Exhibit 13

LOGO

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Cyanotech develops and commercializes natural products from microalgae.

Cyanotech
produces microalgae products for the nutritional supplement, aquaculture feed, animal nutrition, and immunological diagnostics markets.

Microalgae
form a diverse group of over 30,000 species of microscopic plants, which have a wide range of physiological and biochemical characteristics and may contain high levels
of natural proteins, amino acids, vitamins, phytonutrients and enzymes. Microalgae are a largely unexplored and unexploited renewable natural resource, and grow much faster than land-based
plants. Under favorable growing conditions, microalgae may produce a new crop every week.

BioAstin®
is Cyanotech's natural astaxanthin (pronounced "asta-zan-thin") product for use as a human dietary supplement and nutraceutical. Clinical
evaluations have shown that natural astaxanthin can provide such health benefits as helping limit or prevent sunburn as a systemic (oral) sunscreen; alleviate the effects of carpal tunnel syndrome;
promote stomach health by inhibiting Gastroesophageal Reflux Disease (GERD); enhance the immune response system; and reduce pain caused by rheumatoid arthritis. BioAstin has the potential of being a
dietary supplement with a wide range of health benefits. Laboratory comparisons of free radical absorption show astaxanthin contained in BioAstin, acting as an antioxidant, to be 500 times stronger
than vitamin E and 10 times stronger than beta-carotene.

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

NatuRose®
is the Company's natural astaxanthin product for the aquaculture industry. It acts as a natural pigment to impart a pink-red color to
farm-raised fish and shrimp. Aquaculture sales of synthetic astaxanthin made from petrochemicals exceed $200 million per year. The Company sells NatuRose to feed producers,
principally in Japan, for the popular "Tai" or Sea Bream. Demand for NatuRose promises to increase as more aquaculture producers seek Cyanotech's all-natural product over synthetic
pigments.

Cyanotech
has 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. The Company's technologies, systems, processes and favorable growing location permit year-round harvesting of its
microalgae products in a cost-effective manner.

Cyanotech
maintains an environmentally responsible philosophy in the development and production of its products, using natural production methods and resources which employ extensive
recycling of raw materials and nutrients. The Company believes that these recycling methods result in lower operating costs. The production system operates without the use of pesticides and
herbicides, and does not create erosion, fertilizer runoff or water pollution. Cyanotech was the first producer of microalgae to receive third-party organic certification and also the first microalgae
company in the world to have an ISO 9002 Registered Quality System.

In
recent years, Cyanotech has deliberately expanded its prospects beyond single-product and single-customer dominance.

In
fiscal 2002, that effort came to fruition. We now have multiple productsBioAstin®, Spirulina Pacifica® and
NatuRose®providing these important customer benefits, among others:



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We
sell through multiple channelsfrom our own branded products sold directly online and through retailers, to private label packaged products sold to others, to wholesale
bulk products sold to manufacturers. We market in the United States and 30 countries around the world from the Kona Coast of Hawaii. We are the world's leading producer of high-value
products from microalgae and the largest producer of natural astaxanthin.

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To our stockholders:Bringing new products to market is challenging, particularly for a company
with
limited resources, like Cyanotech. Yet, we believe that fiscal 2002, while not successful financially, was indeed fruitful in terms of the advances we made in validating certain health benefits of our
leading products, especially BioAstin. As a result, there is growing adoption of our products in formulations by other dietary supplement and skincare companies, both in the United States and
overseas.

There
is clearly a groundswell of visibility, acceptance and adoption of BioAstin growing as we progress into fiscal 2003. We began the new fiscal year operating at full capacity to meet
current and projected demand for all of our products and we hope it will pay off in increased sales and a return to profitability in fiscal 2003.



We
ran several clinical evaluations and studies during the past 18 months for our natural astaxanthin product, BioAstin. One study tested the product as a systemic sunscreen and found that
BioAstin does effectively act to increase the time required for a person to accumulate the radiant energy or ultraviolet light required for reddening of the skin, in effect, retarding sunburn. We
applied for and received a U.S. patent for the use of BioAstin natural astax-anthin as a sunscreen. The patent covers the use of natural and synthetic astaxanthin as a single active ingredient to
retard and prevent sunburn in both oral and topical applications. Other companies, like the Sea & Ski skincare products company (www.sea-and-ski.com) have added natural
astaxanthin to their product formulations for use as a topical sunscreen and skin protector as well. The additional protective quality comes from natural astaxanthin's proven value as an
antioxidant500 times stronger than vitamin E and 10 times stronger than beta-carotene. We are also working with other suncare and skincare companies who are considering using
BioAstin in their formulations. Cyanotech is the largest supplier in the world of natural astaxanthin from microalgae.

We
conducted two separate tests on the effectiveness of BioAstin for the treatment of Carpel Tunnel Syndrome (CTS). The conclusion of these two tests was that correct dosages of BioAstin
were effective in CTS treatment as the participants showed improvement as to both the severity and duration of their pain. Twinlab Corporation, a new customer for Cyanotech and a leading nutraceutical
manufacturer and marketer, is one of the companies planning to address the CTS market segment using BioAstin in
its new "Carp-L-Care" product. In a clinical trial of BioAstin to determine its ability to lower cholesterol levels, it was confirmed that BioAstin had no negative impact in 36
different blood measurements, therefore, proving it's safety for human supplementation.

Other
trials showed that BioAstin prevents knee and joint soreness and increases immune system response after strenuous exercise, which may lead to important applications for sports
nutrition. One of the most startling results was the recent finding that BioAstin significantly reduces joint pain and improves physical performance in people with rheumatoid arthritis. We are just
beginning to assess the implications of this health benefit.



With
several feeding trials completed, NatuRose natural astaxanthin has been found particularly effective in Japanese aquaculture for pigmenting the popular "Tai" or Sea Bream fish that is heavily
farmed for the Japanese market. One of the largest producers of aquaculture feed in Japan has become a customer of Cyanotech and has begun to use NatuRose in its feed formulations rather than
synthetic astaxanthin. Others are following suit. To serve this growing market effectively, we formed Cyanotech Japan YK. Initially we will market NatuRose and Spirulina Pacifica to the Japanese
animal feed market and later offer BioAstin and Spirulina Pacifica to the human nutrition market. Cyanotech now can

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economize on shipping, provide more timely delivery to customers and allow customers to conduct business in Japanese Yen rather than US Dollars.



Spirulina
Pacifica, Cyanotech's original product, continues to be sold directly and through resellers in 18 countries around the world despite heavy price competition by producers of lower quality
product. Cyanotech's largest customer, Spirulina International BV, based in The Netherlands, markets Spirulina throughout western Europe and South Africa. In fiscal 2002, a study by Japanese
researchers resulted in new clinical evidence suggesting that the use of Spirulina stimulates the human immune response to cancer. The researchers at the Osaka Center for Cancer and Cardiovascular
Diseases found that a hot water extract of Spirulina taken orally caused a statistically significant increase in both the number and the effectiveness of immune cells called natural killer cells.



