**Exhibit99.1**

 

**RISKFACTORS**

 

You should carefullyconsider the risks described below which we believe are significant but not theonly ones we face.   Any of thefollowing risks could have a material adverse effect on our business, financialcondition and operating results.  Youshould also refer to the other information contained in this report, includingour financial 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 causeour quarterly operating 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 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 Adequately Address**

 

We conduct business in anumber of countries around the world. For the nine months ended December 31, 2003, approximately 57% ofour net sales were from sales to foreign customers.  As a result, we are subject to a number of risks which include,but are not 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) restrictions of the movement of cash;

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

 

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•                  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 oneor more individual customers may exceed 10% of our revenues for thequarter.  During the nine months endedDecember 31, 2003, sales to one customer, a European distributor ofnatural products were approximately 12% 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 WeAre Unable to Protect Our Intellectual Property Rights or if We Infringe Uponthe 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 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.

 

**We MayNeed to Raise Additional Capital in the Future Which May Not Be Available**

 

The Company has incurredlosses of $1,775,000, $2,589,000 and $1,067,000 in the past three fiscal yearsended March 31, 2003, 2002 and 2001, respectively.  At December 31, 2003, the Company’sworking capital was $3,141,000 with cash and cash equivalents totaling$1,517,000.  The Company’s continuationas a going concern is dependent upon its ability to generate sufficient cashflow to meet its obligations on a timely basis, to comply with the terms of itsfinancing agreements, to obtain additional financing or refinancing as may berequired, to attain profitability, or a combination thereof.  While the Company generated cash and cashequivalents from operating activities for the nine months endedDecember 31, 2003, there can be no assurance that future efforts willcontinue to be successful or that the Company will have sufficient cashresources to support its future operations.

 

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