**Exhibit 99.1**

 

**RISKFACTORS**

 

You should carefullyconsider the risks described below which we believe are significant but not theonly ones we face.  Any of the followingrisks could have a material adverse effect on our business, financial conditionand operating results.  You should alsorefer to the other information contained in this report, including ourfinancial statements and the related notes.

 

**ASignificant or Prolonged Economic Downturn Could Have a Material Adverse Effecton Our Results of Operations**

 

Our results of operationsare affected by the level of business activity of our clients and customerswhich in turn is affected by the level of economic activity in the industriesand markets that they serve.  A declinein the level of business activity of our clients could have a material adverseeffect on our revenues and profit margin.

 

**OurQuarterly Operating Results May Vary From Quarter to Quarter, Which May Resultin Increased Volatility of Our Share Price**

 

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

 

•                  the business decisions of ourcustomers regarding orders for our products;

•                  increased energy costs;

•                  increased raw material costs;

•                  production difficulties;

•                  the effects of weather and naturaldisasters;

•                  the introduction of new products byus or our competitors;

•                  changes in our pricing policies orthose of our competitors;

•                  seasonal trends in our customers’buying patterns

•                  changes in government regulation,both domestic and foreign;

•                  fluctuation in foreign currencyexchange rates;

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

•                  other factors beyond our control.

 

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

 

**OurGlobal Operations Post Complex Management, Foreign Currency, Legal, Tax andEconomic Risks, Which We May Not Be Able to Adequately Address**

 

We conduct business in anumber of countries around the world. For the three months ended December 31, 2005, net sales ofapproximately 44% were to foreign customers. As a result, we are subject to a number of risks which include, but arenot limited to:

 

•                  the burden of complying with a widevariety of national and local laws;

•                  potentially longer payment cycles forforeign sales;

•                  multiple and possibly overlapping andconflicting tax laws;

•                  coordinating geographically separatedlocations;

•                  restrictions (government andotherwise) on the movement of cash;

 

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•                  the absence in some jurisdictions ofeffective laws to prevent our intellectual property rights;

•                  changes in government regulations,both domestic and foreign;

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

•                  fluctuations in foreign currencyexchange rates.

 

**Competitionin Our Industry is Intense**

 

The nutritional productsmarket is highly competitive.  Inincludes international, national, regional and local producers anddistributors, many of whom have greater resources than Cyanotech and many ofwhom offer a greater variety of products. Increased competition in our industry could result in price reductions,reduced gross profit margin or loss of market share, any of which could have amaterial effect on our business, results of operations and financial condition.

 

**OurRevenues Could Be Adversely Affected By the Loss of a Significant Customer orthe Failure to Collect a Large Accounts Receivable**

 

We have in the pastderived, and may continue in the future to derive, a significant portion of ourrevenues from a relatively limited number of major customers.  From quarter to quarter, revenues from one ormore individual customers may exceed 10% of our revenues for the quarter.  During the quarter ended December 31,2005, sales to one customer, a distributor, were approximately 12% of net sales.  If sales to a major customer decreasesignificantly, it may materially affect our results of operations.  In addition, if we fail to collect largeaccounts receivable from such major customers, we could be subject tosignificant financial exposure.

 

**Changesin Government Regulation and Industry Standards Could Increase Our Costs ofDoing Business**

 

Our products, potentialproducts and its manufacturing and research activities are subject to a varyingdegree of regulation by a number of government authorities in the United Statesand in other countries, including the United States Food and DrugAdministration (the “FDA”) pursuant to the Federal Food, Drug and CosmeticAct.  The FDA regulates, to varyingdegrees and in different ways, dietary supplements, other food products,diagnostic medical devices and pharmaceutical products, including theirmanufacture, testing, exportation, labeling and, in some cases, advertising.

 

We are also subject toother federal, state and foreign laws, regulations and policies with respect tolabeling of products, importation of organisms, environmental protection andoccupational safety laws, among others. These laws, regulations and policies are subject to change and depend onadministrative policies and interpretations. We work with foreign distributors to ensure our compliance with foreignlaws, regulations and policies.  Therecan be no assurance that any change with respect to federal, state and foreignlaws, regulations and policies, and, particularly with respect to the FDA orother such regulatory bodies, with possible retroactive effect, will not have amaterial adverse effect on our business, financial condition and results ofoperations.  There can be no assurancethat any of our potential products will satisfy applicable regulatoryrequirements.

 

The Federal DietarySupplement Health and Education Act (“DSHEA”) regulates the use and marketingof dietary supplements, including vitamin products.  The DSHEA covers only dietary supplements andcontains a number of provisions that differentiate dietary supplements fromother foods.  The DSHEA also sets forthstandards for adulteration of dietary supplements or ingredients and providesdetailed requirements for the labeling of dietary supplements, includingnutrition and ingredient labeling. Compliance with relevant requirements can be onerous and time consumingand there can be no assurance that Cyanotech can continue to meet relevant FDAmanufacturing requirements for existing products or meet such requirements forany future products.  Ongoing compliancewith applicable regulatory requirements are monitored through periodicinspections by state and federal agencies, including the FDA, the HawaiiDepartment of Health and comparable agencies in other countries.