We
have accomplished much of what we sought: to secure a proprietary position for certain major health claims and to develop products that address those benefits; to develop distribution alliances
with major end-product manufacturers to place BioAstin products in the marketplace; and to expand direct sales and marketing of our higher margin, finished Spirulina and BioAstin consumer
products. During fiscal 2002 the Company invested significant resources to increase distribution, brand awareness, and sales of its Nutrex Hawaii brand of Spirulina Pacifica consumer products. As a
result, sales of the higher-margin Nutrex Hawaii products increased 55% during the year to $2.1 million and now accounts for 25% of sales. We can now meet increased demand with 68 large culture
ponds on 90 acres producing microalgae productsand additional acreage is partially prepared for more culture ponds. The total available acreage could generate revenues of
$25 million to $70 million annually, depending upon product mix. With our growing number of customers, we hope to put this capacity to productive use in fiscal 2003.

| |  |                                                                                           
| |  | ------------------------------------------------------------------------------------------
| |  | /s/ Gerald R. Cysewski
Gerald R. Cysewski, Ph.D.
Chairman, President and CEO
June 24, 2002

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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, 2002. 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 2002 Annual
Report to Stockholders consisting of this Management Discussion, 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, 2002, 2001 and 2000, the Company incurred losses of $2,589,000, $1,067,000 and $4,485,000, respectively. The
Company's working capital at March 31, 2002 was $1,008,000. As further described in Liquidity and Capital Resources, in May 2002 the Company reached an agreement with the holders of the
6% convertible subordinated debentures ("Debentures") aggregating $1,238,000 at March 31, 2002, to extend the original maturity date by six months to October 31, 2002. If the Company is
unable to force conversion of the Debentures prior to their maturity on October 31, 2002, the Company will be required to repay the holders the principal amount. The Company is seeking
arrangements for additional financing and/or equity from outside investors. In May 2002, the Company issued 515,000 shares of restricted common stock to a private investor which resulted in net
proceeds to the Company totaling approximately $350,000, to be used for working capital purposes. There can be no assurance however, the Company will be able to arrange for additional financing or
equity on terms suitable to the Company or in amounts sufficient to liquidate its debts as they become due. Accordingly, if the Company is unable to obtain the alternative financing or equity it is
seeking, on terms acceptable to the Company, this would cause 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.

Principles of ConsolidationThe Company consolidates enterprises in which it has a controlling financial interest. The accompanying
consolidated financial statements include the accounts of Cyanotech Corporation and its wholly-owned subsidiaries, Nutrex Hawaii, Inc. and Cyanotech Japan

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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.

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

Revenue RecognitionThe 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.

Equipment and Leasehold ImprovementEquipment 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.



The
following table presents the Company's contractual obligations at March 31, 2002:

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

Use of EstimatesThe 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.

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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,    |                                 | 2002   |                          | 2001   |       | 2000   |      
|------------------------ | ------------------------------- | ------ | ------------------------ | ------ | ----- | ------ | -----
|Net sales                |                                 | 100.0% |                          | 100.0% |       | 100.0% |      
|Cost of sales            |                                 | 81.0   |                          | 70.8   |       | 79.7   |      
|                         |                                 |        |                          |        |       |        |      
|                         |                                 |        | Gross profit             |        | 19.0  |        | 29.2 
|                         |                                 |        |                          |        |       |        |      
|Operating expenses:      |                                 |        |                          |        |       |        |      
|                         | Research and development        |        | 4.2                      |        | 3.3   |        | 7.0  
|                         | General and administrative      |        | 20.1                     |        | 21.2  |        | 21.3 
|                         | Sales and marketing             |        | 21.2                     |        | 13.5  |        | 12.5 
|                         | Impairment of long-lived assets |        |                         |        |      |        | 37.8 
|                         |                                 |        |                          |        |       |        |      
|                         |                                 |        | Total operating expenses |        | 45.5  |        | 38.0 
|                         |                                 |        |                          |        |       |        |      
|                         |                                 |        | Loss from operations     |        | (26.5 | )      | (8.8 
|                         |                                 |        |                          |        |       |        |      
|Other income (expense):  |                                 |        |                          |        |       |        |      
|                         | Interest income                 |        | 0.8                      |        | 1.5   |        | 0.1  
|                         | Interest expense                |        | (6.1                     | )      | (7.7  | )      | (3.8 
|                         | Other income, net               |        | 0.3                      |        | 1.6   |        | 1.1  
|                         |                                 |        |                          |        |       |        |      
|                         |                                 |        | Total other expense      |        | (5.0  | )      | (4.6 
|                         |                                 |        |                          |        |       |        |      
|Loss before income taxes |                                 | (31.5  | )                        | (13.4  | )     | (60.9  | )    
|Income tax benefit       |                                 | 0.1    |                          | 0.1    |       | 0.3    |      
|                         |                                 |        |                          |        |       |        |      
|                         |                                 |        | Net loss                 |        | (31.4 | )%     | (13.3
|                         |                                 |        |                          |        |       |        |      

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Fiscal 2002 Compared to Fiscal 2001



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 all BioAstin products (an increase of $682,000, or 292%), offset in part by lower sales of bulk Spirulina Pacifica products (a
decrease of $544,000, or 11%) and bulk NatuRose products (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, BV ("Spirulina International"), a Spirulina
marketing and distribution company based in the Netherlands 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 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, 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.



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 for BioAstin.

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.

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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.



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.



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.

Fiscal 2001 Compared to Fiscal 2000



Net
sales for the year ended March 31, 2001 increased by 8.7% from net sales of $7,398,000 for the year ended March 31, 2000, primarily due to increased sales of bulk natural astaxanthin
products (both NatuRose and BioAstin) offset in part by lower sales of bulk Spirulina Pacifica products.

International
sales increased to 54% of total net sales for the year ended March 31, 2001, up from 46% for the year ended March 31, 2000. This increase was primarily due to
increased Asia/Pacific sales offset in part by lower European sales. Sales of bulk Spirulina products to our largest customer, Spirulina International, were 19% of net sales for the year ended
March 31, 2001. This customer accounted for 23% of net sales for the year ended March 31, 2000.



Gross
profit for the year ended March 31, 2001 improved by approximately 56% over that recorded for the prior year, with gross profit margin increasing to 29.2% from 20.3% of net sales. This
improvement in gross profit from the prior year is primarily attributable to increased sales of higher margin astaxanthin products combined with significantly decreased astaxanthin production costs,
offset in part by increased Spirulina production costs during the last six months of fiscal 2001 because of less than optimal production levels.



Total
operating expenses for the year ended March 31, 2001 amounted to $3,053,000, a decrease of 47.5% from the $5,815,000 of operating expenses reported for the prior fiscal year primarily due
to the recognition of an asset impairment charge of $2,796,000, related to the Company's strategic decision to discontinue joint venture negotiations with Norsk Hydro ASA (Norsk Hydro) in fiscal 2000.
In accordance with the provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of," the Company was obligated to record the asset impairment charge on the
construction-in-progress balance related to the 93-acre astaxanthin expansion project. If the effect of this impairment charge is omitted for the purposes of
comparison, operating expenses during the year ended March 31, 2000 amounted to $3,019,000, slightly less than in fiscal 2001.

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Research and DevelopmentExpenditures for research and development decreased 48.4% to $265,000 for the year ended March 31, 2001,
from $514,000 for the year ended March 31, 2000. The decrease
from the prior year resulted primarily from significantly reduced personnel and outside service expenses due to suspension of research work on two projects.

