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        The following table sets forth, for the three years ended March 31, 2009,2010, the net sales contributed by each of the Company'sour product lines (in thousands):

Spirulina Products

        Cyanotech hasWe have been producing a strain of spirulina microalgae marketed asSpirulina Pacifica since 1984. Spirulina Pacifica represents 49%, 53%49% and 63%53% of net sales for the years ended March 31, 2010, 2009 2008, and 2007,2008, respectively.Spirulina Pacifica provides a vegetable-based, highly absorbable source of protein, natural beta-carotene, mixed carotenoids, B vitamins, gamma linolenic acid, essential amino acids and other phytonutrients.Spirulina Pacifica is produced in threetwo forms: powder flake and tablets. Powder is used as an ingredient in nutritional supplements and health beverages; flakes are used as a seasoning on various foods; and tablets are consumed as a daily dietary supplement. All threeBoth forms are sold as raw material ingredients in bulk quantities, as a private label consumer packaged product and as packaged consumer products under the Nutrex Hawaii label.

        Spirulina Pacifica is GRAS (generally recognized as safe) for addition to a variety of foods as determined by the United States Food and Drug Administration. The Company'sOur all naturalSpirulina Pacifica is also certified Kosher by Organized Kashrus Laboratories of Brooklyn, New York, certified Halal by the Islamic Food and Nutrition Council of America and is cultivated without the use of herbicides or pesticides.

        OurSpirulina Pacifica is cultivated in a combination of fresh water and a metered amount of nutrient-rich deep ocean water (containing essential trace elements), drawn from a depth of 2,000 feet below sea level. This water mixture is supplemented with other major required nutrients. With the exception of deep ocean water, the raw materials and nutrients required in our Spirulinaspirulina production are available from multiple sources; however, there can be no assurance that the pricing from a new source will be comparable to current pricing. In the case of deep ocean water, although abundantly available at this location, the facility to pump and deliver the water to the Company is owned by the State of Hawaii. The facility is constructed of two separately located pump stations providing redundancy should one station fail. The State of Hawaii sets the price for deep ocean water annually based on its cost to deliver the water. If the pricing for a critical raw material or nutrient significantly increases, this could have a material adverse effect on our business, financial condition and results of operations. The ability of the Company'sour suppliers to meet performance and quality specifications and delivery schedules is also important to operations.

        Continuing the production process, the Spirulinaspirulina crop in each pond is circulated by paddlewheels to keep an even blend of nutrients in suspension and a uniform exposure of the algae to sunlight. Our ponds are engineered to maintain the right media depth for sunlight to permeate each crop completely, facilitating rapid growth. The design of our cultivation ponds promotes efficient growing conditions, allowing theSpirulina Pacifica algae to reproduce rapidly. Each pond can be harvested, on average, in six days. As sunlight is a major component of cultivation, production can be impacted by seasonality changes during the winter months, with shortened daylight hours and potential inclement weather.

        Once ready for harvest, a majority of the Spirulinaspirulina algae are pumped from a pond to our processing building where the crop is separated from the culture media. The culture remaining in the ponds serves as

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an inoculum for the next growth cycle. Harvested Spirulinaspirulina is washed with fresh water and filtered before moving to the drying stage. Culture media separated from Spirulinaspirulina algae during processing are conserved and recycled. OurIntegrated Culture Biology Management ("ICBM") technology for microalgae cultivation has proven to be a reliable and stable operating environment, allowing us to grow and harvest Spirulinaspirulina without significant contamination by unwanted microorganisms and without associated loss of productivity.

        Spirulina Pacifica powder is dried via our patented low-oxygenOcean-Chill Drying process, thereby preserving high levels of antioxidant carotenoids and other nutrients sensitive to heat and oxygen. The drying process takes about six seconds and results in a dark green powder. Spirulina powder is difficult to form into tablets. Most tablet manufacturers either add high amounts (from 10% to 30%) of inert substances to "glue" the tablet together or use a heat granulation process that destroys nutrients. In contrast, ourSpirulina Pacifica tablets contain a maximum of 2% of such substances and are produced in cold press compression tablet-making machines. OurSpirulina Pacifica flakes are produced by combining freshly harvestedSpirulina Pacifica with food-grade lecithin and drying this blend in a proprietary system.

        Each production lot ofSpirulina Pacifica is sampled and subjected to thorough quality control analyses including testing for moisture, carotenoids, minerals, color and taste, among others. Further, each lot of ourSpirulina Pacifica undergoes a prescribed set of microbiological food product tests, including total aerobic bacteria, coliform bacteria and E. coli. TheSpirulina Pacifica powder, flakes and tablets are packed. This packaging ensures product freshness and extends the shelf life of bulkSpirulina Pacifica products. The Company'sOur packaged consumer products are bottled and labeled by two contractors in California. These contractors are Kosher certified and subject to regular government inspections.inspections and hold Drug Manufacturing Licenses & Processed Food Registrations with the State of California Department of Health. Such packaging services are readily available from multiple sources.

        The majority of our bulk Spirulinaspirulina sales are to health food manufacturers and formulators with their own Spirulinaspirulina product lines, many of whom identify and promote Cyanotech's HawaiianSpirulina Pacifica in their products. Such customers purchase bulk powder or bulk tablets and package these products under their brand label for sale to the health and natural food markets. ManySome of the brands produced by these customers are marketed and sold domestically in direct competition with the packaged consumer products sold through our Nutrex Hawaii subsidiary. Nutrex Hawaii packaged consumer products are sold through an established health food distribution network in the domestic market and shipped through our wholesale distributors. The Company has also introduced a line of multivitamins combining the health benefits of HawaiianSpirulina Pacifica with other proven nutrients targeted for the specific health requirements of Men, Women and Seniors. In selected foreign markets, we have exclusive sales distributors for both our bulk and packaged consumer products.

        OurSpirulina Pacifica products compete with a variety of vitamins, dietary supplements, other algal products and similar nutritional products available to consumers. The nutritional products market is highly competitive and includes international, national, regional and local producers and distributors, many of whom have greater resources than Cyanotech and many of whom offer a greater variety of products. Our direct competition in the Spirulinaspirulina market is currently from Dainippon Ink and Chemical Company's Earthrise facility in California, Parry Nutraceuticals, a division of Murugappa Group of India and several farms in China. Other competitors include numerous smaller farms in China, India, Thailand, Taiwan, Cuba, South Africa and South America. The market for Spirulinaspirulina is mature with slow growth expected in future periods. In this mature market, the Company haswe have experienced increased price competition due to more Spirulinaspirulina suppliers as well as a larger portion of sales coming from bulk product orders whose customers who generally treat these products as commodities with price being the major determining factor driving their purchasing decision. As one of the largest producers of Spirulina,spirulina, our challenge is to increase our market share among customers who seek the high-quality products we produce while concurrently adjusting our product mix to meet our revenue and profitability targets.

