            |                 |  |              |    |  |            |  |   |    |  |   |        |  |  
|                                                                                                        | Other comprehensive lossforeign currency translation adjustments   |                 |  |              |    |  |            |  |   |    |  |   |        |  |  
|                                                                                                        |                                                                     |                 |   |              |    |   |            |   |   |    |   |   |        |   |  
|                                                                                                        | Comprehensive loss                                                  |                 |  |              |    |  |            |  |   |    |  |   |        |  |  
|                                                                                                        |                                                                     |                 |   |              |    |   |            |   |   |    |   |   |        |   |  
|Balances at March 31, 2002                                                                              |                                                                     |                |   |              |   |   | 17,043,701 |   |   | 85 |   |   | 24,567 |   |  
|Common stock issued for cash, net of costs of $21                                                       |                                                                     |                |   |              |   |   | 1,265,000  |   |   | 7  |   |   | 623    |   |  
|Issuance of common stock to nonemployee director for services, at fair value                            |                                                                     |                |   |              |   |   | 8,000      |   |   |   |   |   | 5      |   |  
|Issuance of common stock warrants in connection with extension of convertible debentures, at fair value |                                                                     |                |   |              |   |   |           |   |   |   |   |   | 223    |   |  
|Comprehensive loss:                                                                                     |                                                                     |                 |   |              |    |   |            |   |   |    |   |   |        |   |  
|                                                                                                        | Net Loss                                                            |                 |  |              |    |  |            |  |   |    |  |   |        |  |  
|                                                                                                        | Other comprehensive loss  foreign currency translation adjustments |                 |  |              |    |  |            |  |   |    |  |   |        |  |  
|                                                                                                        |                                                                     |                 |   |              |    |   |            |   |   |    |   |   |        |   |  
|                                                                                                        | Comprehensive loss                                                  |                 |   |              |    |   |            |   |   |    |   |   |        |   |  
|                                                                                                        |                                                                     |                 |   |              |    |   |            |   |   |    |   |   |        |   |  
|Balances at March 31, 2003                                                                              |                                                                     |                |   |              |   |   | 18,316,701 |   | $ | 92 |   | $ | 25,418 |   | $
|                                                                                                        |                                                                     |                 |   |              |    |   |            |   |   |    |   |   |        |   |  

See accompanying notes to consolidated financial statements.

31

---

CONSOLIDATED STATEMENT OF CASH FLOWS        Years ended March 31, 2003, 2002 and 2001

|                                                                                                         |                                                                                          | 2003                              |        | 2002  |      | 2001   |      
|-------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | --------------------------------- | ------ | ----- | ---- | ------ | -----
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                    |                                                                                          |                                   |        |       |      |        |      
|Net loss                                                                                                 |                                                                                          | $                                 | (1,775 | )     | $    | (2,589 | )    
|Adjustments to reconcile net loss to net cash provided by, (used in) operating activities:               |                                                                                          |                                   |        |       |      |        |      
|                                                                                                         | Depreciation and amortization                                                            |                                   |        | 1,324 |      |        | 1,312
|                                                                                                         | Amortization of debt issue costs                                                         |                                   |        | 123   |      |        | 134  
|                                                                                                         | Issuance and revision of warrants in connection with extension of convertible debentures |                                   |        | 223   |      |        |     
|                                                                                                         | Issuance of common stock, warrants and options in exchange for services                  |                                   |        | 5     |      |        | 86   
|                                                                                                         | Write-down of capital expenditure project                                                |                                   |        | 80    |      |        |     
|                                                                                                         | Net (increase) decrease in assets:                                                       |                                   |        |       |      |        |      
|                                                                                                         |                                                                                          | Accounts receivable               |        |       | (499 | )      |      
|                                                                                                         |                                                                                          | Refundable income taxes           |        |       |     |        |      
|                                                                                                         |                                                                                          | Inventories                       |        |       | (406 | )      |      
|                                                                                                         |                                                                                          | Prepaid expenses and other assets |        |       | 132  |        |      
|                                                                                                         | Net increase (decrease) in liabilities:                                                  |                                   |        |       |      |        |      
|                                                                                                         |                                                                                          | Accounts payable                  |        |       | 118  |        |      
|                                                                                                         |                                                                                          | Accrued expenses                  |        |       | 173  |        |      
|                                                                                                         |                                                                                          | Deferred revenue                  |        |       |     |        |      
|                                                                                                         |                                                                                          |                                   |        |       |      |        |      
|                                                                                                         | Net cash provided by (used in) operating activities                                      |                                   |        | (502  | )    |        | (567 
|                                                                                                         |                                                                                          |                                   |        |       |      |        |      
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                    |                                                                                          |                                   |        |       |      |        |      
|Investment in equipment and leasehold improvements                                                       |                                                                                          |                                   | (250   | )     |      | (382   | )    
|                                                                                                         |                                                                                          |                                   |        |       |      |        |      
|                                                                                                         | Net cash used in investing activities                                                    |                                   |        | (250  | )    |        | (382 
|                                                                                                         |                                                                                          |                                   |        |       |      |        |      
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                    |                                                                                          |                                   |        |       |      |        |      
|Proceeds from issuance of common stock and exercise of stock options and warrants, net of issuance costs |                                                                                          |                                   | 630    |       |      |       |      
|Cost of conversion of series C preferred stock to common stock                                           |                                                                                          |                                   |       |       |      | (11    | )    
|Proceeds from issuance of long-term debt                                                                 |                                                                                          |                                   | 1,250  |       |      |       |      
|Principal payments on long-term debt                                                                     |                                                                                          |                                   | (1,541 | )     |      | (258   | )    
|Debt issue costs                                                                                         |                                                                                          |                                   | (59    | )     |      |       |      
|Restricted cash deposit                                                                                  |                                                                                          |                                   |       |       |      |       |      
|                                                                                                         |                                                                                          |                                   |        |       |      |        |      
|                                                                                                         | Net cash provided by (used in) financing activities                                      |                                   |        | 280   |      |        | (269 
|                                                                                                         |                                                                                          |                                   |        |       |      |        |      
|Net increase (decrease) in cash and cash equivalents                                                     |                                                                                          |                                   | (472   | )     |      | (1,218 | )    
|Cash and cash equivalents at beginning of year                                                           |                                                                                          |                                   | 1,051  |       |      | 2,269  |      
|                                                                                                         |                                                                                          |                                   |        |       |      |        |      
|Cash and cash equivalents at end of year                                                                 |                                                                                          | $                                 | 579    |       | $    | 1,051  |      
|                                                                                                         |                                                                                          |                                   |        |       |      |        |      
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                                        |                                                                                          |                                   |        |       |      |        |      
|Cash paid during the year for interest                                                                   |                                                                                          | $                                 | 295    |       | $    | 349    |      
|                                                                                                         |                                                                                          |                                   |        |       |      |        |      
|Supplemental disclosure of non-cash financing activities:                                                |                                                                                          |                                   |        |       |      |        |      
|                                                                                                         | Issuance of warrants in connection with issuance of long-term debt                       |                                   | $      |      |      | $      |     
|                                                                                                         |                                                                                          |                                   |        |       |      |        |      
|                                                                                                         | Conversion of convertible debentures to common stock                                     |                                   | $      |      |      | $      | 12   
|                                                                                                         |                                                                                          |                                   |        |       |      |        |      