General and AdministrativeGeneral and administrative expenses increased 7.7% to $1,700,000 for the year ended March 31, 2001, from
$ 1,578,000 for the year ended March 31, 2000. The increase from the prior year is primarily due to higher costs related to financing activities and increased costs related to patent
litigation. (See Note 13, "Commitments and Contingencies" in Notes to Consolidated Financial Statements).

Sales and MarketingSales and marketing expenses increased 17.4% to $1,088,000 for the year ended March 31, 2001, from $927,000 for
the year ended March 31, 2000. The increase from the prior year is primarily due to increased advertising and promotional expenses, higher consulting and outside service fees and higher
commission expenses.



Other
expense for the year ended March 31, 2001 amounted to $367,000, an increase of 90.2% from $193,000 for the year ended March 31, 2000. The increase from the prior year is primarily
due to increased interest expenses related to debt refinancing efforts (see Note 5, "Long-Term Debt" in Notes to Consolidated Financial Statements), offset in part by higher
interest income and other income.



The
income tax benefit for the years ended March 31, 2001 and 2000 represent current state tax refunds.



The
Company recorded a net loss of $1,067,000 for the year ended March 31, 2001 compared to a loss of $4,485,000 for the year ended March 31, 2000. For the year ended March 31,
2000, the net loss includes an asset impairment charge of $2,796,000. If the effect of this charge is omitted for comparison purposes, the Company recorded an adjusted net loss of $1,689,000 for the
year ended March 31, 2000, an improvement in results of 37% in fiscal 2001. This improvement in results is primarily attributable to increased sales of bulk natural astaxanthin products (both
NatuRose and BioAstin) and decreased cost of product sales offset in part by increased interest expense and slightly higher operating expenses.

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 2002, the Company had total net sales of $38,041,000 and net losses totaling
$10,998,000. As of March 31, 2002, our accumulated deficit is $11,459,000. 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

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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 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

Goodwill
and Other Intangible Assets In July 2001, the FASB Issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses the initial recognition and
measurement of intangible assets acquired individually or as part of a group of other assets not constituting a business. SFAS No. 142 also addresses, regardless of how acquired, the subsequent
accounting and measurement of goodwill and intangible assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of SFAS No.142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 142 is effective for fiscal years beginning after December 31, 2001. The adoption of SFAS No. 142 is not
expected to have a material effect on the Company's financial condition, results of operations or liquidity.

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. Management has not yet determined the impact, if any, of adoption of SFAS No. 143.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." For the long-lived assets to be held
and used, SFAS No. 144 retains the requirements of SFAS No. 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value. Further, SFAS No. 144 eliminates the
requirement to allocate goodwill to long-lived assets to be tested for impairment, describes a probability-weighted cash flow estimation approach to deal with situations in which
alternative courses of action to recover the carrying amount of a long-lived are under consideration or a range is estimated for the amount of possible future cash flows, and establishes a
"primary-asset" approach to determine the cash flow estimation period. For long-lived assets to be disposed of other than by sale (e.g., assets abandoned, exchanged or distributed to
owners in a spinoff), SFAS No. 144 requires that such assets be considered held and used until disposed of. Further, an impairment loss should be recognized at the date an asset is exchanged
for a similar productive asset or distributed to owners in a spinoff if the carrying amount exceeds its fair value. For long-lived assets to be disposed of by sale, SFAS No. 144
retains the requirement of SFAS No. 121 to measure a long-lived asset classified as held for sale at the

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lower of its carrying amount or fair value less cost to sell and to cease depreciation. Discontinued operations would no longer be measured on a net realizable value basis, and future operating
losses would no longer be recognized before they occur. SFAS No. 144 broadens the presentation of discontinued operations to include a component of an entity, establishes criteria to determine
when a long-lived asset is held for sale, prohibits retroactive reclassification of the asset as held for sale at the balance sheet date if the criteria are met after the balance sheet
date but before issuance of the financial statements, and provides accounting guidance for the reclassification of an asset from "held for sale" to "held and used." The provisions of SFAS
No. 144 are effective for fiscal years beginning
after December 15, 2001. Management has not yet determined the impact, if any, of adoption of SFAS No. 144.

Liquidity and Capital Resources



Our
working capital at March 31, 2002 amounted to $1,008,000, a decrease of $3,169,000 from working capital of $4,177,000 at March 31, 2001. Our cash and cash equivalents decreased by
$1,218,000 to $1,051,000, due to cash flows used during fiscal 2002 (primarily from cash flows used in operating activities of $567,000, cash used for investment in equipment and leasehold
improvements of $382,000 and cash used in financing activities of $269,000).

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 (capital equipment purchases and leasehold improvements) 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.



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 $48,000, commencing June 1,
2000 ($39,000 and $45,000 at March 31, 2002 and 2001, respectively). The interest rate under this Term Loan, 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, 2002 and 2001, the prime rate was 4.75%, and 9.5% respectively). The Term Loan contains restrictive covenants which include, 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. The lender issued the Company a waiver of the covenant
violation and deferred the calculation of such ratio until the year ending March 31, 2003.

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 can only be exercised after the Company has repaid the Term Loan in full.

11

---



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 was payable quarterly, in arrears, at a rate of 6% per annum. The Debentures were convertible into shares of common stock of the Company at a
conversion price of $1.50 per share. 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: reduce the conversion price from $1.50 per share to $1.00 per share (the approximate market value at date of issuance); increase the interest rate during the
remaining period the Debentures are outstanding from 6% to 10%; 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 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. Although there can be no assurance in this regard, the Company hopes to see improved
operating results in the near term and an increase in the price of its common stock. If the market price of the common stock should be above $1.50 for the period specified in the Debenture agreements,
the Company intends to exercise its forced conversion rights. However, if the Company is unable to force conversion of the Debentures prior to their maturity on October 31, 2002, the Company
will be required to repay the holders the principal amount.

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
convertible debenture maturity extension, the warrant exercise price was reduced to $1.10 per share and the expiration date has been accelerated to May 2004.

As
a result of this renegotiation of debt, the Company will record a charge of approximately $236,000 in the quarter ending June 30, 2002, of which approximately $232,000 is a
non-cash charge. However, the exercise of all the warrants in the future (which may or may not occur) has the potential of additional cash proceeds to the Company of approximately
$500,000.

12

---





In
May 2002, the Company issued 515,000 shares of restricted common stock to a private investor which resulted in net proceeds to the Company of approximately $350,000 to be used for working
capital purposes.

On
June 17,2002 the Company received a delisting warning letter from NASDAQ for failure to comply with the $1.00 minimum bid price. Cyanotech now has 90 calendar days, or until
September 16, 2002, to regain compliance. If 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 prior to
September 16, 2002, the NASDAQ staff will provide written notification that the Company is in compliance. However, if the Company is unable to regain compliance prior to September 16,
2002, it intends to apply for listing on the NASDAQ SmallCap Market, which makes available a 180 calendar day SmallCap Market grace period, or until December 16, 2002 to regain compliance. The
Company will also then be eligible for an additional 180 calendar day grace period, or until June 16, 2003 to demonstrate compliance provided that it meets additional NASDAQ listing criteria
for the SmallCap Market, which Cyanotech currently does. Furthermore, the Company may be eligible to transfer back to the NASDAQ National Market if, by June 12, 2003, its bid price
main-tains the $1.00 per share requirement for 30 consecutive trading days and it has maintained compliance with all other continued listing requirements, which it currently does.