        As of March 31, 2009, there was no backlog of orders for all Spirulina products. Backlogs at the end of fiscal 2008 and 2007 were $710,000 and $432,000 respectively. Prior years' backlogs were the result of production issues resulting in inventory shortages. No such shortages were experienced during fiscal 2009.

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Natural Astaxanthin Products

        The CompanyWe commenced commercial production of natural Astaxanthinastaxanthin in 1997. Astaxanthin is a red pigment which the Companywe initially sold to the aquaculture market, under the name NatuRose, primarily to impart a pink to red color to the flesh of commercially raised fish and shrimp. The CompanyWe discontinued NatuRose production and sales in March 2008 in order to focus itsour resources on producing and marketing of natural astaxanthin for the higher value human nutrition market discussed below.NatuRose sales accounted for 0%, 4%0% and 12%4% of net sales for the years ended March 31, 2010, 2009 2008 and 2007,2008, respectively.

        In 1999,BioAstin, our natural astaxanthin product for the human health and nutrition market was introduced.BioAstin sales accounted for 51%, 42%51% and 24%42% of net sales for the years ended March 31, 2010, 2009 2008 and 2007,2008, respectively.BioAstin is produced in three forms: a liquid lipid extract, gelcaps and microencapsulated "beadlets" with all three forms sold in bulk quantities.BioAstin gelcaps are also sold as a private label consumer packaged product and in packaged consumer form under the Nutrex Hawaii label. A growing body of scientific literature is suggestingsuggests that the beneficial antioxidant properties of natural astaxanthin as an antioxidant, anti-inflammatory, for joint, skin and eye health. Its antioxidant properties may surpass many of the antioxidant properties of vitamin C, vitamin E, beta-carotene and other carotenoids. Independent scientific studies indicate that in certain models, natural astaxanthin has up to 550 times the antioxidant activity of vitamin E and 10 times the antioxidant activity of beta-carotene.

        The Company producesWe produce natural astaxanthin fromHaematococcus pluvialis microalgae grown in fresh water supplemented with nutrients. As these algae are extremely susceptible to contamination by unwanted algae, protozoa and amoebae, the Companywe developed a proprietary system known as thePhytoDome Closed Culture System orPhytoDome CCS to overcome this problem. Using these large-scale photobioreactors, we have generally been able to grow consistently large volumes of contaminant-freeHaematococcus culture. Raw materials and nutrients for our natural astaxanthin production share the same sourcing constraints and pricing risks as those existing in our Spirulinaspirulina production. Fresh water is critical to the production of our natural astaxanthin and is supplied by the County of Hawaii. While the Company haswe have not experienced any constraint on fresh water availability to date, availability could be impacted by a significant population growth in the region as well as throughput constraints on the water delivery infrastructure. The Company hasWe have met with officials of the County of Hawaii to assess the fresh water situation and evaluate the probability of future risks. The Company recyclesWe recycle fresh water in its production process where possible and continuescontinue to explore further recycling opportunities. However, there is no guarantee that these efforts will result in significant changes to our fresh water utilization.

        For the final stage of cultivation, theHaematococcus algae is transferred to open ponds where an environmental stress is applied causing the algae to form spores which accumulate high levels of astaxanthin. Once ready for harvest, the media containing these spores is transported through underground pipes to our astaxanthin processing building where the culture media and algal spores are separated. Fresh water recovered from this stage of processing may be recycled for further use in cultivation. The harvested algal spores are dried to flakes or a fine powder. During processing, the spores are cracked in a proprietary system to assure high bioavailability of astaxanthin. Each production lot of astaxanthin is sampled and tested for astaxanthin concentration. Finally, the bulk powder is vacuum-packed.

        Unlike Spirulina,spirulina, astaxanthin is produced in a batch-mode and each cultivation pond must be completely drained and thoroughly cleaned between cycles. Pond cultivation can be negatively impacted seasonally with shortened daylight hours and potential inclement weather in winter months.

        Natural astaxanthin for human consumption is processed further utilizing a high-pressure extraction process. The resulting product is a lipid extract insoluble in water used for the production of gelcaps. This product can also be micro-encapsulated into "beadlets" which our customers use in other formulations. All natural astaxanthin products destined for human consumption undergo a prescribed set of microbiological food product tests to ensure safety and quality. The Company usesWe use third party contractorscontract manufacturers for the

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extraction services, the production of gelcaps and the production of beadlets. . All third party contract manufacturers are audit inspected by Cyanotech's Quality Control Department, and are required to comply with FDA Good Manufacturing Practices (GMP) regulations. The majority of these contract manufacturers hold independent third party GMP certifications. Although these services are available only from a limited number of sources, we believe we have the ability to use other parties if any of the current contractorscontract manufacturers become unavailable; however, there is no assurance that the pricing from a new contractorcontract manufacturer will be comparable to current negotiated pricing. In addition, a new contractorcontract manufacturer would have to pass the Company'sour qualification process ensuring quality standards can be met or exceeded. Significant pricing increases for any of these services could have a material adverse effect on our business, financial condition and results of operations.

        The potential benefits of astaxanthin to human health are continuing to emerge. Natural astaxanthin is one of the most potent and bioactive biological antioxidants found in nature therefore, the number of potential roles of natural astaxanthin for human health is growing. Much research has been published in recent years on the beneficial roles of antioxidants in our health, in the aging process and on specific health conditions. The full efficacy ofBioAstin as a human nutraceutical supplement requires further significant clinical study. The Company, to contain costs, did not spend significantWe have spent limited amounts on clinical trials over the past two fiscal years. Independent antioxidant research and prior clinical trials show promising human applications. The Company holds three United States patents relating to the usage ofBioAstin in the treatment of Carpal Tunnel Syndrome, the treatment of canker/cold sores and for its use as a topical and oral sunscreen.

        BioAstin is sold in liquid lipid form as a raw ingredient to dietary supplement manufacturers, health food formulators and cosmetic manufacturers, andBioAstin gelcaps and beadlets are sold in bulk quantities to distributors.BioAstin gelcaps are also sold as a packaged consumer product through Nutrex Hawaii directly to natural product distributors, retailers and consumers. The Company hasWe also introduced in 2007 a line ofBioAstin based nutritional supplements,MDFormulas.MDFormulas combined the health benefits ofBioAstin with other proven nutrients with benefits for targeted applications such as skin, heart and joint health.