See
accompanying notes to consolidated financial statements.

32

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (all amounts in thousands, except share data)

Note 1    Description of Business and Summary of Accounting Policies



Cyanotech
Corporation (Company) develops and commercializes natural products from microalgae. The Company is currently producing microalgal products for the nutritional supplement,
aquaculture feed/pigments and immunological diagnostics markets.



The
accompanying consolidated financial statements include the accounts of Cyanotech Corporation and its wholly owned subsidiaries, Nutrex Hawaii, Inc and Cyanotech Japan YK. All
significant intercompany balances and transactions have been eliminated in consolidation.



Assets
and liabilities of foreign operations and subsidiaries are translated at the year-end exchange rate and resulting translation gains or losses are accounted for in a
stockholders' equity account entitled "accumulated other comprehensive lossforeign currency translation adjustments." Operating results of foreign subsidiaries are translated at average
exchange rates during the period.



For
purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt securities purchased with original or remaining maturities of three months or less
to be cash equivalents.



Trade
accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable
credit losses in the Company's existing accounts receivable. The Company determines the allowance based on historical write-off experience. The Company reviews its allowance for doubtful
accounts monthly. Past due balances over 90 days and a specified amount are reviewed individually for collectibility. 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.



Inventories
are stated at the lower of cost (which approximates first-in, first-out) or market. Market is determined by net realizable value.



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, the shorter of the lease terms or estimated useful lives for leasehold improvements as follows:

Equipment

3 to 10 yearsLeasehold improvements

10 to 23 yearsFurniture and fixtures

7 years


33

---



The
Company recognizes revenues when goods are shipped and when significant risks and benefits of ownership are transferred. Amounts received in advance under sales and distribution
agreements for the right to sell and distribute the Company's products are recognized as revenues on a straight-line basis over the term of such agreements.



For
the years ended March 31, 2003, 2002 and 2001, there were no reconciling items between the numerators and denominators of the Basic and Diluted net loss per Common Share
computations.

Years ended March 31,

2003

2002

2001Basic and Diluted Loss Per ShareNet loss

$
(1,775
)
$
(2,589
)
$
(1,067
)Weighted average Common Shares outstanding


17,840,000


17,033,000


15,997,000Net loss per Common Share

$
(0.10
)
$
(0.15
)
$
(0.07
)


For
the years ended March 31, 2003 and 2002 warrants and options to purchase Common Stock shares of the Company and convertible debentures were outstanding, but were not included
in the computation of Diluted net loss per common share because the inclusion of these securities would have had an antidilutive effect on the net loss per common share. As of March 31, 2003,
warrants and options to acquire 1,358,430 shares of the Company's common stock and debentures convertible into 1,923,077 shares of the Company's common stock were outstanding. As of March 31,
2002, warrants and options to acquire 969,030 shares of the Company's common stock and debentures convertible into 825,333 shares of the Company's common stock were outstanding. As of March 31,
2001, warrants and options to acquire 994,030 shares of the Company's common stock and debentures convertible into 833,333 shares of the Company's common stock were outstanding.



Research
and development and advertising costs are expensed as incurred.



Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the 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 carryforwards. 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 effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.



The
Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,Accounting for Stock
Issued to Employees, and related interpretations, in accounting for its fixed plan stock options issued to employees, including

34

---

nonemployee
directors. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company applies
the fair value-based method of accounting prescribed by Statement of Financial Accounting Standards ("SFAS") No. 123,Accounting for Stock-Based
Compensation, in accounting for its fixed plan stock options issued to outside third parties other than nonemployee directors. As such, expenses representing the fair value of
stock-based awards on the date of grant are recognized over the vesting period.

As
allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above for employee stock options, and has adopted
only the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net loss and net loss per common share if the Company had applied the fair-value
method under SFAS No. 123 to its employee stock options.