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, 2002, 2001 and 2000, the Company incurred losses of $2,589,000, $1,067,000 and $4,485,000 respectively. The
Company's working capital at March 31, 2002 was $1,008,000. As mentioned above in this section the Company reached an agreement with the holders of the 6% convertible subordinated debentures to
extend the original maturity date by six months to October 31, 2002. If the Company is unable to force conversion of the Debentures prior to their maturity on October 31, 2002, the
Company will be required to repay the holders the principal amount. The Company is seeking arrangements for addi-tional financing and/or equity from outside investors. There can be no
assurance however, the Company will be able to arrange for additional financing or equity on terms suitable to the Company or in amounts sufficient to liquidate its debts as they become due.
Accordingly, if the Company is unable to obtain the alternative financing or equity it is seeking, on terms acceptable to the Company, this would cause 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.



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.

13

---

Consolidated Balance Sheets

|(in thousands, except share data)                                                                                                                                                            |                                            | 2002 |         | March 31,
2001 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---- | ------- | -------------- | -
|Assets                                                                                                                                                                                       |                                            |      |         |                |  
|Current Assets:                                                                                                                                                                              |                                            |      |         |                |  
|Cash and cash equivalents                                                                                                                                                                    |                                            | $    | 1,051   |                | $
|Accounts receivable, net of allowance for doubtful receivables of $40 in 2002 and $20 in 2001                                                                                                |                                            |      | 1,340   |                |  
|Refundable income taxes                                                                                                                                                                      |                                            |      | 9       |                |  
|Inventories                                                                                                                                                                                  |                                            |      | 994     |                |  
|Prepaid expenses                                                                                                                                                                             |                                            |      | 58      |                |  
|                                                                                                                                                                                             |                                            |      |         |                |  
|                                                                                                                                                                                             | Total current assets                       |      |         | 3,452          |  
|Equipment and leasehold improvements, net                                                                                                                                                    |                                            |      | 13,931  |                |  
|Other assets                                                                                                                                                                                 |                                            |      | 1,017   |                |  
|                                                                                                                                                                                             |                                            |      |         |                |  
|                                                                                                                                                                                             | Total assets                               |      | $       | 18,400         |  
|                                                                                                                                                                                             |                                            |      |         |                |  
|Liabilities and Stockholders' Equity                                                                                                                                                         |                                            |      |         |                |  
|Current liabilities:                                                                                                                                                                         |                                            |      |         |                |  
|Current maturities of long-term debt                                                                                                                                                         |                                            | $    | 1,543   |                | $
|Accounts payable                                                                                                                                                                             |                                            |      | 685     |                |  
|Accrued expenses                                                                                                                                                                             |                                            |      | 216     |                |  
|                                                                                                                                                                                             |                                            |      |         |                |  
|                                                                                                                                                                                             | Total current liabilities                  |      |         | 2,444          |  
|Long-term debt, excluding current maturities                                                                                                                                                 |                                            |      | 2,765   |                |  
|Deferred revenue                                                                                                                                                                             |                                            |      |        |                |  
|                                                                                                                                                                                             |                                            |      |         |                |  
|                                                                                                                                                                                             | Total liabilities                          |      |         | 5,209          |  
|                                                                                                                                                                                             |                                            |      |         |                |  
|Stockholders' equity:                                                                                                                                                                        |                                            |      |         |                |  
|Common stock of $.005 par value, authorized 25,000,000 shares at March 31, 2002 and 2001; issued and outstanding 17,043,701 shares at March 31, 2002 and 16,949,702 shares at March 31, 2001 |                                            |      | 85      |                |  
|Additional paid-in capital                                                                                                                                                                   |                                            |      | 24,567  |                |  
|Accumulated other comprehensive lossforeign currency translation adjustments                                                                                                                |                                            |      | (2      | )              |  
|Accumulated deficit                                                                                                                                                                          |                                            |      | (11,459 | )              |  
|                                                                                                                                                                                             |                                            |      |         |                |  
|                                                                                                                                                                                             | Total stockholders' equity                 |      |         | 13,191         |  
|                                                                                                                                                                                             |                                            |      |         |                |  
|                                                                                                                                                                                             | Total liabilities and stockholders' equity |      | $       | 18,400         |  
|                                                                                                                                                                                             |                                            |      |         |                |  

See accompanying notes to consolidated financial statements.

14

---

Consolidated Statements of Operations

|                                                                       |  | Years ended March 31, |       
|---------------------------------------------------------------------- |  | --------------------- | ------
|
|
|Net sales                                                              |  | $                     | 8,235 
|Cost of sales                                                          |  |                       | 6,673 
|                                                                       |  |                       |       
|Gross profit                                                           |  |                       | 1,562 
|                                                                       |  |                       |       
|Operating expenses:                                                    |  |                       |       
|Research and development                                               |  |                       | 343   
|General and administrative                                             |  |                       | 1,653 
|Sales and marketing                                                    |  |                       | 1,751 
|Impairment of long-lived assets                                        |  |                       |      
|                                                                       |  |                       |       
|Total operating expenses                                               |  |                       | 3,747 
|                                                                       |  |                       |       
|Loss from operations                                                   |  |                       | (2,185
|                                                                       |  |                       |       
|Other income (expense):                                                |  |                       |       
|Interest income                                                        |  |                       | 66    
|Interest expense                                                       |  |                       | (499  
|Other income, net                                                      |  |                       | 20    
|                                                                       |  |                       |       
|Total other expense                                                    |  |                       | (413  
|                                                                       |  |                       |       
|Loss before income taxes                                               |  |                       | (2,598
|Income tax benefit                                                     |  |                       | 9     
|                                                                       |  |                       |       
|Net loss                                                               |  |                       | (2,589
|Undeclared Preferred Stock dividends                                   |  |                       |      
|                                                                       |  |                       |       
|Net loss attributable to Common stockholders                           |  | $                     | (2,589
|                                                                       |  |                       |       
|Net loss per Common shareBasic and Diluted                            |  | $                     | (0.15 
|                                                                       |  |                       |       
|Weighted average number of common shares outstandingBasic and Diluted |  |                       | 17,033
|                                                                       |  |                       |       

See accompanying notes to consolidated financial statements.