        BioAstin andMDFormulas compete directly with similar products marketed by other manufacturers including Fuji Chemical of Japan, Algatechnologies of Israel, and Valensa (formally U.S. Nutraceuticals) in the United States. In the general category of nutritional supplements,BioAstin also competes with a variety of vitamins, dietary supplements and other antioxidant products available to consumers. The nutritional products market is highly competitive and includes international, national, regional and local producers and distributors, many of whom have greater resources than Cyanotech and many of whom offer a greater variety of products.

        As of March 31, 2009, there was no backlog of orders for all Natural Astaxanthin products. Backlogs at the end of fiscal 2008 and 2007 were $209,000 and $802,000, respectively. Prior years' backlogs were the result of production issues resulting in inventory shortages. No such shortages were experience during fiscal 2009.

Phycobiliprotein Products

        On March 26, 2008 the Company announced that it would discontinue producing phycobiliproteins for sale to the medical and biotechnology research industries. Phycobiliproteins are highly fluorescent pigments derived from microalgae. Their spectral properties make them useful as tags or markers in many kinds of biological assays, such as flow cytometry, fluorescence immunoassays and fluorescence microscopy. Phyciobilliproteins have never represented a significant component of total sales and the discontinuance is not significant to the Company's financial results.

Major Customers

        Approximately $1,521,000The Company has two major European customers. Sales to a single spirulina customer were approximately $1,027,000, or 11%7% of our total net sales for the year ended March 31, 2009 were to a Spirulina marketing and distribution company based in the Netherlands.2010. Sales to this customer amountedfor fiscal 2009 and 2008 were $1,521,000 (11% of net sales) and $1,149,000 (10% of net sales), respectively. Sales to

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$1,149,000sales for the year ended March 31, 2010. Sales to this customer were $1,806,000 (13% of net sales) and $495,000 (4% of net sales), for the fiscal years 2009 and 2008, respectively. The Company has one major US customer, astaxanthin sales to this customer for the year ended March 31, 2010 were approximately $1,653,000 or 10% of our total net salessales. Sales to this customer were approximately $821,000 (6% of net sales) and $656,000 (6% of net sales), for the fiscal yearyears 2009 and 2008, and $937,000 or 10% of net sales for the fiscal year 2007.respectively.

Research and Development

        Cyanotech'sOur expertise for many years has been in the development of efficient, stable and cost-effective production systems for microalgal products. We have learned however, during the operating period after the fiscal year 2007 astaxanthin production imbalance, and during the fiscal year 2008 spirulina production imbalance, that acceptable and consistent quality production levels from our systems may not

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be sustainable across periods of days, weeks, or even months. Accordingly, Cyanotechwe typically investigatesinvestigate each specific microalgae identified in the scientific literature for potentially marketable products and for solutions to production stability and efficiency challenges, and then strivesstrive to develop the technology to grow such microalgae on a commercial scale or to incorporate procedures or technology to improve production stability and efficiency. Successful microalgal product developments and technical solutions are highly uncertain and dependent on numerous factors, many beyond the Company'sour control. Products and solutions or improvements that appear promising in early phases of development may be found to be ineffective, may be uneconomical because of manufacturing costs or other factors, may be precluded from commercialization due to the proprietary rights of other companies, or may fail to receive necessary regulatory approvals. The CompanyWe had research and development expenditures of $264,000, $206,000 $143,000 and $203,000$143,000 in fiscal years 2010, 2009 2008 and fiscal 2007,2008, respectively.

We invested $68,000 in scientific clinical trials during 2010. No investment was made in scientific clinical trials during fiscal 2009 2008 and 2007.2008.

Patents, Trademarks and Licenses

        Cyanotech hasWe have received five United States patents: two on aspects of our production methods and three relating to usage of our BioAstin products. The Company views itsWe view our proprietary rights as important but believesbelieve that a loss of such rights is not likely to have a material adverse effect on the Company'sour present business as a whole. The Company'sOur operations are not dependent upon any single trademark, although some trademarks are identified with a number of the Company'sour products and are of importanceimportant in the sale and marketing of such products.

Regulations

        Several governmental agencies regulate various aspects of our business and our products in the United States, including the Food and Drug Administration, the Federal Trade Commission, the Consumer Product Safety Commission, the State of Hawaii Department of Health, the Department of Agriculture, the Environmental Protection Agency, the United States Postal Service, state attorney general offices and various agencies of the states and localities in which our products are sold. We believe we are in compliance the all material government regulations which apply to our products and operations. However, we are not able to predict the nature of any future laws, regulations, interpretations or applications, nor can we predict what effect future changes would have on our business.

        Our international customers are subject to similar governmental agency regulations in their various geographic regions. Compliance by our customers with such local regulations is beyond our control and we cannot predict their ability to maintain such compliance. However, we strive to assist our customers in meeting local regulations pertaining to the use and sale of our products whenever possible.

Environmental Matters

        In 2002, the Company waswe were issued under the Endangered Species Act ("ESA") an Incidental Take Permit ("ITP") by the United States Department of Interior Fish and Wildlife Service ("FWS"). The ESA defines "incidental take" as "incidental to, and not for the purpose of, the carrying out of an otherwise lawful activity." This permit authorizes incidental take of the endangered Hawaiian stilt (Himantopus mexicanus knudseni) that is anticipated to occur as a result of ongoing operations and maintenance at the Company'sour Kona facility. As a mandatory component for the issuance of such permit, the Companywe submitted and maintainsmaintain a Habitat Conservation Plan ("HCP") to ensure that the effects of the permitted action on listed species are adequately minimized and mitigated.

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        The HCP called for the creation of a nesting and breeding ground for the Hawaiian stilt to offset any take activity. The Company hasWe have complied with these requirements since 2002. The breeding program was so successful that the increase in the Hawaiian stilt population in the area became a potential hazard for the adjacent State airport facility. The CompanyWe disassembled the stilt habitat and isare mitigating "take" by using standard non-lethal hazing devices to discourage nesting and breeding.

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        A requirement of the ITP is to provide insurance coverage for funding the project for the term of the ITP. The Company'sOur insurance broker was unable to locate an underwriter who would provide such a bond. As permitted by law, the FWS waived this requirement recognizing that this HCP did not involve a significant capital expenditure. However, under Hawaii state law, no waiver provision is available. A new ITP was issued by the FWS on September 29, 2006 and by the State of Hawaii Division of Forestry and Wildlife (DOFAW) on October 13, 2006, both which expire on March 17, 2016. In October, 2005, the Companywe submitted a new ten-year HCP to the FWS and the DOFAW.

