**Exhibit 99.1**

 

**RISK FACTORS**

 

You should carefully consider the risks described below.  The risks described are not the only ones weface.  Any of the following risks couldhave a material adverse effect on our business, financial condition andoperating results.  You should alsorefer to the other information contained in this report, including ourfinancial statements and 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 which in turn is 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 VaryFrom Quarter to Quarter, Which May Result in Increased Volatility of OurShare 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 our quarterly operating results to vary include,but are not limited to:

 

•                  thebusiness decisions of our customers regarding orders for our products;

•                  increasedenergy costs;

•                  increasedraw material costs;

•                  productiondifficulties;

•                  theintroduction of new products by us or our competitors;

•                  changesin our pricing policies or those of our competitors;

•                  seasonaltrends in our customers’ buying patterns

•                  changesin government regulation, both domestic and foreign;

•                  fluctuationin foreign currency exchange rates;

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

•                  otherfactors beyond 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 Post ComplexManagement, Foreign Currency, Legal, Tax and Economic Risks, Which WeMay Not Adequately Address**

 

We conduct business in a number of countries around the world.  For the six months ended September 30,2003, approximately 47% of our net sales were from sales to foreign customers.  As a result, we are subject to a number ofrisks which include, but are not limited to:

 

•                  theburden of complying with a wide variety of national and local laws;

•                  potentiallylonger payment cycles for foreign sales;

•                  multipleand possibly overlapping and conflicting tax laws;

•                  coordinatinggeographically separated locations;

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

•                  theabsence in some jurisdictions of effective laws to prevent our intellectualproperty rights;

 

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•                  changesin government regulations, both domestic and foreign;

•                  globaleconomic and political conditions and related risks, including acts ofterrorism; and

•                  fluctuationsin foreign currency exchange rates.

 

**Competition in Our Industry is Intense**

 

The nutritional products market is highly competitive.  In 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 six monthsended September 30, 2003, sales to one customer, Spirulina InternationalB. V., were approximately 10% of net sales. If sales to this customer or other such major customer decreasesignificantly, this 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.

 

**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 critical to our success, we rely on a combination of trade secret,contract, patent, copyright and trademark law to establish and protect ourrights in our products and technology. There can be no assurance that we will be able to protect our technologyadequately or that competitors will not be able to develop similar technologyindependently.  In addition, the laws ofcertain foreign countries may not protect the Company’s intellectual propertyrights to the same extent as the laws of the United States.  Litigation in the United States or abroadmay be necessary to enforce our patent or other intellectual property rights,to protect our trade secrets, to determine the validity and scope of theproprietary rights of others or to defend against claims of infringement.  Such litigation, even if successful, couldresult in substantial costs and diversion of resources and could have amaterial adverse effect on our business, results of operations and financialcondition.  Additionally, if any suchclaims are asserted against us, we may seek to obtain a license under the thirdparty’s intellectual property rights. There can be no assurance, however, that a license would be available onterms acceptable or favorable to us, if at all.

 

**Market Price for Our Common Stock Has BeenUnpredictable;  Delisting Under Appeal**

 

On September 15, 2003, the Companyreceived notification from the NASDAQ Listing Qualifications Department thatits Common Stock failed to comply with the $1.00 minimum bid price per sharerequirement for continued listing on the NASDAQ SmallCap Market pursuant toMarketplace Rule 4310(c)(4).  TheCompany requested a hearing before the NASDAQ Listing Qualification Panel(“Panel”) to appeal the ruling.  Duringthe appeals process, the scheduled delisting will be stayed and the Company’sCommon Stock will continue to trade on the NASDAQ SmallCap Market, pending thePanel’s decision. The Company’s appeal was heard by the Panel onOctober 16, 2003 with no formal notification yet received.    While there can be no assurance that theCompany’s request for continued listing on the NASDAQ SmallCap Market will begranted, the Company is exploring all possible avenues to preserve the NASDAQlisting.

 

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If the Company is not successful in the appeals process, the Company’sCommon Stock will be delisted from the NASDAQ SmallCap Market and will begintrading on the NASDAQ Over-The-Counter Bulletin Boards.   In such case, the Common Stock of theCompany will be traded on a less active market to the possible detriment of thestockholders.

 

**We May Need to Raise Additional Capitalin the Future Which May Not Be Available**

 

The Company has incurred losses of $1,775,000, $2,589,000 and$1,067,000 in the past three fiscal years ended March 31, 2003, 2002 and2001, respectively.  AtSeptember 30, 2003, the Company’s working capital was $2,921,000 with cashand cash equivalents totaling $1,193,000. The Company’s continuation as a going concern is dependent upon itsability to generate sufficient cash flow to meet its obligations on a timelybasis, to comply with the terms of its financing agreements, to obtainadditional financing or refinancing as may be required, to attainprofitability, or a combination thereof. There can be no assurance that our efforts will be successful or thatthe Company will return to generating profit on either a quarterly or annualbasis.

 

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