15

---

Consolidated Statements of Stockholders' Equity and Comprehensive Loss

Years ended March 31, 2002, 2001 and 2000

|                                                                                               |                                                                   | Preferred Stock |   | Common Stock |    |   |            |   |   |    |   |   |        |   |  
|---------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | --------------- | - | ------------ | -- | - | ---------- | - | - | -- | - | - | ------ | - | -
|
|
|Balances at March 31, 1999                                                                     |                                                                   | 595,031         |   | $            | 1  |   | 13,603,572 |   | $ | 68 |   | $ | 23,956 |   | $
|Exercise of stock options for cash                                                             |                                                                   |                |   |              |   |   | 21,650     |   |   |   |   |   | 20     |   |  
|Common stock purchased and cancelled                                                           |                                                                   |                |   |              |   |   | (2,603     | ) |   |   |   |   | (3     | ) |  
|Issuance of common stock warrants for services, at fair value                                  |                                                                   |                |   |              |   |   |           |   |   |   |   |   | 19     |   |  
|Issuance of common stock to nonemployee director for services, at fair value                   |                                                                   |                |   |              |   |   | 38,756     |   |   |   |   |   | 35     |   |  
|Issuance of common stock for services and rent, at fair value                                  |                                                                   |                |   |              |   |   | 97,922     |   |   | 1  |   |   | 131    |   |  
|Common stock issued for cash, net of costs of $2                                               |                                                                   |                |   |              |   |   | 203,000    |   |   | 1  |   |   | 219    |   |  
|Exchange of Series C preferred stock for common stock                                          |                                                                   | (124,000        | ) |              |   |   | 620,000    |   |   | 3  |   |   | (3     | ) |  
|Net loss                                                                                       |                                                                   |                |   |              |   |   |           |   |   |   |   |   |       |   |  
|                                                                                               |                                                                   |                 |   |              |    |   |            |   |   |    |   |   |        |   |  
|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 |   | $
|                                                                                               |                                                                   |                 |   |              |    |   |            |   |   |    |   |   |        |   |  

See accompanying notes to consolidated financial statements.

16

---

Consolidated Statement of Cash Flows

|                                                                                                                             |                                                                         | Years ended March 31,             |       
|---------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | --------------------------------- | ------
|
|
|Cash flows from operating activities:                                                                                        |                                                                         |                                   |       
|Net loss                                                                                                                     |                                                                         | $                                 | (2,589
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                                    |                                                                         |                                   |       
|                                                                                                                             | Depreciation and amortization                                           |                                   |       
|                                                                                                                             | Impairment of long-lived assets                                         |                                   |       
|                                                                                                                             | Gain on disposal of assets                                              |                                   |       
|                                                                                                                             | Amortization of debt issue costs                                        |                                   |       
|                                                                                                                             | Issuance of common stock, warrants and options in exchange for services |                                   |       
|                                                                                                                             | Net (increase) decrease in assets:                                      |                                   |       
|                                                                                                                             |                                                                         | Accounts receivable               |       
|                                                                                                                             |                                                                         | Refundable income taxes           |       
|                                                                                                                             |                                                                         | Inventories                       |       
|                                                                                                                             |                                                                         | Prepaid expenses and other assets |       
|                                                                                                                             | Net increase (decrease) in liabilities:                                 |                                   |       
|                                                                                                                             |                                                                         | Accounts payable                  |       
|                                                                                                                             |                                                                         | Accrued expenses                  |       
|                                                                                                                             |                                                                         | Deferred revenue                  |       
|                                                                                                                             |                                                                         |                                   |       
|                                                                                                                             | Net cash provided by (used in) operating activities                     |                                   |       
|                                                                                                                             |                                                                         |                                   |       
|Cash flows from investing activities:                                                                                        |                                                                         |                                   |       
|Investment in equipment and leasehold improvements                                                                           |                                                                         |                                   | (382  
|Proceeds from sale of capital assets                                                                                         |                                                                         |                                   |      
|                                                                                                                             |                                                                         |                                   |       
|                                                                                                                             | Net cash used in investing activities                                   |                                   |       
|                                                                                                                             |                                                                         |                                   |       
|Cash flows from financing activities:                                                                                        |                                                                         |                                   |       
|Proceeds from issuance of common stock and exercise of stock options and warrants, net of issuance costs                     |                                                                         |                                   |      
|Cost of conversion of series C preferred stock to common stock                                                               |                                                                         |                                   | (11   
|Proceeds from issuance of long-term debt                                                                                     |                                                                         |                                   |      
|Principal payments on long-term debt                                                                                         |                                                                         |                                   | (258  
|Debt issue costs                                                                                                             |                                                                         |                                   |      
|Borrowings (repayment) on short term revolving line of credit, net                                                           |                                                                         |                                   |      
|Principal payments on capital lease obligations                                                                              |                                                                         |                                   |      
|Restricted cash deposit                                                                                                      |                                                                         |                                   |      
|                                                                                                                             |                                                                         |                                   |       
|                                                                                                                             | Net cash provided by (used in) financing activities                     |                                   |       
|                                                                                                                             |                                                                         |                                   |       
|Net increase (decrease) in cash and cash equivalents                                                                         |                                                                         |                                   | (1,218
|Cash and cash equivalents at beginning of year                                                                               |                                                                         |                                   | 2,269 
|                                                                                                                             |                                                                         |                                   |       
|Cash and cash equivalents at end of year                                                                                     |                                                                         | $                                 | 1,051 
|                                                                                                                             |                                                                         |                                   |       
|Supplemental disclosure of cash flow information:                                                                            |                                                                         |                                   |       
|Cash paid during the year for interest                                                                                       |                                                                         | $                                 | 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.

17

---

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
Company consolidates enterprises in which it has a controlling financial interest. 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.



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 24 yearsFurniture and fixtures

7 years




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.

18

---



Following
is a reconciliation of the numerators and denominators of the Basic and Diluted net loss per Common Share computations for the periods presented (in thousands except share data):

Years ended March 31,

2002

2001

2000Basic and Diluted Loss Per ShareNet loss

$
(2,589
)
$
(1,067
)
$
(4,485
)Undeclared Preferred Stock dividends








(237
)Net loss attributable to Common stockholders

$
(2,589
)
$
(1,067
)
$
(4,722
)Weighted average Common Shares outstanding


17,033,000


15,997,000


13,775,000Net loss per Common Share

$
(0.15
)
$
(0.07
)
$
(0.34
)


For
the years ended March 31, 2002 and 2001 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. For the year ended March 31,
2000, warrants and options to purchase Common Stock shares of the Company and con-vertible preferred stock 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, 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. As of March 31, 2000, warrants and options to acquire 842,796
shares of the Company's common stock and preferred stock convertible into 2,355,155 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 liabili-ties 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 and 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")

19

---

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.



The
Company accounts for long-lived assets in accordance with the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be 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 future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.



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 lia-bilities 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 esti-mates.



In
June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In July 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging ActivitiesDeferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB
Statement No. 133," which defers the effective date of SFAS No. 133 to be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, An Amendment of FASB Statement No. 133," which addresses a limited number of
issues causing implementation difficulties for certain entities that apply SFAS No. 133. The Company currently holds no derivative instruments, nor is it currently participating in hedging
activities. The adoption of SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, did not have a material effect on the Company's financial condition, results of operations
or liquidity.

In
July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires that all business combinations be accounted for under the purchase method
of accounting. SFAS No. 141 also changes the criteria for the separate recognition of intangible assets acquired in a business combination. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001. The adoption of SFAS No. 141 did not have a material effect on the Company's financial condition, results of operations or liquidity.

20

---

In
July 2001, the FASB Issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses the initial recognition and measurement of intangible assets
acquired individually or as part of a group of other assets not constituting a business. SFAS No. 142 also addresses, regardless of how acquired, the subsequent accounting and measurement of
goodwill and intangible assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least
annually in accor-dance with the provisions of SFAS No.142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 142 is effective for fiscal years beginning after December 31, 2001. The adoption of SFAS No. 142 is not expected to
have a material effect on the Company's financial condition, results of operations or liquidity.