Employees

        As of March 31, 2009, the Company2010, we employed 6367 people on a full-time basis and 32 people on a part-time basis. Of the total, 2833 are involved in harvesting, and production and quality, the remainder in maintenance, shipping, sales, administration and support. Management believes that its relations with employees are good. Attracting permanent entry level and skilled employees can be difficult due to the limited local population to draw from. None of our employees are subject to collective bargaining agreements.

Internet Information

        Our Internet address iswww.cyanotech.com. There we make available, free of charge, copies of Cyanotech documents, news releases and financial statements issued in the last 12 months. Included are copies of the Company's Code of Conduct and Ethics, the Nominating and Corporate Governance Committee Charter, and the Charter and Powers of the Audit Committee. The information found on our Web site, unless otherwise indicated, is not part of this or any other report we file or furnish to the Securities and Exchange Commission.Spirulina PacificaPacifica® andBioAstinBioAstin® are sold directly online through the Company's website,www.nutrex-hawaii.com, as well as through resellers in over 40 countries worldwide. Corporate data, product information and charters of our Board committees are also available atwww.cyanotech.com.

Item 1A.    Risk Factors

        You should carefully consider the risks described below which we believe are significant but not the only ones we face. Any of the following risks could have a material adverse effect on our business, financial condition and operating results. You should also refer to the other information contained in this report, including our financial statements and the related notes.

The nutritional products industry is extremely competitive. Many of our significant competitors have greater financial and other resources than we do, and one or more of these competitors could use their greater resources to gain market share at our expense.

        The nutritional products market includes international, national, regional and local producers and distributors, many of whom have substantially greater production, financial, research and development, personnel and marketing resources than we do, and many of whom offer a greater variety of products. As a result, each of these companies could compete more aggressively and sustain that competition over a longer period of time than we could. Our lack of resources relative to our significant competitors may cause us to fail to anticipate or respond adequately to development of new products and changing consumer demands and preferences, or may cause us to experience significant delays in obtaining or introducing new or enhanced products. These failures or delays could reduce our competitiveness and

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cause a decline in our market share and sales. Increased competition in our industry could result in price reductions, reduced gross profit margin or loss of market share, any of which could have a material effect on our business, results of operations and financial condition.

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We depend heavily on the unique abilities and knowledge of our officers and key personnel. Our Chief Executive Officer and our Chief Scientific Officer have knowledge and experience critical to the ongoing operations of the Company. We also depend on the unique knowledge of our Chief Financial Officer and Vice President of Finance and Administration, Vice President of Operations, and Vice President of Sales and Marketing.Marketing, and Vice President of Quality & Regulatory Affairs. Cyanotech is a small company and the loss of any such personnel or the delay in the replacement of one could significantly delay the achievement of our business objectives and could adversely affect our ability to do business or could hinder our ability to provide needed management.

        Our success depends, to a significant extent, upon the services and collective experience of such personnel. For example, theThe Company is conducting a search to identify a Chief Executive Officer who has the industry knowledge, experience and operating discipline vital toessential for the management of the Company and consistent delivery of our products. Our Interim President and Chief Executive Officer has vital knowledge and experience gained through his prior work experience in related industries and his activities as a Director of the Company since 2000 allowing him to direct the Company until a permanent Chief Executive Officer is identified, employed and able to commence the duties and functions of President and Chief Executive Officer. The inability to identify and hire a Chief Executive Officer with the essential knowledge and experience in a timely manner could be detrimental to the future performance of the Company

        The Chief Scientific Officer and founder of the Company is the Company's primary scientific resource, continuing to improve production and cultivation technology and to investigate new microalgal products. Our Chief Financial Officer has a unique understanding of the company'sCompany's financial systems and needs. Our Vice President Operations has years of experience with the mechanical operation of the production facility and continues to improve our production process. Our Vice President Sales and Marketing has developed valuable personal relationships with domestic and foreign customers. Our Vice President of Quality and Regulatory Affairs has experience and knowledge of federal and state regulations governing our production processes and product representation essential to continuing compliance. Attracting permanent skilled employees can be difficult due to limited local qualified applicants.

Our production of algae involves an agricultural process, subject to such risks as weather, disease and contamination.

        The production of our algae products involves complex agricultural systems with inherent risks including weather, disease, and contamination. These risks are unpredictable and also include such elements as the control and balance of necessary nutrients and other factors. The efficient and effective cultivation of microalgae requires consistent light, warm temperatures, low rainfall and proper chemical balance in a very nutrient-rich environment. If the chemical composition of a pond changes from its required balance, unusually high levels of contamination due to the growth of unwanted organisms or other biological problems may occur. These often arise without warning and sometimes there are few or no clear indicators as to appropriate remediation or corrective measures. We believe that our technology, systems, processes and favorable growing location generally permit year-round harvest of our microalgal products in a cost-effective manner. However, environmental factors cannot be controlled in an open air environment, therefore, we cannot, and do not attempt to, provide any form of assurance with regard to our systems, processes, location, or cost-effectiveness.

There is risk in operating entirely in one business segment such as the cultivation and production of microalgae at a single production facility.

        Single location agricultural and production facilities do not provide the protections and assurances afforded by operations in two or more widely separated locations. Our single location in Hawaii is susceptible to increased energy and transportation costs, and energy and transportation disruptions with either limited alternatives or no alternatives. The Company's most significant operating expenditures are

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for electricity, related water pumping and nutrient and supply costs. These costs are directly or substantially affected by the price of fuel oil since Hawaii has virtually no hydroelectric power resources and only limited alternative electrical energy resources. Also, a single agricultural facility provides limited biologic diversity protection against invasive, mutant, or harmful organisms.

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Our operations are vulnerable because we have limited personnel and redundancy and backup systems in our data management function.

        Our internal order, inventory and product data management system is an electronic system through which orders are placed for our products and through which we manage product pricing, shipment, returns and other matters. This system's continued and uninterrupted performance is critical to our day-to-day business operations. Despite our precautions, unanticipated interruptions in our computer and telecommunications systems have, in the past, caused problems or stoppages in this electronic system. These interruptions, and resulting problems, could occur again in the future. We also have limited personnel available to process purchase orders and to manage product pricing and other matters in any manner other than through this electronic system. Any significant interruption or delay in the operation of this electronic management system could cause a decline in our sales and profitability.

A Significantsignificant or Prolonged Economic Downturn Could Haveprolonged economic downturn could have a Material Adverse Effectmaterial adverse effect on Our Resultsour results of Operationsoperations.

        Our results of operations are affected by the business activity of our customers who in turn are affected by the level of economic activity in the industries and markets that they serve. A decline in the level of business activity of our clients or the economy as a whole could have a material adverse effect on our revenues and profit margin.