2003

2002

2001Net loss, as reported

$
(1,775
)
$
(2,589
)
$
(1,067
)Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards


(89
)

(121
)

(316
)Pro forma net loss

$
(1,864
)
$
(2,710
)
$
(1,383
)Net loss per common shareBasic and DilutedAs reported

$
(0.10
)
$
(0.15
)
$
(0.07
)Pro forma

$
(0.10
)
$
(0.16
)
$
(0.09
)




SFAS
No. 144 provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held
for sale; and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. The Company
adopted SFAS No. 144 on April 1, 2002. The adoption of SFAS No. 144 did not affect the Company's consolidated financial statements.

In
accordance with SFAS No. 144, 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 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 by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the
lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately
in the appropriate asset and liability sections of the balance sheet.

Goodwill
and intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the
asset might be

35

---

impaired.
An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value.

Prior
to the adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."



As
the Company's operations are solely related to microalgae-based products, management considers its operations to be one industry segment.



The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ significantly from those estimates.



In
June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs would be capitalized as part of the carrying
amount of the long-lived asset and depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is
settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The provisions of SFAS No. 143 are effective for fiscal years beginning
after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material effect on the Company's financial condition, results of operations or liquidity.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 requires
issuers to classify as liabilities (or assets in some circumstance) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003.
Adoption of SFAS No. 150 is not expected to have a material effect on the Company's financial condition, results of operations or liquidity.

In
November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements are effective for financial statements of interim or annual periods ending after

36

---

December 15,
2002. The adoption of FIN No. 45 did not have a material effect on the Company's financial condition, results of operations or liquidity.

In
January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities," which addresses the consolidation of variable interest entities ("VIE") as
defined. FIN No. 46 applies immediately to variable interests in VIEs created after January 31, 2003, and to variable interests in VIEs obtained after January 31, 2003. For a
variable interest in a VIE acquired before February 1, 2003, FIN No. 46 is to be applied no later than the beginning of the first interim or annual reporting period beginning after
June 15, 2003. The adoption of FIN No. 46 did not have a material effect on the Company's financial condition, results of operations or liquidity.

Note 2    Inventories

Inventories consists of the following as of March 31, 2003 and 2002

2003

2002Raw materials

$
161

$
115Work in process


117


192Finished goods


1,028


559Supplies


94


128$
1,400

$
994


Note 3    Equipment and Leasehold Improvements, Net

Equipment and leasehold improvements consists of the following as of March 31, 2003 and 2002:

2003

2002Equipment

$
9,631

$
9,382Leasehold improvements


14,173


14,024Furniture and fixtures


83


8323,887


23,489Less accumulated depreciation and amortization


(11,341
)

(10,017
)Construction in-progress


231


459Equipment and leasehold improvements, net

$
12,777

$
13,931


Note 4    Accrued Expenses

Components of accrued expenses as of March 31, 2003 and 2002 are as follows:

2003

2002Accrued wages, commissions and royalties

$
210

$
136Accrued interest


34


34Other accrued expenses


145


46$
389

$
216


37

---

Note 5    Long-Term Debt

Term Loan Agreement

On April 21, 2000, the Company executed a Term Loan Agreement ("Term Loan") with a lender which provided for $3.5 million in aggregate credit
facilities, secured by substantially all the assets of the Company. The Term Loan has a maturity date of May 1, 2010 and is payable in 120 equal monthly principal and interest payments of
approximately $40,000, commencing June 1, 2000 ($39,000 at March 31, 2003 and 2002). The interest rate under this Term Loan, 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% (at March 31, 2003 and 2002, the prime rate was 4.25% and 4.75%, respectively). Interest is
calculated on the unpaid balance of principal based on a straight-line amortization schedule commencing May 1, 2000. Of the loan proceeds, $500,000 has been deposited in an
interest-bearing restricted cash account per the terms of the loan, with such amount included in other assets in the consolidated balance sheets at March 31, 2003 and 2002. A warrant to
purchase 20,000 shares of the Company's common stock was issued in conjunction with this Term Loan agreement. The warrant expires in April 2011 and has an exercise price of $2.55 per share. The
warrant may only be exercised after the Company has repaid the Term Loan in full.

The
Term Loan contains restrictive covenants which included, among others, maintenance of an annual minimum debt service coverage ratio. The Company failed to meet this covenant
requirement for the year ended March 31, 2002 but received from the lender a waiver of the covenant violation until the year ending March 31, 2003. In October 2002, this covenant
was deleted from the Term Loan by the lender. At March 31, 2003 the Company was in compliance with all restrictive covenants of the Term Loan.

In
connection with the Term Loan the Company is prohibited from declaring any common stock dividends without the lender's prior written consent.

Convertible Debentures due April 30, 2002

On May 2, 2000, the Company completed a private placement of $1,250,000 principal amount 6% convertible subordinated debentures ("Debentures") due
April 30, 2002, with net proceeds to the Company of approximately $1.1 million. Interest on these Debentures was to be paid quarterly, in arrears, at a rate of 6% per annum. The
Debentures were convertible into shares of the Company's common stock at a conversion price of $1.50 per share, the market price of the Company's common stock at the date of issuance. Warrants to
purchase 83,334 shares of the Company's common stock were issued to the placement agent of the Debentures, exercisable for five years from the issue date, at $1.80 per share. At March 31, 2002
and 2001, the outstanding principal amount of these debentures were $1,238,000 and $1,250,000 respectively.

