**Exhibit 99.1**

 

**RISK FACTORS**

 

You should carefully consider the risks described below which webelieve are significant but not the only ones we face.  Any of the following risks could have amaterial adverse effect on our business, financial condition and operatingresults.  You should also refer to theother information contained in this report, including our financial statementsand the related notes.

 

**A Significant or Prolonged Economic DownturnCould Have a Material Adverse Effect on Our Results of Operations**

 

Our results of operations are affected by the level of businessactivity of our clients and customers whom in turn are affected by the level ofeconomic activity in the industries and markets that they serve.  A decline in the level of business activityof our clients could have a material adverse effect on our revenues and profitmargin.

 

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

 

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

 

•                  the businessdecisions of our customers regarding orders for our products;

•                  increased energycosts;

•                  increased rawmaterial costs;

•                  productiondifficulties;

•                  the introductionof new products by us or our competitors;

•                  changes in ourpricing policies or those of our competitors;

•                  seasonal trendsin our customers’ buying patterns

•                  changes ingovernment regulation, both domestic and foreign;

•                  fluctuation inforeign currency exchange rates;

•                  global economicand political conditions and related risks, including acts of terrorism; and

•                  other factorsbeyond our control.

 

A significant portion of our expense levels are relatively fixed andthe timing of increases in expense levels is based in large part on ourforecasts of future sales.  If net salesare below expectations in any given period, the adverse impact on results ofoperations may be magnified by our inability to adjust expenses quickly enoughto compensate for the sales shortfall.

 

**Our Global Operations Expose Us to ComplexManagement, Foreign Currency, Legal, Tax and Economic Risks, Which We May NotBe Able to Adequately Address**

 

We conduct business in a number of countries around the world.  For the three months ended June 30,2004, approximately 46% of our net sales were to foreign customers.  As a result, we are subject to a number ofrisks which include, but are not limited to:

 

•                  the burden ofcomplying with a wide variety of national and local laws;

•                  potentiallylonger payment cycles for foreign sales;

•                  multiple andpossibly overlapping and conflicting tax laws;

•                  coordinatinggeographically separated locations;

•                  restrictions(government and otherwise) on the movement of cash;

•                  the absence insome jurisdictions of effective laws to prevent our intellectual propertyrights;

•                  changes ingovernment regulations, both domestic and foreign;

•                  global economicand political conditions and related risks, including acts of terrorism; and

•                  fluctuations inforeign currency exchange rates.

 

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**Competition in Our Industry is Intense**

 

The nutritional products market is highly competitive.  It includes international, national,regional and local producers and distributors, many of whom have greaterresources than Cyanotech and many of whom offer a greater variety ofproducts.  Increased competition in ourindustry could result in price reductions, reduced gross profit margin or lossof market share, any of which could have a material effect on our business,results of operations and financial condition.

 

**Our Revenues Could Be Adversely Affected Bythe Loss of a Significant Customer or the Failure to Collect a Large AccountsReceivable**

 

We have in the past derived, and may continue in the future to derive,a significant 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.  During the quarter endedJune 30, 2004, sales to one customer, a United States distributor, wereapproximately 11% of net sales.  Ifsales to a major customer decrease significantly, it may materially affect ourresults of operations.  In addition, ifwe fail to collect large accounts receivable from such major customers, wecould be subject to significant financial exposure.

 

**If We Are Unable to Protect Our IntellectualProperty Rights or if We Infringe Upon the Intellectual Property Rights ofOthers Our Business May Be Harmed**

 

Cyanotech has received five United States patents:  two on aspects of our production methods andthree 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 beno assurance 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 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 areasserted against 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 Limitedin Certain Circumstances**

 

In the ordinary course of business, the Company purchases insurancecoverages (e.g., property and liability coverages) to protect itself againstloss of or damage to its properties and claims made by third parties andemployees for property damage or personal injuries.  However, the protection provided by such insurance is limited insignificant respects and, in some instances, the Company has no coverage andcertain of the Company’s insurance has substantial “deductibles” or has limitson the maximum amounts that may be recovered. For example, if a hurricane or other uninsured catastrophic naturaldisaster should occur, the Company may not be able to recover all facilityrestoration costs and revenues lost from business interruption.  In addition, the Company maintains productliability insurance in limited amounts for all of its products involving humanconsumption, however, broader product liability coverage is prohibitivelyexpensive.  Insurers have alsointroduced new exclusions or limitations of coverage for claims related tocertain perils including, but not limited to, mold and terrorism.  If a series of losses occurred, such as froma series of lawsuits in the ordinary course of business each of which weresubject to the deductible amount, or if the maximum limit of the availableinsurance were substantially exceeded, the Company could incur losses inamounts that would have a material adverse effect on its result of operationsand financial condition.

 

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