        The global cost of oil derived energy impacts Cyanotech in several ways, and it may hinder our efforts to achieve profitability. Oil prices primarily impact Cyanotech through the costs of electricity, transportation, materials and supplies which are tied to the cost of oil either directly or indirectly. The return of last years high cost of oil on a global basis may signal a prolonged economic downturn resulting in a material adverse effect on our business.

Our Quarterly Operating Results May Vary From Quarterquarterly operating results may vary from quarter to Quarter, Which May Resultquarter, which may result in Increased Volatilityincreased volatility of Our Share Priceour 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 Common Stock. Factors that may cause our quarterly operating results to vary include, but are not limited to:

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business decisions of our customers regarding orders for our products;



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increased energy costs;



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increased raw material costs;



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production problems which we cannot solve technically or economically;



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weather-related cultivation difficulties;



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contamination of our cultivation and production facilities;



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effects of weather on customer demand patterns;



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the introduction of new products by us or our competitors;



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changes in our pricing policies or those of our competitors;



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changes in seasonal and other trends in our customers' buying patterns;

        General and administrative expenses were $3,311,000, $2,873,000 and $2,478,000 in fiscal 2010, 2009 and 2008, respectively. General and administrative expenses increased 15% from 2009 due to costs associated with separation of production equipmentthe Chief Executive Officer in March 2010 and leasehold improvements of $4.5 million (as a result of an analysis required under SFAS No. 144); expensessalary and benefits increases. General and administrative expense in conjunction with2009 increased 16% over 2008 due to increased salaries and benefits from the restatement and amendmentaddition of a prior period annual report on Form 10-K;new Chief Executive Officer, an accountant to improve internal controls, and costs incurred to meet listing requirements with NASDAQ Capital Market including a one-for-four reverse stock split, all discussed in detail in prior Forms 10-K.

        Researchsalary and development costs increased to $206,000 in 2009, up 44% from $143,000 in fiscal 2008, and approximately equalbenefits increases. Current staffing has returned to the $203,000 in fiscal 2007. During fiscal year 2008 personnel were redirected to assist with urgent production issues accounting for the decrease in research and development expense from 2007 to 2008. In fiscal 2009 these resources returned their focus on identifying potential areas to improve cultivation and production processes therefore 2009 expense increased from 2008. The Company benefited from these efforts in fiscal 2009 and they will continue in 2010. No new clinical trials were conducted in 2009 and 2008. However, the Company expects to sponsor clinical studies in fiscal year 2010pre-workforce reduction levels in order to expandmaintain adequate administration and financial accounting and reporting. The Company is committed to ongoing cost containment aimed at controlling its level of operating expenses, but may increase some discretionary spending in future periods as necessary to maintain product quality and the applications of its health products.Company's competitive position.

        Sales and marketing costs were $1,402,000, $1,125,000 $1,355,000 and $1,297,000$1,355,000 in fiscal 2010, 2009 and 2008, respectively, increasing 25% in 2010 from fiscal 2009 and 2007, respectively, decreasing 17% in 2009 from fiscal 20082008. The increase in 2010 over 2009 is due to the Company resuming selected advertising and increasing 5%promotional programs in 2008 from fiscal 2007.2010 in order to maintain and expand sales levels. The decrease in 2009 from 2008 is due to the cessation of advertising programs and selling promotions eliminated with efforts to control expenses in the latter part of fiscal 2008. The 5% increase in fiscal 2008 compared to 2007 was due to inflationary increases. The Company anticipates resumingcontinuing selected advertising and promotional programs in fiscal 20102011 in order to maintain and expand sales levels.

        General and administrative expenses were $2,873,000, $2,478,000 and $2,448,000 in fiscal 2009, 2008 and 2007, respectively. General and administrative expenses increased 16% from 2008 due to increased salaries and benefits from the addition of a new Chief Executive Officer, an accountant to improve internal controls, and salary and benefits increases. General and administrative expense in 2008 increased less than 1% over 2007levels as a result of a workforce reduction which occurred in December 2007, to balance costs with sales and production environment occurring at the time. Current staffing has returned to the pre-workforce reduction levels in order maintain adequate administration and financial accounting. The Company is committed to ongoing cost containment aimed at controlling its level of operating expenses, but may increase some discretionary spending in future periods as dictateddetermined by the needs of the business.

        Research and development costs increased to $264,000 in 2010, up 28% from $206,000 in fiscal 2009, and up by 85% from $143,000 in fiscal 2008. During fiscal year 2010, new clinical trials initiated to expand the application of its products. In fiscal 2009, resources returned their focus on identifying potential areas to improve cultivation and production processes, therefore 2009 R&D expense increased from 2008. The Company benefited from these efforts in fiscal 2009 and 2010, and they will continue in 2011. The Company began to sponsor clinical studies once again in fiscal year 2010, in order to expand the applications of its health products. No new clinical trials were conducted in 2009 and 2008.

        Loss on disposal of equipment and leasehold improvements was $155,000 in 2010. There was no loss on disposal of assets in 2009.

        The Company reviews the recoverability of the carrying value of long-lived assets using the methodology prescribed in Statement of Financial Accounting Standards (SFAS) 144, "Accounting for the Impairment and Disposal of Long-Lived Assets."assets. The Company reviews long-lived assets and intangible assets for potential impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. This analysis under SFAS No. 144 at March 31, 2009

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2010 determined that the Company's equipment and leasehold improvements are not impaired in Cyanotech's Consolidated Balance Sheet at March 31, 2009. However, such analysis under SFAS No. 144 at March 31, 2007 had determined that the Company should record a non-cash impairment loss reducing, by $4.5 million, the values of certain production related equipment and leasehold improvement assets. Accordingly, the values of the Company's equipment and leasehold improvement assets as reported on the Consolidated Balance Sheets as of March 31, 2007 were reduced by the impairment loss, and the Company's Consolidated Statements of Operations for the year ended March 31, 2007 includes the corresponding charge of $4.5 million for the impairment of equipment and leasehold improvements. The Company notes that the foregoing reduction of asset carrying values significantly and correspondingly reduced depreciation expense in future periods.2010.

        The Company expects fiscal 20102011 operating expense spending will remain consistent with or increase from fiscal 20092010 due to increased personnel costs, inflationary increases of expenses and the resumption of

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selected advertisingmarketing and research activities as previously discussed. The Company will continue to leverage customer supported research where and as practicable. Increases in sales and marketing expenses may become necessary as the Company seeks new and increased markets and market share. Also, the cost of regulatory compliance—including international standards (ISO), US food and drug manufacturing practice (GMP), Securities and Exchange Commission requirements including Sarbanes Oxley, NASDAQ Capital Market listing requirements and other regulatory compliance areas—continue to increase. The Company will be required under Sarbanes-Oxley to have an independent audit of the Company's internal controlcontrols over financial reporting for fiscal year ending March 31, 2010.2011. This will be an expense not currently incurred by the Company. Finally, the Company must remain competitive in the labor market, and this may lead to some increases in general and administrative costs.