In
May 2002, the Company reached an agreement with the holders of the Debentures to extend the maturity date by six months to October 31, 2002. In exchange for the
extension, the Company agreed to: 1) reduce the conversion price from $1.50 per share to $1.00 per share (the approximate market value at date of issuance); 2) increase the interest rate
during the remaining period the Debentures are outstanding from 6% to 10%; 3) issue two-year warrants to the Debenture holders to purchase additional shares of common stock of
Cyanotech in an amount equal to thirty percent (30%) of the shares into which the Debentures are convertible at $1.10 per share; and 4) reduce the forced conversion price at which the Company
can require the conversion of the Debentures from $3.00 per share to $1.50 per share. The terms of the aforementioned warrant issued to the placement agent in

38

---

conjunction
with the initial placement were also revised in this extension agreement. Under the terms of the extension, the warrant exercise price was reduced to $1.10 per share and the expiration
date was accelerated to May 2004. As a result of this renegotiation of debt, the Company recorded a charge of approximately $236,000 during the year ended March 31, 2003, of which
approximately $223,000 was a non-cash charge. These Debentures were retired in their entirety in October 2002.

Convertible Debentures due September 30, 2004

In October 2002, the Company issued in a private placement (a) $1,250,000 principal amount of 10% convertible subordinated debentures, due
September 30, 2004, convertible into shares of the Company's common stock at a price of $0.65 per share and (b) 750,000 shares of common stock with proceeds to the Company of $300,000.
Proceeds from the 10% convertible subordinated debentures issued in October were used to retire convertible debentures of $1,238,000 which were due to mature on October 31, 2002. The remaining
net proceeds from the issuance of common stock are to be used for working capital purposes. Subsequent to the transaction the debenture holder was elected to the Company's Board of Directors.

Long-term
debt consists of the following as of March 31, 2003 and 2002:

2003

2002Term loan

$
2,767

$
3,070Convertible subordinated debentures


1,250


1,238Total long-term debt


4,017


4,308Less current maturities of long-term debt


(323
)

(1,543
)Long-term debt, excluding current maturities

$
3,694

$
2,765


At
March 31, 2003, the aggregate maturities of long-term debt are as follows:

Year ending March 31:2004

$
3232005


1,5922006


3632007


3842008


407Thereafter


948$
4,017


Note 6    Leases

The Company leases facilities, equipment and land under operating leases expiring between 2004 and 2025.

39

---

Future
minimum lease payments under non-cancelable operating leases at March 31, 2003 are as follows:

Year ending March 31:2004

$
2242005


2232006


2232007


2232008


186Thereafter, through 2025


2,480Total minimum lease payments

$
3,559


Total
rent expense under operating leases amounted to $218, $286 and $329 for the years ended March 31, 2003, 2002 and 2001, respectively.

The
land leases provide for contingent rentals in excess of minimum rental commitments based on a percentage of the Company's sales. Contingent rentals for the years ended
March 31, 2003, 2002 and 2001 were not material.

During
1997, we reached a preliminary agreement with the State of Hawaii to lease an additional 93 acres at the HOST Park on a year-to-year basis, until such time
that the Company determined the need for a longer lease term. Due, in large part, to improvements made in our astaxanthin cultivation techniques during fiscal 2002 and 2003 we concluded that our
existing 90 acre facility would be sufficient for near future projections and terminated our lease on the entire 93 acre expansion parcel during the first quarter of fiscal 2003. In the event we need
to expand beyond our current 90 acre facility there is sufficient available land at the HOST Park to meet our currently planned needs.

Note 7    Series C Preferred Stock

During the first three quarters of fiscal 2001, all outstanding shares of Series C preferred stock totaling 471,031 shares were converted into 2,355,155
shares of common stock. As a result of this conversion, cumulative dividends in arrears on these converted shares, totaling approximately $2.1 million at the time of conversion, were no longer
payable.

Note 8    Stock Options and Warrants

Stock Options

The Company's 1995 Stock Option Plan (the "1995 Plan"),approved by the stockholders in 1995, reserves a total of 800,000 shares of common stock for issuance under
the Plan. The 1995 Plan provides for the issuance of both incentive and non-qualified stock options. Options are to be granted at, or above, the fair market value of the Company's common
stock at the date of grant and generally become exercisable over a five-year period.

The
Company also has a Non-employee Director Stock Option and Stock Grant Plan, approved by stockholders in 1994 (the "1994 Plan") which reserves a total of 100,000 shares of
common stock for issuance under the Plan. Under the 1994 Plan, and upon election to the Board of Directors, non-employee directors are granted a ten-year option to purchase
3,000 shares of the Company's

40

---

common
stock at its fair market value on the date of grant. In addition, on the date of each Annual Meeting of Stockholders in each year that the 1994 Plan is in effect, each non-employee
director continuing in office will be automatically granted, without payment, 2,000 shares of common stock that is non-transferable for six months following the date of grant. Grants
aggregating 8,000 shares of common stock were made under the 1994 Plan in August 2002. Grants aggregating 6,000 shares of common stock were made under the 1994 Plan in August 2001 and
2000. Expense recognized as a result of these stock grants amounted to $8 for the year ended March 31, 2003, $6 for the year ended March 31, 2002 and $10 for the year ended
March 31, 2001.

At
March 31, 2003 there were 48,854 shares available for grant under the 1995 Plan and 24,000 shares available under the 1994 Plan. The per share weighted-average fair value of
stock options granted during 2003, 2002 and 2001 was $0.48, $0.84 and $1.35, respectively, on the date of grant using a Black Scholes option-pricing model with the following weighted-average
assumptions: 2003expected dividend yield of 0%, risk-free interest rate of 3.3%, expected volatility of 113%, and an expected life of 4.0 years;
2002expected dividend yield of 0%, risk-free interest rate of 4.5%, expected volatility of 120%, and an expected life of 4.3 years; 2001expected dividend
yield of 0%, risk-free interest rate of 6.0%, expected volatility of 106%, and an expected life of 4.2 years.