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. Management has not yet determined the impact, if any, of adop-tion of SFAS No. 143.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." For the long-lived assets to be held
and used, SFAS No. 144 retains the requirements of SFAS No. 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from
its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value. Further, SFAS No. 144 eliminates the requirement to allocate
goodwill to long-lived assets to be tested for impairment, describes a probability-weighted cash flow estimation approach to deal with situations in which alternative courses of action to
recover the carrying amount of a long-lived are under consideration or a range is estimated for the amount of possible future cash flows, and establishes a "primary-asset" approach to
determine the cash flow estimation Cyanotech Corporation    2002 Annual Report 19 period. For long-lived assets to be disposed of other than by sale (e.g., assets abandoned,
exchanged or distributed to owners in a spinoff), SFAS No. 144 requires that such assets be considered held and used until disposed of. Further, an impairment loss should be recognized at the
date an asset is exchanged for a similar productive asset or distributed to owners in a spinoff if the carrying amount exceeds its fair value. For long-lived assets to be disposed of by
sale, SFAS No. 144 retains the requirement of SFAS No. 121 to measure a long-lived asset classified as held for sale at the lower of its carrying amount or fair value less
cost to sell and to cease depreciation. Discontinued operations would no longer be measured on a net realizable value basis, and future operating losses would no longer be recognized before they
occur. SFAS No. 144 broadens the presentation of discontinued operations to include a component of an entity, establishes criteria to determine when a long-lived asset is held for
sale, prohibits retroactive reclassification of the asset as held for sale at the balance sheet date if the criteria are met after the balance sheet date but before issuance of the financial
statements, and provides accounting guidance for the reclassification of an asset from "held for sale" to "held and used." The provisions of SFAS No. 144 are effective for fiscal years
beginning after December 15, 2001. Management has not yet determined the impact, if any, of adoption of SFAS No. 144.

21

---

Note 2    Inventories

Inventories
consists of the following as of March 31, 2002 and 2001

2002

2001Raw materials

$
115

$
82Work in process


192


174Finished goods


559


1,607Supplies


128


141$
994

$
2,004


Note 3    Equipment and Leasehold Improvements, Net

Equipment
and leasehold improvements consists of the following as of March 31, 2002 and 2001:

2002

2001Equipment

$
9,382

$
9,164Leasehold improvements


14,024


13,926Furniture and fixtures


83


8323,489


23,173Less accumulated depreciation and amortization


(10,017
)

(8,705
)Construction in-progress


459


393Equipment and leasehold improvements, net

$
13,931

$
14,861


In
June 1999, we reached a preliminary agreement with Norsk Hydro ASA ("Norsk Hydro") to produce and market NatuRose in a joint venture that would have been owned 51% by Norsk Hydro and 49% by
Cyanotech. The Company decided not to finalize the joint venture relationship. As a result of the Company's decision to end the negotiations, the projected future cash flows expected from the proposed
joint venture were reduced to zero. In accordance with the provisions of SFAS No. 121, the Company recorded a non-cash asset impairment charge of $2,796 during the year ended
March 31, 2000 on the construction-in-progress balance related to this project.

Note 4    Accrued Expenses

Components
of accrued expenses as of March 31, 2002 and 2001 are as follows:

2002

2001Accrued wages, commissions and royalties

$
136

$
141Accrued interest


34


82Other accrued expenses


46


26$
216

$
249


Note 5    Long-Term Debt



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 $48, commencing June 1, 2000
($39 and $45 at March 31, 2002 and 2001 respectively). The interest rate under this Term Loan is the prime rate plus

22

---

1% (at March 31, 2002 and 2001, the prime rate was 4.75% and 9.5%, respectively). The Term Loan contains restrictive covenants which include, 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. The lender issued the Company a waiver of the covenant violation and
deferred the calculation of such ratio until the year ending March 31, 2003.

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 can only be exercised after the Company has repaid the Term Loan in full.



On
May 2, 2000, the Company completed a private placement of $1,250 principal amount 6% convertible subordinated debentures ("Debentures") due April 30, 2002, with net proceeds to the
Company of approximately $1.1 million. Interest was payable quarterly, in arrears, at a rate of 6% per annum. The Debentures were convertible into shares of common stock of the Company at a
conversion price equal to $1.50 per share. 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.

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: reduce the conversion price from $1.50 per share to $1.00 per share; increase the interest rate during the remaining period the Debentures are outstanding from 6% to
10%; issue two-year warrants to the Debenture holders to purchase additional shares of common stock of Cyanotech in an amount equal to thirty (30%) percent of the shares into which the
Debentures are convertible at an exercise price of $1.10 per share; and 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. Although there can be no assurance in this regard, the Company hopes to see improved operating results in the near term and an increase in the price of its Common Stock. If the market
price of the common stock should be above $1.50 for the period specified in the Debenture agreements, the Company intends to exercise its forced conversion rights. However, if the Company is unable to
force conversion of the Debentures prior to their maturity on October 31, 2002, the Company will be required to repay the holders the principal amount. Accordingly, if the Company is unable to
obtain the alternative financing or equity it is seeking on terms acceptable to the Company, this would cause substantial doubt as to the ability of the Company to continue as a going concern.

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
convertible debenture maturity extension, the warrant exercise price was reduced to $1.10 per share and the expiration date has been accelerated to May 2004.

As
a result of this renegotiation of debt, the Company will record a charge of approximately $236 in the quarter ending June 30, 2002, of which approximately $232 is a
non-cash charge. However, the exercise of all the warrants in the future (which may or may not occur) has the potential of additional cash proceeds to the Company of approximately $500.

23

---

Long-term debt consists of the following as of March 31, 2002 and 2001:

2002

2001Term loan

$
3,070

$
3,328Convertible subordinated debentures


1,238


1,250Total long-term debt


4,308


4,578Less current maturities of long-term debt


(1,543
)

(242
)Long-term debt, excluding current maturities

$
2,765

$
4,336


At
March 31, 2002, the aggregate maturities of long-term debt are as follows:

Year ending March 31:2003

$1,5432004

3232005

3422006

3632007

384Thereafter

1,353$4,308


Note 6    Leases

The
Company leases facilities, equipment and land under operating leases expiring between 2003 and 2025. Future minimum lease payments under non-cancelable operating leases at
March 31, 2002 are as follows:

Year ending March 31:2003

$2502004

2242005

2232006

2232007

223Thereafter, through 2025

2,666Total minimum lease payments

$3,809


Total
rent expense under operating leases amounted to $286, $329, and $330 for the years ended March 31, 2002, 2001 and 2000, 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, 2002, 2001 and 2000 were not material.

In
1997, the State of Hawaii agreed to allow the Company to lease an additional 93-acre parcel on a year to year basis, until such time that the Company determines the need
for a longer lease term. In April 2002 management determined that only a portion of this reserved expansion area would be needed due to improvements made in astaxanthin cultivation and
processing. As a result, the current lease was revised to reduce the reserved acreage from 93 to 30 acres and is effective through December 31, 2002.

24

---

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.