        Other Expense    The following details the amounts included in other expense:

(1)

The total principal balance on the Company's Term Loans was $889,000, $1,501,000 $2,072,000 and $1,390,000$2,072,000 as of March 31, 2010, 2009 2008 and 2007,2008, respectively. The interest rate under the Term Loans is 1% above the prime rate. The prime rate as of March 31, 2010, 2009 2008 and 20072008 was 3.25%, 5.25%3.25% and 8.25%5.25%, respectively. Interest expense includes amortization of debt issue costs.

(2)

Other interest expense includes imputed interest on two equipment loans, one capital lease and other finance charges. As of March 31, 2010, the principal balance of the two equipment loans and capital lease was $49,000 and $97,000, respectively. There was only one equipment loan outstanding at March 31, 2009 with a balance of $29,000.

(3)

FY 2010 Other (income) expense, net represents the interest earned on certain cash and cash equivalents balances.balances and miscellaneous sales. Fiscal 2008 also includes state sales tax expense related to prior years. Fiscal 2008 and 2007 also included gains (losses) arising from exchange rate fluctuations on transactions of the Company's Japan subsidiary which was discontinued in 2008.

        Income Taxes    For fiscal 20092010 the Company recorded income tax expense of $22,000$24,000 compared with an income tax expense of $22,000 for 2009 and $29,000 for 2008 and a benefit2008. The income tax expense represents primarily alternative minimum taxes due to the utilization of $9,000 for 2007. The 2007 tax benefit amounts were anticipated Hawaii State tax credits which were ultimately disallowed in fiscal 2008.loss carry forwards. At March 31, 20092010 the Company had Federal and Hawaii state net operating loss carry forwards of approximately $16,843,000$15,455,000 and $11,562,000,$8,957,000, respectively. TheseThe deferred tax assets resulting from these net operating loss benefits have been fully reserved as their utilization is not assured.

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Liquidity and Capital Resources

        Financial Condition    At March 31, 2009,2010, the Company's working capital was $3,892,000,$4,942,000, an increase of $800,000$1,050,000 compared to $3,092,000$3,892,000 at March 31, 2008.2009. Cash and cash equivalents at March 31, 20092010 totaled $977,000,$817,000, a decrease of $113,000$160,000 from $1,090,000$977,000 at March 31, 2008.2009. The increase in working capital is mainly due to an increase in inventories from the prior year.year and the reclassification of $250,000 restricted cash from long term to current. Good production levels throughout fiscal 2010 and 2009 have allowed the Company to build sufficient inventory to meet the needs of our customers on a timely basis. The decrease in cash and cash equivalents is due to cash used in operating activities, primarily resulting from increasesinvesting in researchequipment and developmentleasehold improvements and general and administrative expenses previously discussed.financing activities.

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        The Company has two Term Loan Agreements ("Term Loans") with a lender. These provided up to $4.6 million in combined credit facilities which are secured by substantially all the assets of the Company. The outstanding combined balance under the Term Loans as of March 31, 20092010 is approximately $1,501,000.$889,000. The Term Loans have maturity dates of May 1, 2010 as to $551,000$80,000 and March 1, 2015 as to $950,000$809,000 and are payable in equal monthly principal and interest payments of approximately $55,000. One term loan with a balance of $80,000 was subsequently paid in full on May 1, 2010.

        The interest rate under the Term Loans, in absence of a default under the agreement, is the prime rate in effect as of the close of business on the first day of each calendar quarter, plus 1%. The prime rate was 3.25% at March 31, 2009.2010. The Company is prohibited by the Term Loan from declaring any cash dividends without the lender's prior written consent. A $250,000 restricted cash deposit is held in an interest-bearing restricted cash account per the terms of the Term Loan and is included in Other Assets in the consolidated balance sheets at March 31, 20092010. The restricted cash was subsequently returned to the company in May of 2010.

        The Company has two equipment loans with John Deere at March 31, 2010 with a total outstanding combined balance of approximately $49,000. The equipment loans have maturity dates of December 28, 2012 as to $27,000 and 2008.March 25, 2013 as to $22,000 and are payable in equal monthly principal payments of approximately $1,400. The loans are at a 0% rate of interest and are net of imputed interest of $3,000.

        The Company has an equipment capital lease with Thermo Fisher Financial Services. The outstanding balance under the capital lease as of March 31, 2010 is approximately $97,000 and has a maturity date of March 2013.

Contractual Obligations

        The following table presents the Company's debt and lease obligations at March 31, 20092010 (in thousands):

(1)

Includes a term loan totaling $29,000 for farmloans, equipment purchased March 20, 2009.loans and capital lease mentioned above.

(2)

Interest on Bridgeview loans is computed using the rate in effect at April 1, 20092010 of 4.25%.

        On April 24, 2009, the Company entered into an agreement with First Hawaiian Bank for a Line of Creditcredit in the amount of $150,000 for a term of one year. Upon renewal on March 25, 2010, the credit limit was increased to $350,000. The obligation is secured by the Company's U.S. accounts receivable and bears a variable interest rate based on prime plus 2%. There is noThe outstanding balance as of June 22, 2009.March 31, 2010 was $150,000.

        Cash Flows    Our cash and cash equivalents were $817,000, $977,000 $1,090,000 and $1,444,000$1,090,000 at March 31, 2010, 2009 2008 and 2007,2008, respectively.

        During fiscal year 2009, theThe Company generated cash from operating activities of $1,219,000 and $908,000 fiscal years 2010 and 2009 respectively, compared to cash used in operations for fiscal 2008 of $782,000 and $459,000 in fiscal 2007.2008. The increase in cash provided by operations from 2009 was primarily due to the fiscal 2010 net income of $1,391,000, non-cash expenses totaling $680,000, and timing differences in current payables, offset by increased inventory and prepaid balances of $809,000. The improved cash provided by operations in fiscal year 2009 compared to

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fiscal year 2008 is primarily due to the fiscal 2009 net income of $1,142,000, non-cash expenses totaling $740,000 and timing differences in current payables and receivables, offset by increased inventory balances of $1,523,000. The additional cash used in operations in fiscal year 2008 compared to fiscal year 2007 was due to the fiscal 2008 net loss of $1,139,000 compared to a net loss of $7,425,000 in fiscal year 2007 which included non-cash expenses of $5,784,000 coupled with the impact of increases in Accounts Receivable and Prepaid expenses and other assets in 2008

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amounting to $500,000. Depreciation and amortization expense was $512,000, $431,000 $490,000 and $1,250,000$490,000 for the years ended March 31, 2010, 2009 2008 and 2007,2008, respectively. Depreciation expense for 2009 and 20082010 was significantly lessmore than 20072009 as a result of additions to depreciable assets in fiscal 2010. It is uncertain whether operating activities will generate cash in future periods due to the non-cash impairment write-downvolatility of production equipmentthe world economy and leasehold improvements in 2007.its impact on our foreign customers.