Stock
option activity during the periods indicated is as follows:

Number of shares

Weighted-average
exercise priceBalance at March 31, 2000

717,796

$
3.68Granted

233,800


1.69Exercised

(6,250
)

0.97Expired

(87,200
)

5.13Forfeited

(92,450
)

2.64Balance at March 31, 2001

765,696


3.05Granted

164,000


1.00Exercised




Expired

(96,300
)

7.63Forfeited

(92,700
)

2.26Balance at March 31, 2002

740,696


2.10Granted

142,500


0.59Exercised




Expired

(72,900
)
$
6.31Forfeited

(51,600
)

1.46Balance at March 31, 2003

758,696

$
1.46


41

---

The
following table summarizes information about stock options outstanding at March 31, 2003:

|               |  | Options Outstanding |  | Options Exercisable
|-------------- |  | ------------------- |  | -------------------
|
|$.51 to $1.69  |  | 639,796             |  | 2.8 years          
|$3.13 to $3.69 |  | 115,900             |  | 1.2 years          
|$6.13          |  | 3,000               |  | 3.5 years          
|               |  |                     |  |                    
|$.51 to $6.13  |  | 758,696             |  | 2.6 years          
|               |  |                     |  |                    

Warrants

At March 31, 2003 and 2002, the Company has warrants outstanding to acquire 599,734 and 228,334 shares of the Company's common stock respectively. A
warrant to acquire 75,000 shares of common stock was granted in December 1999 in consideration for services provided by a third party. The warrant
is exercisable at $.63 per share, and expires in December, 2004. A warrant to acquire 50,000 shares of common stock was granted on January 19, 2000 in connection with the purchase of 50,000
shares of the Company's common stock by an existing stockholder. The warrant is exercisable at $1.00 per share, and expires in January, 2005. A warrant to acquire 20,000 shares of common stock was
granted in April 2000 in conjunction with completion of a term loan agreement. The warrant is exercisable at $2.55 per share, and expires in April 2011. Warrants to acquire 83,334 shares
of common stock were granted in May 2000 in conjunction with completion of a private placement of convertible debentures. The warrants were exercisable at $1.80 per share, and were to expire in
May 2005. However, under the terms of the convertible debenture maturity extension (see Note 5), the warrant exercise price was reduced to $1.10 per share and the expiration date has
been accelerated to May 2004. Also in conjunction with the convertible debenture mature extension in May 2002, warrants to acquire 371,400 shares of common stock were granted to the
debenture holders. The warrants are exercisable at $1.10 per share and expire in May 2004.

Note 9    Major Customers and Export Sales

Sales (as a percent of product sales) to the Company's major customer for the years ended March 31, 2003, 2002 and 2001 were 17%, 13% and 19% respectively.

42

---

Net
product sales by geographic area for the years ended March 31, 2003, 2002 and 2001 are summarized as follows:

|                                  |  | 2003 |       | 2002 |     | 2001 |  
|--------------------------------- |  | ---- | ----- | ---- | --- | ---- | -
|United States                     |  | $    | 4,149 |      | 46  | %    | $
|Canada/South America              |  |      | 268   |      | 3   | %    |  
|The Netherlands                   |  |      | 1,550 |      | 17  | %    |  
|Europe, excluding the Netherlands |  |      | 977   |      | 11  | %    |  
|Japan                             |  |      | 1,043 |      | 12  | %    |  
|Asia/Pacific, excluding Japan     |  |      | 964   |      | 11  | %    |  
|                                  |  |      |       |      |     |      |  
|                                  |  | $    | 8,951 |      | 100 | %    | $
|                                  |  |      |       |      |     |      |  

Sales
made through the Company's subsidiary, Cyanotech Japan YK, are transacted in Japanese yen and converted to US dollars for consolidation purposes.

Note 10    Income Taxes

The income tax benefit for the years ended March 31, 2003, 2002 and 2001 represent current state tax refunds.

A
reconciliation of the amount of income taxes computed at the federal statutory rate of 34% to the amount reflected in the Company's consolidated statements of operations for the years
ended March 31, 2003, 2002 and 2001 follows:

2003

2002

2001Amount at the federal statutory income tax rate

$
(607
)
$
(883
)
$
(366
)State income taxes, net of federal income tax effect


(6
)

(6
)

(5
)Increase in the valuation allowance for deferred tax assets


727


1,017


1,374Other


(123
)

(137
)

(11
)$
(9
)
$
(9
)
$
(8
)


The
significant components of deferred income taxes for the years ended March 31, 2003, 2002 and 2001 are as follows:

2003

2002

2001Deferred tax benefit, exclusive of the change in beginning-of-the-year valuation allowance balance

$
(727
)
$
(1,017
)
$
(374
)Increase in beginning-of-the-year balance of the valuation allowance for deferred tax assets


727


1,017


374$


$


$



43

---

The
tax effects of temporary differences related to various assets, liabilities and carryforwards that give rise to deferred tax assets and deferred tax liabilities as of
March 31, 2003 and 2002 are as follows:

2003

2002Deferred tax assets:Net operating loss carryforwards

$
5,487

$
4,771Leasehold improvement, impairment loss for financial reporting purposes


1,062


1,062Tax credit carryforwards


171


186Other


137


125Gross deferred tax assets


6,857


6,144Less valuation allowance


(5,266
)

(4,539
)Net deferred tax assets


1,591


1,605Deferred tax liabilityequipment and leasehold improvements, principally due to differences in depreciation and amortization


(1,591
)

(1,605
)Net deferred tax asset

$


$



The
valuation allowance for deferred tax assets as of April 1, 2002, 2001and 2000 was $4,539, $3,522 and $3,148, respectively. The valuation allowance increased by $727, $1,017
and $374 during the years ended March 31, 2003, 2002 and 2001, respectively. 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 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 the net deferred tax assets are deductible, management believes it
is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at March 31, 2003. The amount of the deferred tax assets
considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

44

---

At
March 31, 2003, the Company has net operating tax loss carryforwards and tax credit carryforwards available to offset future federal income taxes as follows:

Expires March 31,

Net operating
losses

Research and
experimentation
tax credits2004

$


$
522005





42006


400


2011





232012


44


92013


1,601


2019


3,632


2020


2,051


2021


1,727


2022


3,161


2023


1,799


$
14,415

$
88


In
addition, at March 31, 2003, the Company has alternative minimum tax credit carryforwards of approximately $83 which are available to reduce future federal regular income taxes
over an indefinite period.

