**Exhibit 99.1**

**RISK FACTORS**

 

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.

 

**A Significant or Prolonged Economic Downturn Could Have aMaterial Adverse Effect on 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.

 

**Our Quarterly Operating Results May Vary From Quarter toQuarter, Which May Result in Increased Volatility of Our Share Price**

 

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

 

•                  the business decisions ofour customers regarding orders for our products;

•                  increased energy costs;

•                  increased raw materialcosts;

•                  production difficulties;

•                  the effects of weather andnatural disasters;

•                  the introduction of newproducts by us or our competitors;

•                  changes in our pricingpolicies or those of our competitors;

•                  seasonal trends in ourcustomers’ buying patterns

•                  changes in governmentregulation, both domestic and foreign;

•                  fluctuation in foreigncurrency exchange rates;

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

•                  other factors beyond ourcontrol.

 

Asignificant portion of our expense levels are relatively fixed and the timingof increases in expense levels is based in large part on our forecasts offuture sales.  If net sales are belowexpectations in any given period, the adverse impact on results of operationsmay be magnified by our inability to adjust expenses quickly enough tocompensate for the sales shortfall.

 

**Our Global Operations Post Complex Management, ForeignCurrency, Legal, Tax and Economic Risks, Which We May Not Be Able to AdequatelyAddress**

 

Weconduct business in a number of countries around the world.  For the six months ended September 30, 2004,net sales of approximately 47% were to foreign customers.  As a result, we are subject to a number ofrisks which include, but are not limited to:

 

•                  the burden of complying witha wide variety of national and local laws;

•                  potentially longer paymentcycles for foreign sales;

•                  multiple and possiblyoverlapping and conflicting tax laws;

•                  coordinating geographicallyseparated locations;

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

•                  the absence in somejurisdictions of effective laws to prevent our intellectual property rights;

 

 

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•                  changes in governmentregulations, both domestic and foreign;

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

•                  fluctuations in foreigncurrency exchange rates.

 

**Competition in Our Industry is Intense**

 

Thenutritional products market is highly competitive.  In includes international, national, regionaland local producers and distributors, many of whom have greater resources thanCyanotech and many of whom offer a greater variety of products.  Increased competition in our industry couldresult in price reductions, reduced gross profit margin or loss of marketshare, any of which could have a material effect on our business, results ofoperations and financial condition.

 

**Our Revenues Could Be Adversely Affected By the Lossof a Significant Customer or the Failure to Collect a Large Accounts Receivable**

 

Wehave in the past derived, and may continue in the future to derive, asignificant portion of our revenues from a relatively limited number of majorcustomers.  From quarter to quarter,revenues from one or more individual customers may exceed 10% of our revenuesfor the quarter.  For the three monthsended September 30, 2004, no single customer has net sales of 10% or more oftotal net sales.  If sales to a majorcustomer decrease significantly, it may materially affect our results ofoperations.  In addition, if we fail tocollect large accounts receivable from such major customers, we could besubject to significant financial exposure.

 

**Changes in Government Regulation and Industry Standards Could IncreaseOur Costs of Doing Business**

 

Ourproducts, potential products and its manufacturing and research activities aresubject to a varying degree of regulation by a number of government authoritiesin the United States and in other countries, including the United States Foodand Drug Administration (the “FDA”) pursuant to the Federal Food, Drug andCosmetic Act.  The FDA regulates, tovarying degrees and in different ways, dietary supplements, other foodproducts, diagnostic medical devices and pharmaceutical products, includingtheir manufacture, testing, exportation, labeling and, in some cases,advertising.

 

Weare also subject to other federal, state and foreign laws, regulations andpolicies with respect to labeling of products, importation of organisms,environmental protection and occupational safety laws, among others.  These laws, regulations and policies aresubject to change and depend on administrative policies andinterpretations.  We work with foreigndistributors to ensure our compliance with foreign laws, regulations andpolicies.  There can be no assurance thatany change with respect to federal, state and foreign laws, regulations andpolicies, and, particularly with respect to the FDA or other such regulatorybodies, with possible retroactive effect, will not have a material adverseeffect on our business, financial condition and results of operations.  There can be no assurance that any of ourpotential products will satisfy applicable regulatory requirements.

 

TheFederal Dietary Supplement Health and Education Act (“DSHEA”) regulates the useand marketing of 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 devicecomponents, phycobiliprotein products do not currently require pre-marketclearances by the FDA.  However, as acomponent of a medical device, they can be subject to other various medical devicerequirements, including certified Good Manufacturing Practice requirements.

 

 

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**If We Are Unable to Protect Our Intellectual PropertyRights or if We Infringe Upon the Intellectual Property Rights of Others OurBusiness May Be Harmed**

 

Cyanotechhas received five United States patents: two on aspects of our production methods and three for use of ourBioAstinâ products.  Although we regard our proprietarytechnology, trade secrets, trademarks and similar intellectual property asimportant, we rely on a combination of trade secret, contract, patent,copyright and trademark law to establish and protect our rights in our productsand technology.  There can be noassurance that we will be able to protect our technology adequately or thatcompetitors will 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 enforce ourpatent or other intellectual property rights, to protect our trade secrets, todetermine 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.

 

**Our Insurance Liability Coverage is Limited in CertainCircumstances**

 

In the ordinary course of business, the Companypurchases insurance coverages (e.g., property and liability coverages) toprotect itself against loss of or damage to its properties and claims made bythird parties and employees for property damage or personal injuries.  However, the protection provided by suchinsurance is limited in significant respects and, in some instances, theCompany has no coverage and certain of the Company’s insurance has substantial “deductibles”or has limits on the maximum amounts that may be recovered.  For example, if a hurricane or otheruninsured catastrophic natural disaster should occur, the Company may not beable to recover all facility restoration costs and revenues lost from businessinterruption.  In addition, the Companymaintains product liability insurance in limited amounts for all of itsproducts involving human consumption, however, broader product liabilitycoverage 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.

 

 

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