        Net cash of $449,000$1,032,000 was used in investing activities during fiscal 2009. This2010 compared to net cash used in investing activities of $449,000 during fiscal 2009. Net cash used in investing activities in 2008 ofwas $131,000. SuchInvestments are primarily plant and equipment purchases continue to be aimed toward capital projects enhancing or maintaining our ability to respond to market demand. Management expects to continue to invest in equipment upgrades and leasehold improvements tied to market requirements and production efficiency. CapitalInvestment was also made in phase one of the Company's resource management system upgrade. Continued expenditures to expand the system are anticipated for the next fiscal year. Future capital expenditures are expected to beremain level or increasedecrease as compared to amounts expended in fiscal 2009.2010.

        During fiscal 2010, cash used in financing activities was $347,000, consisting of $150,000 cash provided from drawing on the credit line with First Hawaiian Bank, offset by principal payments on term debt of $497,000. During fiscal 2009, cash used in financing activities was $572,000 representing principal payments on long-term debt. During fiscal 2008, cash obtained from financing activities amounted to $1,078,000, the proceeds of senior debt. Cash used in financing activities in fiscal 2008 was $396,000 in principal payments on long-term debt and $123,000 of closing costs related to the senior debt.

        Sufficiency of Liquidity    Based upon our current operating plan, analysis of our consolidated financial position and projected future results of operations, we believe that our operating cash flows and expectedexisting cash balances will be sufficient to finance current operating requirements, debt service, and planned capital expenditures, for the next 12 months. With total working capital of $3.9$4.9 million, and a current ratio of 2.853 to 1 as of March 31, 2009,2010, management expects liquidity in fiscal 20102011 to be generated primarily from operating cash flows. UnexpectedCurrently unanticipated capital expenditures or business expansion could require the Company to identify additional debt or equity funding sources.

        The Company has used estimates of future financial results including projected revenue, expenses, borrowings, and capital expenditures in reaching its conclusions. Such estimates are subject to change based on future results and such change could cause future results to vary significantly from expected results presented in this Form 10-K.

        The Company's results of operations and financial condition can be affected by numerous factors, many of which are beyond its control and could cause future results of operations to fluctuate materially as it has in the past. Future operating results may fluctuate as a result of changes in sales volumes to our largest customers, weather patterns, increased competition, increased materials, nutrient and energy costs, foreign currency exchange fluctuations, governmental regulations and other factors beyond our control. In addition, the Company maintains product liability insurance only in limited amounts for products involving human consumption because broader product liability coverage is cost prohibitive.

        A significant portion of ourthe Company's expense levels are relatively fixed, so the timing of increases in expense levels is based in large part on forecasts of future sales. If net sales are below expectations in any given period, the adverse impact on results of operations may be magnified by our inability to adjust spending quickly enough to compensate for the sales shortfall. We may also choose to reduce prices or increase spending in response to market conditions, which may have a material adverse effect on financial condition and results of operations.

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Effect of Recently Issued Accounting Standards and Estimates

        In September 2006,January 2010, the FASBFinancial Accounting Standards Board ("FASB") issued SFASAccounting Standards Update ("ASU") No. 157,2010-06, "Improving Disclosures about Fair Value Measurements," an amendment to Accounting Standards Codification ("ASC") No. 820, "Fair Value Measurements". This statement clarifies the definitionMeasurements and Disclosures." The standard requires disclosure for transfers in and out of fair value, establishes a framework for measuring fair value,Level 1 and expands the disclosures on fair measurements. SFAS No. 157 defines fair valueLevel 2, as well as the exchange price that woulddisclosure of Level 3 activity on a gross, rather than net, basis. The guidance also requires enhancements to certain existing disclosures. The amendments will be received for an asset or paid to transfer a liability (an exit price) ineffective as of the principal or most advantageous marketbeginning of fiscal 2011, except for the asset or liability in an orderly transaction between market participants onnew requirements around Level 3 activity, which is deferred until the measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entitybeginning of fiscal 2012. The guidance is not expected to maximize the use of

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observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

        Level 1—Quoted prices in active markets for identical assets or liabilities.

        Level 2—Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;

        Level 3—Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

        SFAS No. 157 is effective for the Company's fiscal year beginning April 1, 2008, except for non-financial assets and liabilities recognized or disclosed at fair value on a non-recurring basis, for which the effective date is fiscal years beginning after November 15, 2008. The adoption of SFAS No. 157 did not have an impact on the Company's consolidated results of operations, cash flows or financial condition.statements.

        In February 2008,May 2009, the FASB issued FASB Staff Position for SFASASC No. 157 ("FSP FAS 157-1") to amend SFAS No. 157 to exclude SFAS No 13, "Accounting for Leases,855, "Subsequent events," and otherupdated this guidance in February 2010. The objective of this Statement is to establish general standards of accounting pronouncementsfor and disclosure of events that address fair value measurements for purposes of lease classificationoccur after the balance sheet date but before financial statements are issued or measurement under SFAS No. 13. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination that are requiredavailable to be measured at fair value under SFAS No. 141, "Business Combinations",issued. In particular, this Statement sets forth: 1. the period after the balance sheet date during which management of a reporting entity should evaluate events or SFAS No. 141R, "Business Combinations" (as discussedtransactions that may occur for potential recognition or disclosure in more detail below), regardless of whether those assets and liabilities are related to leases. Additionally, in February 2008, the FASB issued FASB Staff Position for SFAS No. 157 ("FSP FAS 157-2"), which delays the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in an entity's financial statements, on a recurring basis (at least annually) until fiscal years beginning2. the circumstances under which an entity should recognize events or transactions occurring after Novemberthe balance sheet date in its financial statements and 3. the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. In accordance with this Statement, an entity should apply the requirements to interim or annual financial periods ending after June 15, 2008. Also, in October 2008, the FASB issued FASB Staff Position for SFAS No. 157 ("FSP FAS 157-3"), which clarifies the application of SFAS No. 157 in a market that is not active.