At
March 31, 2003, the Company has tax net operating loss carryforwards of $9,761, which expire in March 31, 2019 through 2023, available to offset future Hawaii state
taxable income.

Note 11    Fair Value of Financial Instruments

SFAS Statement No. 107, "Disclosures about Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which
the instrument could be exchanged in a current transaction between willing parties.

The
following methods and assumptions were used to estimate the fair value of each class of financial instruments as of March 31, 2003 and 2002.

Cash and Cash Equivalents

The carrying amounts approximate fair value because of the short-term nature of these instruments.

Long-Term Debt

The carrying amounts approximate fair value because the interest rates on the long-term debt reprice quarterly at market rates or approximates current
market rates for similar debt instruments of comparable maturities.

45

---

Note 12    Profit Sharing Plan

The Company sponsors a 401(k) profit sharing plan for all associates not covered under a separate management incentive plan. Under the 401(k) profit sharing plan,
5% of pre-tax profits may be allocated based on gross wages to non-management associates on a quarterly basis. Fifty percent of each associate's profit sharing bonus is
distributed in cash on an
after-tax basis, with the remainder deposited in each associate's 401(k) account on a pre-tax basis with a six year vesting schedule, based on years of service with the
Company. All associates may make voluntary pre-tax contributions to their 401(k) accounts; Company contributions are discretionary. Compensation expense relative to this plan was nil for
each of the three years ended March 31, 2003, 2002 and 2001.

Note 13    Commitments and Contingencies

In the fourth quarter of fiscal 2001, Cyanotech and Aquasearch settled a patent suit without admission of liability by either party. Terms of the agreement are
confidential. Under this agreement, Cyanotech agreed to an injunction that prevents it from using any tube system for microalgal production that infringes Aquasearch's U.S. Patent
No. 5,541,056. Aquasearch agreed that Cyanotech's current proprietary process for producing microalgae, known as thePhytoDome CCSsystem, does
not infringe its aforementioned patent. Both parties agreed to dismiss, with prejudice, all claims that the parties asserted in the litigation. The Court entered an Order to that effect and that
Aquasearch's aforementioned patent is valid and enforceable. Cyanotech further agreed to pay Aquasearch an undisclosed settlement, including royalties, for a limited time, on future sales of BioAstin.
Amounts due at March 31, 2003 under this settlement have been fully accrued by the Company. Cyanotech management does not expect that
future royalty payments will have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.

Note 14    Selected Quarterly Financial Data (Unaudited)

|                          |                         | First
Quarter |       | Second
Quarter |   | Third
Quarter |       | Fourth
Quarter |       | Total
Year |  
|------------------------- | ----------------------- | ------------- | ----- | -------------- | - | ------------- | ----- | -------------- | ----- | ---------- | -
|
|2003                      |                         |               |       |                |   |               |       |                |       |            |  
|Net sales                 |                         | $             | 2,032 |                | $ | 2,018         |       | $              | 2,474 |            | $
|Gross profit              |                         |               | 785   |                |   | 568           |       |                | 711   |            |  
|Net loss                  |                         |               | (785  | )              |   | (540          | )     |                | (180  | )          |  
|Net loss per common share |                         |               |       |                |   |               |       |                |       |            |  
|                          | Basic and Diluted(b)    |               |       | (0.05          | ) |               | (0.03 | )              |       | (0.01      | )
|2002                      |                         |               |       |                |   |               |       |                |       |            |  
|Net sales                 |                         | $             | 2,313 |                | $ | 1,951         |       | $              | 1,916 |            | $
|Gross profit(a)           |                         |               | 678   |                |   | 491           |       |                | 53    |            |  
|Net loss(a)               |                         |               | (413  | )              |   | (509          | )     |                | (937  | )          |  
|Net loss per common share |                         |               |       |                |   |               |       |                |       |            |  
|                          | Basic and Diluted(a)(b) |               |       | (0.02          | ) |               | (0.03 | )              |       | (0.05      | )

---

46

---

Note 15    Financial Condition and Liquidity

The Company's consolidated financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and
liquidation of liabilities in the ordinary course of business. During the years ended March 31, 2003, 2002 and 2001, the Company incurred losses of $1,775, $2,589 and $1,067, respectively. The
Company's working capital at March 31, 2003 was $2,352 with cash and cash equivalents amounting to $579. Net cash and cash equivalents used in operating activities for the years ended
March 31, 2003 and 2002 amounted to $502 and $567, respectively.

The
Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms of its
financing agreements, to obtain additional financing or refinancing as may be required, to attain profitability, or a combination thereof. Unless it is successful, there may be liquidity shortfalls in
future periods. The Company is pursuing several sources of additional financing but there can be no assurance that these efforts will be successful or that the Company will have sufficient cash
resources to support its continued operations. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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

Not applicable.

47

---



Part III

Item 10. Directors and Executive Officers; Compliance with Section 16(a) of the Exchange Act

(a)   Identification of Directors

The information required by this Item is incorporated by reference from the Sections captioned "Proposal One: Election of Directors," "Certain Transactions,"
"Security Ownership of Certain Beneficial Owners and Management" and "Compliance with Section 16(a) of the Exchange Act" contained in Cyanotech's definitive 2003 Proxy Statement.