Series C
preferred stock was convertible into common stock at the rate of one share of preferred stock for five shares of common stock through February 23, 2002, after
which date the conversion feature was no longer applicable. Series C preferred stock had voting rights equal to the number of shares of common stock into which it was convertible and had a
preference in liquidation over all other series of preferred stock of $5 per share plus any unpaid accumulated dividends. Holders of Series C preferred stock were entitled to 8% cumulative
annual dividends at the rate of $.40 per share.

Note 8    Stock Options and Warrants



The
Company's 1995 Stock Option Plan (the "1995 Plan"), 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, which was approved by stockholders in 1994 (the "1994 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 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 6,000 shares of common stock
were made under the 1994 Plan in August 2001, 2000, and 1999. Expense recognized as a result of these stock grants amounted to $6 for the year ended March 31, 2002, $10 for the year
ended March 31, 2001 and $6 for the year ended March 31, 2000.

At
March 31, 2002, there were 66,854 additional shares available for grant under the 1995 Plan and 32,000 additional shares available under the 1994 Plan. The per share
weighted-average fair value of
stock options granted during 2002, 2001 and 2000 was $0.84, $1.35 and $0.78, respectively, on the date of grant using a Black Scholes option-pricing model with the following weighted-average
assumptions: 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; 2000expected dividend
yield of 0%, risk-free interest rate of 5.5%, expected volatility of 96%, and an expected life of 4.2 years.

The
Company applies the provisions of APB Opinion No. 25 in accounting for employee stock-based compensation and, accordingly, no compensation cost has been recognized for its
employee stock options in the accompanying financial statements. Had the Company determined compensation cost based on the estimated fair value at the grant date for its employee stock options under
SFAS No. 123,

25

---

the Company's net loss attributable to Common stockholders and net loss per common share would have been as reflected in the pro forma amounts which follow:

2002

2001

2000Net loss attributable to Common stockholdersAs reported

$
(2,589
)
$
(1,067
)
$
(4,722
)Pro forma

$
(2,710
)
$
(1,383
)
$
(5,103
)Net loss per common shareBasic and DilutedAs reported

$
(0.15
)
$
(0.07
)
$
(0.34
)Pro forma

$
(0.16
)
$
(0.09
)
$
(0.37
)


Pro
forma net loss attributable to Common stockholders and net loss per common share information reflect only options granted since 1996. Therefore, the full impact of calculating compensation cost
for
stock options under SFAS No. 123 is not reflected in the pro forma net loss attributable to Common stockholders and net loss per common share amounts presented above because compensation cost
is reflected over the options' vesting period of 5 years, and compensation cost for options granted prior to April 1, 1995 is not considered.

Stock
option activity during the periods indicated is as follows:

Number of
shares

Weighted-
average
exercise priceBalance at March 31, 1999

575,375

$
4.63Granted

301,596


1.03Exercised

(21,650
)

0.94Expired

(42,025
)

0.94Forfeited

(95,500
)

2.86Balance 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

$
2.10


The
following table summarizes information about stock options outstanding at March 31, 2002:

|               |  | Options Outstanding |  | Options Exercisable
|-------------- |  | ------------------- |  | -------------------
|
|$.77 to $1.69  |  | 541,296             |  | 3.3 years          
|$3.13 to $3.69 |  | 123,500             |  | 2.1 years          
|$6.13 to $6.31 |  | 75,900              |  | 0.3 years          
|               |  |                     |  |                    
|$.77 to $6.31  |  | 740,696             |  | 2.8 years          
|               |  |                     |  |                    

26

---



At
March 31, 2002 and 2001, the Company has warrants outstanding to acquire 228,334 shares of the Company's common stock. 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. A warrant to acquire 83,334 shares of common stock was granted in May 2000 in conjunction with completion of a private placement of
convertible debentures. The warrant was exercisable at $1.80 per share, and expired 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.

Note 9    Major Customers and Export Sales

Sales
to major customers for the years ended March 31, 2002, 2001 and 2000 are summarized as follows (percent of product sales):

2002

2001

2000Customer A

13%

19%

23%


Net
product sales by geographic area for the years ended March 31, 2002, 2001 and 2000 are summarized as follows:

2002

2001

2000United States

$
4,393

53%

$
3,676

46%

$
3,992

54%Canada/South America


394

5%


509

6%


371

5%The Netherlands


1,032

13%


1,542

19%


1,715

23%Europe, excluding the Netherlands


706

8%


640

8%


613

8%China


157

2%


119

2%


73

1%Asia/Pacific, excluding China


1,553

19%


1,557

19%


634

9%$
8,235

100%

$
8,043

100%

$
7,398

100%


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

27

---

Note 10 Income Taxes

The
income tax benefit for the years ended March 31, 2002, 2001 and 2000 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, 2002, 2001 and 2000 follows:

|                                                            |  | 2002 |       | 2001 |   | 2000 |  
|----------------------------------------------------------- |  | ---- | ----- | ---- | - | ---- | -
|Amount at the federal statutory income tax rate             |  | $    | (883  | )    | $ | (366 | )
|State income taxes, net of federal income tax effect        |  |      | (6    | )    |   | (5   | )
|Increase in the valuation allowance for deferred tax assets |  |      | 1,017 |      |   | 374  |  
|Other                                                       |  |      | (137  | )    |   | (11  | )
|                                                            |  |      |       |      |   |      |  
|                                                            |  | $    | (9    | )    | $ | (8   | )
|                                                            |  |      |       |      |   |      |  

The
significant components of deferred income taxes for the years ended March 31, 2002, 2001 and 2000 are as follows:

|                                                                                                   |  | 2002 |        | 2001 |   | 2000 |  
|-------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ---- | -
|Deferred tax benefit, exclusive of the change in beginning-of-the-year valuation allowance balance |  | $    | (1,017 | )    | $ | (374 | )
|Increase in beginning-of-the-year balance of the valuation allowance for deferred tax assets       |  |      | 1,017  |      |   | 374  |  
|                                                                                                   |  |      |        |      |   |      |  
|                                                                                                   |  | $    |       |      | $ |     |  
|                                                                                                   |  |      |        |      |   |      |  

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, 2002 and
2001 are as follows:

2002

2001Deferred tax assets:Net operating loss carryforwards

$
4,771

$
3,250Leasehold improvement, impairment loss for financial reporting purposes


1,062


1,062Tax credit carryforwards


186


209Other


125


478Gross deferred tax assets


6,144


4,999Less valuation allowance


(4,539
)

(3,522
)Net deferred tax assets


1,605


1,477Deferred tax liabilityequipment and leasehold improvements, principally due to differences in depreciation and amortization


(1,605
)

(1,477
)Net deferred tax asset

$


$



The
valuation allowance for deferred tax assets as of April 1, 2001, 2000 and 1999 was $3,552, $3,148 and $1,293 respectively. The valuation allowance increased by $1,017, $374 and $1,855
during the years ended March 31, 2002, 2001 and 2000 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

28

---

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, 2002. 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.