 

As *in vitro*diagnostic medical device components, phycobiliprotein products do notcurrently require pre-market clearances by the FDA.  However, as a component of a medical device,they can be subject to other various medical device requirements, including certifiedGood Manufacturing Practice requirements.

 

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**IfWe Are Unable to Protect Our Intellectual Property Rights or if We InfringeUpon the Intellectual Property Rights of Others Our Business May Be Harmed**

 

Cyanotech has receivedfive United States patents:  two onaspects of our production methods and three for use of our BioAstinâproducts.  Although we regard ourproprietary technology, trade secrets, trademarks and similar intellectualproperty as important, we rely on a combination of trade secret, contract,patent, copyright and trademark law to establish and protect our rights in ourproducts and technology.  There can be noassurance that we will be able to protect our technology adequately or that competitorswill not be able to develop similar technology independently.  In addition, the laws of certain foreigncountries may not protect the Company’s intellectual property rights to thesame extent as the laws of the United States. Litigation in the United States or abroad may be necessary to enforceour patent or other intellectual property rights, to protect our trade secrets,to determine the validity and scope of the proprietary rights of others or todefend against claims of infringement. Such litigation, even if successful, could result in substantial costsand diversion of resources and could have a material adverse effect on ourbusiness, results of operations and financial condition.  Additionally, if any such claims are assertedagainst us, we may seek to obtain a license under the third party’sintellectual property rights.  There canbe no assurance, however, that a license would be available on terms acceptableor favorable to us, if at all.

 

**OurInsurance Liability Coverage is Limited in Certain Circumstances**

 

Inthe ordinary course of business, the Company purchases insurance coverages(e.g., property and liability coverages) to protect itself against loss of ordamage to its properties and claims made by third parties and employees for propertydamage or personal injuries.  However,the protection provided by such insurance is limited in significant respectsand, in some instances, the Company has no coverage and certain of the Company’sinsurance has substantial “deductibles” or has limits on the maximum amountsthat may be recovered.  For example, if ahurricane or other uninsured catastrophic natural disaster should occur, theCompany may not be able to recover all facility restoration costs and revenueslost from business interruption.  Inaddition, the Company maintains product liability insurance in limited amountsfor all of its products involving human consumption, however, broader productliability coverage is prohibitively expensive. Insurers have also introduced exclusions or limitations of coverage forclaims related to certain perils including, but not limited to, mold andterrorism.  If a series of lossesoccurred, such as from a series of lawsuits in the ordinary course of businesseach of which were subject to the deductible amount, or if the maximum limit ofthe available insurance were substantially exceeded, the Company could incurlosses in amounts that would have a material adverse effect on its results ofoperations and financial condition.

 

**MarketPrice for Our Common Stock Has Been Unpredictable; Potential Delisting.**

 

Our common stock ispresently listed on the NASDAQ SmallCap Market. The Company received noticefrom Nasdaq on December 1, 2005 that the bid price of the Company’s stockhad closed below the minimum $1.00 per share requirement for the last 30consecutive business days as required by NASDAQ Marketplace Rule 4310(c)(4). Therefore, the Company was provided 180 calendar days, or until May 30,2006, to regain compliance by virtue of the bid price closing at $1.00 pershare or more for a minimum of 10 consecutive trading days.  If compliancecannot be demonstrated by May 30, 2006, then NASDAQ staff will determinewhether the Company meets the NASDAQ initial listing criteria, as set forth inMarketplace Rule 4310(c), except for the bid price requirement.  Ifit meets the initial listing criteria, NASDAQ staff will notify the Companythat it has been granted an additional 180 calendar day compliance period, oruntil November 26, 2006. If the Company is not granted the additional180 day compliance period, and assuming the bid price of the Company’s commonstock has not closed at $1.00 per share or more for a minimum of 10 consecutivebusiness days, then NASDAQ Staff will provide written notification that theCompany’s securities will be delisted from the SmallCap Market and begintrading on the NASDAQ Over-The-Counter Bulletin Boards. In such case commonstock of the Company will be traded on a less active market to the possibledetriment of the stockholders. If the Company is granted the additional 180 daycompliance period, or until November 26, 2006, and again assuming the bidprice of the Company’s common stock has still not closed at $1.00 per share ormore for a minimum of 10 consecutive business days during the additionalcompliance period, then NASDAQ Staff will proceed in the manner just described,to the same possible determent of the stockholders. The Company believes thatit currently meets the criteria to satisfy the aforementioned 180 calendar dayadditional compliance period.

 

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