(b)   Identification of Executive Officers

The executive officers of Cyanotech and their ages and positions as of March 31, 2003 are as follows:

Name

Age

PositionGerald R. Cysewski, Ph.D.

54

Chairman of the Board, President and Chief Executive OfficerJeffrey H. Sakamoto

45

Vice PresidentFinance and Administration, Secretary and TreasurerGlenn D. Jensen

44

Vice PresidentOperationsRobert J. Capelli

43

Vice PresidentSalesR. Shane Rohan

43

Vice PresidentProduction


Dr. Cysewskico-founded Cyanotech in 1983 and has served as a director since that time. Since March 1990,
Dr. Cysewski has served as President and Chief Executive Officer of Cyanotech and in October 1990 was also appointed to the position of Chairman of the Board. From 1988 to
November 1990, he served as Vice Chairman and from 1983 to June, 1996, he served as Scientific Director of the Company. From 1980 to 1982, Dr. Cysewski was group leader of microalgae
research and development at Battelle Northwest, a major contract research and development firm. From 1976 to 1980, Dr. Cysewski was an assistant professor in the Department of Chemical and
Nuclear Engineering at the University of California, Santa Barbara, where he received a two-year grant from the National Science Foundation to develop a culture system for
blue-green algae. Dr. Cysewski received his doctorate in Chemical Engineering from the University of California at Berkeley.

Mr. Sakamotowas appointed to Vice PresidentFinance & Administration, Secretary and Treasurer in
March 2003. He joined the Company in 1995 as Accounting Manager and was promoted to Controller in 1997, in which position he served until his promotion to his present position. Prior to joining
Cyanotech, Mr. Sakamoto served as Assistant Controller for Hale Makua, Inc., a healthcare organization and as Accounting Manager for the Hawaii Division of Fleming Foods.
Mr. Sakamoto holds a B.B.A. degree in Accounting from the University of Hawaii at Manoa.

Mr. Jensenhas served as Vice PresidentOperations since May 1993. He joined Cyanotech in 1984 as Process
Manager and was promoted to Production Manager in 1991, in which position he
served until his promotion to Vice PresidentOperations. Prior to joining Cyanotech, Mr. Jensen worked for three years as a plant engineer at a spirulina production facility,
Cal-Alga, near Fresno, California. Mr. Jensen holds a B.S. degree in Health Science from California State University, Fresno.

Mr. Capellihas served as Vice PresidentSales since March 2002. He joined Cyanotech in January 2002 as
Director of Sales. Prior to joining Cyanotech, Mr. Capelli was Senior Sales Manager for Forecite-The Source, a division of Tree of Life, Inc. Mr. Capelli holds a B.A.
degree from Rutgers University.

48

---

Mr. Rohanhas served as Vice PresidentProduction since July 2000. From April 1994 to July 2000,
he served as Production Manager. Mr. Rohan joined Cyanotech as a Culture Biologist in November 1992. Prior to joining Cyanotech, Mr. Rohan worked as a Senior Research Assistant in
the Marine Biology Department at the Scripps Institute of Oceanography. Mr. Rohan holds a B. S. degree in Marine Natural Products Chemistry from the University of California, San Diego.

Item 11. Executive Compensation

The information required by this Item is incorporated by reference from the section captioned "Executive Compensation and Other Information," "Director
Remuneration" and "Stockholder Return Performance Graph" contained in Cyanotech's definitive 2003 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 by reference from the section captioned "Security Ownership of Certain Beneficial Owners
and Management" contained in Cyanotech's definitive 2003 Proxy Statement.

Equity Compensation Plan Information

The following table provides information about the Company's common stock that may be issued upon the exercise of options and rights under all of the Company's
existing equity compensation plans as of March 31, 2003, including the 1994 Non-employee Director Stock Option and Stock Grant Plan and the 1995 Stock Option Plan.

|Plan Category                                           |                                                              | Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights |              | Weighted-average
exercise price of
outstanding
options,
warrants and rights |      | Number of securities
remaining available for
future issuance under
equity compensation plans
|------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------------------------------------------------- | ------------ | --------------------------------------------------------------------------- | ---- | --------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders: |                                                              |                                                                                             |              |                                                                             |      |                                                                                             
|                                                        | 1994 Non-employee Director Stock Option and Stock Grant Plan |                                                                                             | 15,000 Shr.  |                                                                             | $    | 2.36                                                                                        
|                                                        | 1995 Stock Option Plan                                       |                                                                                             | 743,696 Shr. |                                                                             | $    | 1.44                                                                                        
|                                                        |                                                              |                                                                                             |              |                                                                             |      |                                                                                             
|Total                                                   |                                                              | 758,696 Shr.                                                                                |              | $                                                                           | 1.46 |                                                                                             
|                                                        |                                                              |                                                                                             |              |                                                                             |      |                                                                                             

Item 13. Certain Relationships and Related Transactions

Not applicable.

Item 14. Controls and Procedures

In accordance with Item 307 of Regulation S-K promulgated under the Securities Act of 1933, as amended, and within 90 days of the date
of this Annual Report on Form 10-K, the Chairman of the Board, President and Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") of the Company (the "Certifying
Officers") have conducted an evaluation of the Company's disclosure controls and procedures. As defined under Sections 13a-14(c) and 15d-14(c) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the term "disclosure controls and procedures" means controls and other procedures of an issuer that are designed to ensure that information required to be
disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and
forms. Disclosure controls and procedures include, without limitation, controls and procedures designed

49

---

to
ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including
its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosure.