2009. The Company will adopt SFASadopted ASC No. 157 for non-financial assets that are recognized or disclosed on a non-recurring basis on April 1, 2009 and855 during the management is currently evaluating the effect, if any, on the Company's consolidated resultssecond quarter of operations, cash flows or financial condition.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115". SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair market value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for the Company's fiscal year beginning April 1, 2008.2009. The adoption of this statementASC No. 855 did not have a material impact on the Company's financial positionstatements or condition. In accordance with ASC No. 855, management has evaluated subsequent events through the date the financial statements are filed with the SEC and resultsis not aware of operations.any subsequent events which would require recognition or disclosure in the financial statements.

        On October 1, 2009, we adopted ASU No. 2010-02, "Consolidation (Topic 810) Accounting and Reporting for Decreases in Ownership of a Subsidiary—a Scope Clarification," as codified in ASC No. 810, "Consolidation." ASU No. 2010-02 applies retrospectively to April 1, 2009, our adoption date for ASC 810-10-65-1. This ASU clarifies the applicable scope of ASC No. 810 for a decrease in ownership in a subsidiary or an exchange of a group of assets that is a business or nonprofit activity. The ASU also requires expanded disclosures. The adoption of this ASU did not have a material impact on our consolidated financial statements; however, it may affect future divestitures of subsidiaries or groups of assets within its scope.

        On October 1, 2009, we adopted ASU No. 2010-01, "Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash—a consensus of the FASB Emerging Issues Task Force," as codified in ASC No. 505, "Equity." ASU No. 2010-01 clarifies the treatment of certain distributions to shareholders that have both stock and cash components. The stock portion of such distributions is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. The adoption of this ASU did not have a material impact on our consolidated financial statements; however, it may affect any future stock distributions.

        On October 1, 2009, we adopted ASU No. 2009-12, "Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)," as codified in ASC No. 820-10, "Fair Value Measurements and Disclosures—Overall." ASU No. 2009-12 permits a reporting entity to measure the fair value of certain alternative investments that do not have a readily determinable fair value on the basis of the investments' net asset value per share or its equivalent. This ASU also requires expanded disclosures. The adoption of this ASU did not have a material impact on our consolidated financial statements; however, it may impact the valuation of our future investments.

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Application of Critical Accounting Policies and Estimates

        The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with those accounting principles requires management to make judgments and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Management regularly re-evaluates its judgments and estimates which are based upon historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Management believes that of its significant accounting policies, policies that may involve a higher degree of judgment and complexity are inventory valuations, valuation of equipment and leasehold improvements and long-lived assets, and income taxes.

        The Company records inventories at the lower of cost or market. Cost is defined as the sum of the applicable expenditures and charges directly or indirectly incurred in bringing inventories to their existing

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condition and location. Cost for inventory purposes may be determined under any one of several assumptions as to the flow of cost factors, such as first-in, first-out; average cost; and last-in, first-out. Our inventories are stated using the first-in, first-out method. Inventory values are subject to many critical estimates, and unforeseen changes in any of the factors surrounding the estimates imbedded in the determination of inventory values and cost of sales could have a material impact on the Company's results. Such changes in factors and estimates include but are not limited to production levels and capacity, changes in the prices paid for raw materials, supplies, and labor, changes in yield, potency, and quality of biomass, changes in processing or production methods, and changes in the carrying value of our inventories resulting from the prices our customers are willing to pay for our products. Such estimates are revised on a quarterly based on information available at that time. Based on our analysis of

        Management reviews inventory levels, inventory turnover, product age and product marketability quarterly to evaluate recoverability and determine if a reserve for inventory is deemed necessary. At March 31, 2010 an inventory reserve in the amount of $54,000 has been recognized. An inventory reserve was not deemed necessary.necessary in the prior fiscal year.

        Equipment and leasehold improvements are reported at cost less accumulated depreciation and amortization. Self-constructed leasehold improvements include design, construction and supervision costs. These costs are recorded in construction in progress and are transferred to equipment and leasehold improvements when construction is completed and the facilities are placed in service. If the Company experiences impairment to its equipment or leasehold improvement, we account for the impairment in accordance with SFAS No. 144. Pursuant to SFAS No. 144, long-livedLong-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized to the extent that the carrying amount exceeds the asset's fair value.

        During the year ended March 31, 2007, the Company recorded an impairment charge of $4,487,000. The Company determined fair value based upon present values of expected future cash flows. This technique requires the use of a variety of estimates including projected financial information, discount rates, as well as estimates of asset values many years in the future. As such, the results from the use of this method can result in significant volatility should any of these estimates or assumptions change.

        Income taxes are accounted for under the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be recovered or settled. The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. Judgment is required in assessing the need for the valuation allowance. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Should the Company generate sustained taxable income in the future, management may conclude that a portion or all of the existing valuation allowance is no longer required.

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Due to the Company's history of losses, a full valuation allowance has been recorded against net deferred tax assets. Management has assessed the impact of uncertain tax positions to be immaterial.

Item 7A.    Quantitative and Qualitative Disclosures Aboutabout Market Risk

        We do not enter into any transactions using derivative financial instruments or derivative commodity instruments and believe that our exposure to market risk associated with other financial instruments is not material.

        We have two term loans whichwith interest rates that adjust quarterly based on the prime rate. As such, we are exposed to the interest rate risk whereby a 1% increase in the prime rate would lead to an increase of approximately $15,000$9,000 in interest expense for the year ending March 31, 20102011 (based on March 31, 20092010 amounts outstanding).

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Item 8.    Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Cyanotech Corporation:

        We have audited the accompanying consolidated balance sheetsheets of Cyanotech Corporation and subsidiary (the Company) as of March 31, 2010 and 2009, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for the year then ended. Our auditeach of the two years in the period ended March 31, 2010. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under item 15(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cyanotech Corporation and subsidiary as of March 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Grant Thornton LLP

Honolulu, Hawaii
June 24, 2010

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Cyanotech Corporation:

        We have audited the consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows of Cyanotech Corporation for the year ended March 31, 2008. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cyanotech Corporation and subsidiary as of March 31, 2009, and the results of their operations and their cash flows for year ended March 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Grant Thornton LLP

Honolulu, Hawaii
June 24, 2009

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Cyanotech Corporation:

        We have audited the accompanying consolidated balance sheet of Cyanotech Corporation and subsidiaries (the Company) as of March 31, 2008 and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the two-year period ended March 31, 2008. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cyanotech Corporation and subsidiaries as of March 31, 2008, and the results of their operations and their cash flows for each of the years in the two-year periodyear ended March 31, 2008, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Honolulu, Hawaii
June 24, 200926, 2008

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CYANOTECH CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2009 and 2008

See accompanying notes to consolidated financial statements

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CYANOTECH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YearsYear ended March 31, 2009, 2008 and 2007