At
March 31, 2002, the Company has net operating tax loss carryforwards and tax credit carryfor-wards available to offset future federal income taxes as follows:

Expires March 31,

Net operating losses

Research and experimentation tax credits2003

$


$
152004





522005





42006


400


2011





232012


44


92013


1,601


2019


3,632


2020


2,051


2021


1,727


2022


3,149


$
12,604

$
103


In
addition, at March 31, 2002, 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, 2002, the Company has tax net operating loss carryforwards of $8,081, which expire in March 31, 2019 through 2022, 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, 2002 and 2001.



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



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

29

---

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. Compensation expense relative to this plan was nil for each of the three years ended
March 31, 2002, 2001 and 2000.

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 the PhytoDome CCS system, 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, 2002 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)

|($ in thousands, except per share data) |                           | First Quarter           |   | Second Quarter |       | Third Quarter |       | Fourth Quarter |   | Total Year |      
|--------------------------------------- | ------------------------- | ----------------------- | - | -------------- | ----- | ------------- | ----- | -------------- | - | ---------- | -----
|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
|2001                                    |                           |                         |   |                |       |               |       |                |   |            |      
|                                        | Net sales                 |                         | $ | 2,166          |       | $             | 2,360 |                | $ | 1,762      |      
|                                        | Gross profit              |                         |   | 704            |       |               | 794   |                |   | 467        |      
|                                        | Net loss                  |                         |   | (22            | )     |               | (40   | )              |   | (322       | )    
|                                        | Net loss per common share |                         |   |                |       |               |       |                |   |            |      
|                                        |                           | Basic and Diluted(b)    |   |                | (0.00 | )             |       | (0.00          | ) |            | (0.02

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Note 15    Financial Condition and Liquidity and Subsequent Event

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, 2002, 2001 and 2000, the Company incurred

30

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losses of $2,589, $1,067 and $4,485, respectively. The Company's working capital at March 31, 2002 was $1,008. As mentioned in Note 5 "Long-Term Debt" in May 2002 the
Company reached an agreement with the holders of the Debentures aggregating $1,238 at March 31, 2002, to extend the original maturity date by six months to October 31, 2002. If the
Company is unable to force conversion of the Debentures prior to their maturity on October 31, 2002, the Company will be required to repay the holders the principal amount. In May 2002, the
Company issued 515,000 shares of restricted common stock to a private investor which resulted in net proceeds to the Company of approximately $350 to be used for working capital purposes. The Company
is seeking arrangements for additional financing and/or equity from outside investors. There can be no assurance however, the Company will be able to arrange for additional financing or equity on
terms suitable to the Company or in amounts sufficient to liquidate its debts as they become due. Accordingly, if the Company is unable to obtain the alternative financing or equity it is seeking, on
terms acceptable to the Company, this would cause 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. Unless it is successful, there may be liquidity shortfalls in future periods. 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.

On
June 17,2002 the Company received a delisting warning letter from NASDAQ for failure to comply with the $1.00 minimum bid price. Cyanotech now has 90 calendar days, or until
September 16, 2002, to regain compliance. If 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 prior to
September 16, 2002, the NASDAQ staff will provide written notification that the Company is in compliance. However, if the Company is unable to regain compliance prior to September 16,
2002, it intends to apply for listing on The NASDAQ SmallCap Market, which makes available a 180 calendar day SmallCap Market grace period, or until December 16, 2002 to regain compliance. The
Company will also then be eligible for an additional 180 calendar day grace period, or until June 16, 2003 to demonstrate compliance provided that it meets additional NASDAQ listing criteria
for the SmallCap Market, which Cyanotech currently does. Furthermore, the Company may be eligible to transfer back to The NASDAQ National Market if, by June 12, 2003, its bid price maintains
the $1.00 per share requirement for 30 consecutive trading days and it has maintained compliance with all other continued listing requirements, which it currently does.

31

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Independent Auditors' Report

The Board of Directors
Cyanotech Corporation:

We have audited the accompanying consolidated balance sheets of Cyanotech Corporation and subsidiaries as of March 31, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2002 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, including convertible
debentures of $1, 238,000 due on October 31, 2002, 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 do not include any adjustments that might result from the outcome of this uncertainty.

/s/
KPMG LLP
Honolulu, Hawaii
May 1, 2002, except as to notes 5, 8, and 15 which are as of June 17, 2002

32

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Officers and Directors

Officers

Gerald R. Cysewski, Ph.D.President, Chief Executive Officer
and Chairman of the Board

Ronald P. ScottExecutive Vice President
Finance and Administration
Treasurer and Secretary

Glenn D. JensenVice PresidentOperations

Kelly J. MoorheadVice PresidentSales and Marketing

R. Shane RohanVice PresidentProduction

Other Senior Managers

Robert J. CapelliDirector of Sales

John E. Dore, Ph.D.Scientific Director

J. Hiroshi SakamotoCorporate Controller

Board of Directors

Gerald
R. Cysewski, Ph.D.
Eric H. Reich1(1)(2)
David I. Rosentha1(1)(2)
Ronald P. Scott
John T. Waldron(2)
Paul C. Yuen, Ph.D.(1)

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Corporate Information

Corporate HeadquartersCyanotech Corporation
73-4460 Queen Kaahumanu Hwy.
Suite 102
Keahole Point
Kailua-Kona, HI 96740
Tel (808) 326-1353
Fax (808) 329-3597

Wholly-Owned SubsidiariesNutrex Hawaii, Inc.
Cyanotech Japan YK

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Transfer Agent and RegistrarComputershare Investor Services
350 Indiana Street, Suite 800
Golden, CO 80401
(303) 262-0600
www.computershare.com

Independent AccountantsKPMG LLP
1001 Bishop Street
Pauahi Tower, Suite 2100
Honolulu, HI 96813-3421

Legal CounselGoodsill Anderson Quinn & Stifel
P.O. Box 3196
Honolulu, HI 96801-3196

Form 10-K

A
copy of Cyanotech's annual report to the Securities and Exchange Commission on Form 10-K is available without charge upon written request to:



Notice of Annual Meeting

The
2002 annual meeting of stockholders will be held on Thursday, August 22, 2002, at 7:00 P.M. Hawaii Standard Time at the Ala Moana Hotel, 410 Atkinson Drive, Honolulu, HI 96814

Additional Information

As
a service to our stockholders and prospective investors, copies of Cyanotech news releases and financial statements issued in the last 12 months are available 24 hours a day, seven
days a week on the Internet's World Wide Web athttp://www.cyanotech.com

Forward-Looking Information

Certain
statements herein set forth management's intentions, plans, beliefs, expectations or predictions of the future based on current facts and analyses. Actual results may differ materially due to
a variety of factors including reduced product demand, price competition, government action, and weather conditions. Additional information on factors that may affect the Company and cause actual
results to differ from current expectations can be found in Cyanotech's filings with the SEC.

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Market for Common Equity and Related Stockholder Matters

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

Three Months Ended

High

Low2002March 31, 2002

$
1.43

$
0.96December 31, 2001

$
1.16

$
0.55September 30, 2001

$
1.50

$
0.48June 30, 2001

$
1.75

$
0.872001March 31, 2001

$
1.38

$
0.72December 31, 2000

$
1.75

$
0.63September 30, 2000

$
2.06

$
1.47June 30, 2000

$
2.63

$
1.13


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 on
Common Stock in the foreseeable future.

The
approximate number of record holders of outstanding Common Stock as of June 26, 2002 was 1,357.

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