Based
on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and
forms. Subsequent to the date of their evaluation, there were no significant changes in the Company's internal controls or in other factors that could significantly affect the disclosure controls,
including any corrective actions with regard to significant deficiencies and material weaknesses

Part IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)The following Consolidated Financial Statements, Financial Statement Schedules and Exhibits of Cyanotech Corporation and its
subsidiaries are filed as part of this report or incorporated herein:



Schedule II Valuation and Qualifying Accounts

52Independent Auditors' Report

53


Schedules
not listed above are omitted because of the absence of the conditions under which they are required or because the required information is included in the consolidated
financial statements or notes thereto.

50

---



|Exhibit Number |  | Document Description                                                                                                                                                                                                                                                      
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-QSB for the quarter ended December 31, 1996, file no. 0-14602.)                                                                                
|3.2            |  | Bylaws of the Registrant, as amended. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995, file no. 0-14602.)                                                                              
|4.1            |  | Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form SB-2 filed on February 28, 1996, file no. 333-00951.)                                                                                        
|10.1           |  | Stockholders Agreement dated as of May 17, 1993. (Incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1994, file no. 0-14602.)                                                                    
|10.2           |  | 1994 Non-Employee Directors Stock Option and Stock Grant Plan. (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.)                                                      
|10.3           |  | 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.)                                          
|10.4           |  | 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.)
|10.5           |  | 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 014602.)                                            
|11.1           |  | Statement re: Computation of Earnings per Share.                                                                                                                                                                                                                          
|21.1           |  | Subsidiaries of the Company.                                                                                                                                                                                                                                              
|23.1           |  | Consent of Independent Auditors.                                                                                                                                                                                                                                          
|99.1           |  | Risk Factors                                                                                                                                                                                                                                                              
|99.2           |  | CEO Certification.                                                                                                                                                                                                                                                        
|99.3           |  | CFO Certification.                                                                                                                                                                                                                                                        

(b)   Reports on Form 8-K

The Registrant did not file any reports on Form 8-K during the fourth quarter of the 2003 fiscal year.

No
Annual Report to Stockholders or proxy material have been sent to Stockholders as of this date. Such report and proxy material will be furnished to Stockholders after the filing of
this Form and copies of such materials will be furnished to the Commission when they are sent to Stockholders.

51

---



Schedule II

Cyanotech Corporation and Subsidiaries  Valuation and Qualifying Accounts (in thousands)  Years Ended March 31, 2003, 2002 and 2001

|Column A                           |      | Column B |   | Column C |  | Column D |  | Column E
|---------------------------------- | ---- | -------- | - | -------- |  | -------- |  | --------
|
|
|Allowance for Doubtful Receivables |      |          |   |          |  |          |  |         
|                                   | 2003 |          | $ | 40       |  | 70       |  |        
|                                   | 2002 |          | $ | 20       |  | 20       |  |        
|                                   | 2001 |          | $ | 10       |  | 10       |  |        

52

---



INDEPENDENT AUDITORS' REPORT

The
Board of Directors
Cyanotech Corporation:

Under
date of May 2, 2003, we reported on the consolidated balance sheets of Cyanotech Corporation and subsidiaries as of March 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity and comprehensive loss, and cash flows for each of the years in the three-year period ended March 31, 2003, as contained
in the 2003 annual report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as listed
in Item 15(a)(2). 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
audits.

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.

The
independent auditors' report on the consolidated financial statements of Cyanotech Corporation referred to above also contains an explanatory paragraph that states that the
consolidated financial statements have been prepared assuming that Cyanotech Corporation will continue as a going concern. As discussed in note 15 to the consolidated financial statements, the
Company has suffered recurring losses from operations and has limited sources of additional liquidity to enable it to sufficiently liquidate its debts as they become due that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard to these matters are also described in note 15. The consolidated financial statements and financial statement
schedule do not include any adjustments that might result from the outcome of this uncertainty.

/s/
KPMG LLP
Honolulu, Hawaii
May 2, 2003

53

---



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 30th day of June, 2003.

| |  | CYANOTECH CORPORATION
| |  | ---------------------
| |  | By:                  

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/GERALD R. CYSEWSKIGerald R. Cysewski, Ph.D. |  | Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer and Director) |  | June 30, 2003
|/s/JEFFREY H. SAKAMOTOJeffrey H. Sakamoto      |  | Vice PresidentFinance and Administration, Secretary and Treasurer                                      |  | June 30, 2003
|/s/MICHAEL A. DAVISMichael A. Davis            |  | Director                                                                                                |  | June 30, 2003
|/s/ERIC H. REICHLEric H. Reichl                |  | Director                                                                                                |  | June 30, 2003
|/s/DAVID I. ROSENTHALDavid I. Rosenthal        |  | Director                                                                                                |  | June 30, 2003
|/s/RONALD P. SCOTTRonald P. Scott              |  | Director                                                                                                |  | June 30, 2003
|/s/JOHN T. WALDRONJohn T. Waldron              |  | Director                                                                                                |  | June 30, 2003
|/s/PAUL C. YUENPaul C. Yuen                    |  | Director                                                                                                |  | June 30, 2003

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CERTIFICATION UNDER EXCHANGE ACT RULE 13A-14 AND 15D-14

I
Gerald R. Cysewski, certify that:

|Date: June 26, 2003 |  | /s/GERALD R. CYSEWSKIGerald R. Cysewski Chief Executive
Officer
|------------------- |  | ---------------------------------------------------------------

55

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CERTIFICATION UNDER EXCHANGE ACT RULE 13A-14 AND 15D-14

I
Jeffrey H. Sakamoto, certify that:

|Date: June 26, 2003 |  | /s/JEFFREY H. SAKAMOTOJeffrey H. Sakamoto Chief Financial
Officer
|------------------- |  | -----------------------------------------------------------------

56

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